Growth and Inequality

An article titled ‘Distributive Politics and Economic Growth’, published by the Quarterly Journal of Economics in 1994, serves as a reference for policymakers in Emerging Market Economies (EMEs), particularly Indonesia. Written by two eminent economists, Alberto Alesina and Dani Rodrik, the paper argues that distributive politics negatively impacts 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 constituents to secure political support. Their findings show that countries with high asset and income inequality have high tax rates followed by low economic growth. The same applies to countries characterised by high land ownership and income inequality. This phenomenon is occurring in Indonesia, marked by high per capita income inequality and asset ownership gaps, giving rise to a ‘5% growth trap’. According to Statistics Indonesia (BPS), national economic growth in the second quarter of 2026 was around 5.29%, a figure that has remained stagnant amidst a Gini ratio hovering between 0.360 and 0.400 over the last two decades. This occurs alongside high regional inequality, with Java and Sumatra contributing approximately 80% to the national economy. Meanwhile, the contribution of other islands, which make up two-thirds of Indonesia’s total area, is just 8.15% for Kalimantan, 7.28% for Sulawesi, 2.84% for Bali-Nusa Tenggara, and 2.76% for Maluku-Papua. Consequently, national economic growth in the second quarter of 2026 was largely driven by Java, contributing 3.19 percentage points of the 5.29% growth, while Sumatra contributed 1.14 percentage points. The remaining two-thirds of the country contributed only 0.96 percentage points. A serious implication is the narrow base of national economic growth regionally, with business activities heavily concentrated in Java and Sumatra. The percentage of the poor population is also highest outside Java and Sumatra, reaching 18.06% in Maluku and Papua, compared to 7.60% in Java. To reduce regional and income inequality, the government should first encourage industrial agglomeration outside Java, especially resource-based industries, while centralising high-tech industries on Java. Second, it should maximise the management of integrated industrial zones across all regions based on local resource advantages. Third, it must improve access to capital, markets, manufacturing skills training, entrepreneurship training, education, health, and digital literacy for lower-middle income communities, focusing on rural areas and regions outside Java. Ultimately, returning to Alesina and Rodrik (1994), economic growth should be directed at reducing regional and income inequality by correcting the distribution of land and capital ownership to make it more equitable as a prime mover for long-term growth.