Poverty Falls, Inequality Widens

By: Setyo Budiantoro – Senior Researcher The PRAKARSA

Economic growth allows more people to escape poverty, but the biggest gains still go to those already at the top of the pyramid.

Good news often comes with a grim footnote. In September 2024, the Central Statistics Agency (BPS) reported that Indonesia's poverty rate was 8,57 percent, the lowest point in history. More than a million people managed to escape poverty in six months.

Amid global uncertainty and the economic impact of the pandemic, these achievements are worth celebrating. But the question is, why is the social gap widening when poverty rates are decreasing?

The Gini ratio, an indicator of income inequality, actually rose from 0,379 in March to 0,381 in September. This figure, although small, reflects a much more complex economic dynamic.

In a big city like Jakarta, where the Gini ratio reaches 0,431, the inequality is stark. Luxury apartment towers tower over slums, symbolizing the sharp contrast in the distribution of prosperity.

Meanwhile, rural areas show a relatively better situation, with a gini ratio of 0,308. However, the challenges there are different: absolute poverty is still an acute problem. This is a development paradox that is hard to ignore: although economic growth has lifted many people out of poverty, the benefits have not been distributed evenly.

Although economic growth has lifted many people out of poverty, the benefits have not been distributed evenly.

Why widen?

BPS data shows a significant decline in the middle class population. In the last five years, the number has drastically shrunk by more than 10 million people, from 57,33 million (2019) to only 47,85 million (2024). In contrast, the vulnerable poor group—those who are just above the poverty line—increased from 54,97 million to 67,69 million.

This is a serious signal that millions of people are living in economic uncertainty. They may no longer be counted as poor statistically, but their lives are far from stable. Advertisement Advertisement

The rising cost of basic necessities, from food to education, is squeezing welfare, while incomes are stagnant or even declining in many cases.

This is why deflation has been going on for some time. This development paradox shows that economic growth allows more people to escape poverty, but the biggest gains are still enjoyed by those already at the top of the social pyramid.

The wealthy are strengthening their position through better access to education, health services and business opportunities, while the middle class and vulnerable groups are facing increasing pressure.

Many families who previously enjoyed simple comforts are now forced to cut back on spending, not only on secondary goods, but also on primary needs.

This situation reflects how economic growth has not succeeded in distributing its benefits evenly. In theory, growth should be a tool to reduce inequality, but in practice, economic opportunities are often concentrated among the wealthy.

BPS data shows that the richest 20 percent control almost half of total national spending, while the poorest 20 percent only have 18,41 percent. This inequality is more than just numbers: it reflects an increasingly rigid socio-economic structure, locking vulnerable groups in a cycle of helplessness.

This inequality is more than just numbers: it reflects an increasingly rigid socio-economic structure, locking vulnerable groups in a cycle of powerlessness.

Eric Hoffer in his book, The True Believer, warns that mass movements are often driven not by the poor, but by those who once enjoyed prosperity but were deprived. The decline of Indonesia's middle class is a warning that inequality is not just an economic problem, but also a social threat that needs to be addressed immediately.

Taxes and income redistribution

The government has tried to curb the rate of inequality with fiscal policies, such as canceling the increase in Value Added Tax (VAT) to 12 percent. This step deserves appreciation because it helps maintain people's purchasing power while also reducing unrest in the public space.

However, the regressive nature of VAT remains a problem: such a consumption tax burdens lower-income groups proportionally more than the rich. A more progressive income tax policy is therefore urgently needed.

The current income tax structure also has a major loophole in income redistribution. The highest rate of 35 percent is only imposed on income above Rp 5 billion per year, while groups with income of Rp 2,5 billion to Rp 5 billion are subject to a 30 percent rate.

Raising the tax rate to 35 percent for the income group of IDR 2,5 billion to IDR 5 billion, and 40 percent for those earning more than IDR 5 billion, not only supports redistribution and increases tax revenue, but also provides room for the purchasing power of vulnerable groups to recover.

High-income groups are, in essence, willing to accept tax increases because they realize they could be victims if social unrest occurs, as long as their contributions are used transparently and not misused.

They also want reciprocity in the form of good public services—from a clean and efficient bureaucracy, reliable security forces, to public services that support the common welfare. Without good governance, policies like this will only create resistance.

Increasing taxes without improving governance is like pouring water into a leaky bucket. Increasing the tax ratio is always closely related to trust society towards the government. If this trust is built, support for progressive taxation and redistribution policies will increase.

Structural transformation

Inequality in Indonesia is not only a matter of unfair fiscal policies, but also reflects an economic structure that is not yet inclusive. Advertisement Advertisement

The informal sector, which absorbs more than half of the nation's workforce, is a vulnerable economic landscape. Workers in this sector are often trapped in low-income situations without adequate access to social security or employment protection.

Without structural reforms, they will continue to be on the margins, limiting their opportunities to improve their quality of life.

The Nordic countries’ experience shows that inequality is not destiny. By implementing progressive taxation, investing heavily in education, and comprehensive social protection, they have managed to create more equal societies without sacrificing economic growth.

Although the Nordic countries' approach cannot be fully applied in Indonesia, social justice through redistribution and human development remains relevant.

Digitalization of the informal sector can also increase efficiency, expand markets, and create new opportunities. Platform e-trade helping small business owners reach a wider range of consumers, while fintech can provide access to microcredit. Digital literacy training, especially in rural areas, is also important to ensure that communities take advantage of this potential.

Ultimately, poverty reduction is a major achievement, but rising inequality is a reminder that there is still a lot of work to be done. Governments must be bold in building a more inclusive and equitable economic system.

True success is not just about poverty rates, but also about creating a society where every citizen has an equal opportunity to live in prosperity.

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This article was previously published in Kompas.id with the title “Poverty Falls, Inequality Widens”". Read more here: Kompas.id