Indonesia’s economic development has not benefited the entire population

Indonesia’s recovery from the 1997 Asian Financial Crisis has led to an impressive reduction in poverty and a significant improvement in living standards. However, the decline in poverty slowed significantly after 2010, with 38.2% of the population remaining poor or vulnerable. At the same time, inequality rose strongly until recently.

Social protection is at the centre of Indonesia’s inclusive growth strategy

Since 2000, Indonesia has made great progress towards establishing a social protection system that covers a wide range of risks as part of its strategy to promote inclusive growth as a critical enabler of the country’s continued economic and social development. Yet it is not operating at its full potential.

Households eligible for PKH are also entitled to complementary initiatives to promote their sustainable exit from poverty, including scholarships, free health insurance and subsidised rice. However, it is rare that poor individuals benefit from all these programmes, due to institutional fragmentation and uneven use of the Unified Database (UDB), which has been developed since 2005 as a common targeting mechanism for social assistance.

Indonesia’s social insurance programmes, such as retirement pensions and health insurance, are well established, and the government is taking steps towards reducing coverage gaps. The national health insurance system, JKN, is making extraordinary progress towards universal health coverage, covering three quarters of the population as of October 2018. However, there are concerns regarding its long-term sustainability. At the same time, a new pension system is struggling to increase coverage amongst Indonesia’s large informal sector.

Active labour-market policies are required to enhance the skills and productivity of poor, vulnerable and marginalised workers, but these are currently implemented at a relatively small scale. Meanwhile, passive labour policies, such as minimum wages and severance pay, risk distorting the labour market and compliance is low. Severance pay is considered a constraint to hiring and firing workers, while minimum wages are high relative to the median wage.

Over the coming decades, Indonesia’s elderly population is expected to grow rapidly. This means that the focus on alleviating child poverty will shift over time to programmes for older people. Increasing coverage of contributory pensions is a policy priority of Indonesia but will be difficult to achieve, especially for individuals closer to retirement today. Demand for alternative approaches to ensuring welfare in old age is likely to intensify.

Strengthening the social protection system

Indonesia is realising its commitment to establish a social protection system. Important progress has been made in strengthening coherence and coordination across a number of dimensions, including legislation, policies and institutions. However, financing for social protection is low by international standards, reflecting the country’s weak domestic resource mobilisation.
Policies to expand social insurance coverage, enhance tax compliance and promote formalisation should work hand-in-hand to increase the resources available to social protection while ensuring Indonesians have access to better jobs.

Did you know...?

The challenge of reducing poverty is in part a result of the major economic disparities across the country: in 2018, the poverty rate in Jakarta was below 4% but exceeded 20% in a number of eastern provinces. 

Did you know...?

The majority of the Indonesian workforce is informally employed: in 2016, the informality rate stood at 57%. Informal workers (and their families) often find themselves in the “missing middle” of social protection coverage, whereby they are ineligible for poverty-targeted social assistance but excluded from employment-based contributory arrangements.‌