JAKARTA — Indonesia is a sprawling nation made up of thousands of islands in Southeast Asia and is home to the world’s third-largest democracy. The nation has had robust GDP growth and is one of the world’s largest economies. However, poverty is a major issue in Indonesia. Eleven percent of the population lives in poverty and an additional 40 percent of Indonesians are living just above the poverty line. So why is Indonesia poor?
A significant cause of poverty in Indonesia is a lack of adequate infrastructure. Much of Indonesia’s existing infrastructure is of poor quality and the country is lacking roads, harbors, airports and resources for power generation. Infrastructure is also very difficult to build and maintain due to the country’s geography and frequent natural disasters in the form of floods, earthquakes, volcanic eruptions and tsunamis. As a result, transportation and energy costs are high and discourage foreign investment in the country.
Current infrastructure is also not meeting the needs of Indonesia’s rural population, where poverty is most concentrated. Many rural farmers live in isolated villages that lack paved roads and transportation services that could give them greater market access. These areas are also deprived of education, sanitation, healthcare and financial services. Isolation from these services has caused Indonesians working in informal agriculture to be twice as likely to be poor than workers in other industries and has led to high rates of malnutrition and maternal mortality in rural areas.
Why is Indonesia poor? Another key cause is the country’s growing income inequality. While Indonesia’s growing economy has helped lift nine million people out of poverty over the last decade, Indonesia’s poor have not seen the benefits that Indonesia’s wealthy have. Industries such as mining, telecommunications and financial services have been rapidly expanding, but these industries are less reliant on labor so many urban Indonesians are unemployed.
Agriculture is a more labor-intensive industry, employing 35 percent of Indonesians, but it has experienced very slow growth in comparison. These changes to the economy have also created a widening income gap between Indonesians with access to education and Indonesians with very limited access. Indonesia’s lack of adequate infrastructure also keeps Indonesia’s poor from accessing the same opportunities that the wealthy have. Income inequality is detrimental not just to the poor, but the country at large. The World Bank has found that countries with greater income equality experience faster growth and stronger stability.
A final key factor to answering the question ‘why is Indonesia poor?’ is the nation’s vulnerability to price shocks. Because 40 percent of Indonesians are just above the poverty line, a sharp rise in inflation is all that’s needed to send many into poverty. Food prices are especially volatile since harsh weather conditions and natural disasters can frequently disrupt agricultural production. Poor infrastructure has also made the costs of food 50-70 percent higher in Indonesia than in neighboring countries. The impact of higher food prices, especially for staples like rice, is extremely damaging to the poor and near poor in Indonesia since they spend more than half of their income on food.
Indonesia has a lot of challenges ahead, but there are reasons to remain optimistic about its growth. GDP is growing by 5 percent, one of the highest growth rates of emerging market economies, and the government has made numerous reforms to spend more on infrastructure and social services. Hopefully with continued growth and reform, Indonesia can continue to rise out of poverty.
– Carson Hughes