Growth and Inequality

An article titled “Distributive Politics and Economic Growth”, published by the Quarterly Journal of Economics in 1994, can serve as a reference for policymakers in Emerging Market Economies (EMEs), particularly Indonesia.

The article was written by two distinguished economists: Alberto Alesina, professor of political economy at Harvard University from 2003 to 2020, and Dani Rodrik, lecturer in economics at the John F. Kennedy School of Government in the United States.

Both argue that distributive politics has a negative impact on economic growth in the medium and long term. Distributive politics relates to the strategy of government budget allocation by elected officials solely to specific groups or constituencies in order to secure political support.

Their findings show that countries with high inequality in asset ownership and income have high tax rates followed by low economic growth. The same applies to countries characterised by inequality in land ownership and income, which also experience low economic growth.

This phenomenon is occurring in Indonesia, marked by high inequality in per capita income and disparities in asset ownership, giving rise to the “5% growth trap”.

According to Statistics Indonesia (BPS), in the second quarter of 2026, national economic growth was still around 5.29 percent. This was lower than the annual economic growth in the first quarter of 2026 of 5.61 percent.

The “5% growth trap” phenomenon is occurring amid high per capita income inequality, reflected in a Gini ratio of around 0.360–0.400 over the past two decades. The phenomenon is also occurring amid high regional inequality, marked by the contribution of Java and Sumatra to the national economy reaching around 80 percent.

Meanwhile, the contribution of the other islands, which account for two-thirds of Indonesia’s land area, was only 8.15 percent for Kalimantan, 7.28 percent for Sulawesi, 2.84 percent for Bali-Nusa Tenggara and 2.76 percent for Maluku-Papua.

As a result, national economic growth in the second quarter of 2026 was largely contributed by Java, namely 3.19 of the 5.29 percent economic growth in the second quarter of 2026. Sumatra contributed 1.14 percent of the 5.29 percent national economic growth in the second quarter of 2026 (year-on-year).

This means that Java and Sumatra contributed around 4.33 percent of the 5.29 percent national economic growth in the second quarter of 2026. Two-thirds of Indonesia’s territory contributed only 0.96 percent of the 5.29 percent national economic growth in the second quarter of 2026.

Other islands, such as Kalimantan, contributed 0.33 percent, Sulawesi 0.40 percent, Bali-Nusa Tenggara 0.17 percent, and Maluku-Papua contributed the smallest share, only 0.04 percent, to the national economic growth of 5.29 percent in the second quarter of 2026.

The very serious implication is the narrow regional base of national economic growth. National economic growth of 5.29 percent is supported only by Sumatra and Java.

This fact also shows that business activity nationally is concentrated in Java and Sumatra. Meanwhile, business activity in Kalimantan, Sulawesi, Maluku, Nusa Tenggara and Papua is not developing optimally.

With regard to the poor, the percentage of poor people on each island is also highest outside Java and Sumatra. The percentage of poor people in Java is only around 7.60 percent of the total population of Java, and 7.90 percent of the total population of Sumatra.

The highest percentage of poor people is in Maluku and Papua, at around 18.06 percent of the total population of Maluku and Papua. Sulawesi is around 8.52 percent and Bali-Nusa Tenggara around 11.24 percent of the total population of Bali-Nusa Tenggara.

So what can the Indonesian government do to reduce regional inequality and per capita income disparities? The first step is to encourage industrial agglomeration outside Java, particularly natural resource-based industries. High-technology industrial development should be centred in Java.

The second step is to maximise the management of integrated industrial estates comprising core industry, supporting industry and related industry across all regions of Indonesia. Industrial development should be carried out based on the natural resource advantages of each region.

The third step is to improve access to capital, market access, manufacturing skills training, entrepreneurship training, access to education, access to health, and to increase digital literacy for lower-middle income communities.

Improving digital literacy should be focused outside Java and also in rural areas, including in Java. This step is expected to reduce the digital divide between villages and cities, between Java and outside Java, and between income groups.

Finally, it is worth returning to Alesina and Rodrik (1994): economic growth should be directed towards reducing regional inequality between areas and per capita income disparities. Correcting the distribution of land and capital ownership so that it becomes more equitable is the prime mover of long-term economic growth.