Galveston Jakarta Capital Reviews

Potential commodities boom: Harmful for income inequality

Mid-year of 2017 which will be marked as mid-term of President Joko 'Jokowi', is now around the corner. Jokowi set key developmental targets at the beginning of his administration. One of them is narrowing down income inequality.

Income inequality has declined since President Jokowi took the office. Gini Coefficient, which measures income distribution ranges from zero (perfect equal meaning everyone earns the same income) to one (only one person earns all income in an economy), has fallen from 0.405 to 0.394. Gini Coefficient indicates a declining trend.

Therefore, the follow-up question for that progress is that what makes income inequality narrowing down? There is a tendency that lower commodity prices would lead to narrowing down income inequality.

It is no secret that Indonesia's economy relies heavily on commodities, for example palm oil, rubber, and natural gas. When the commodity prices boom, Indonesia enjoys relatively massive amount of foreign exchange, and eventually higher national income and economic growth.

However, income from commodity price boom is not distributed well for many. And it might lead to widening income inequality, for two main reasons. First, only a certain small group of people benefits from commodity boom. They are generally rent seekers who get a permit to exploit natural resources.

Second, the concept of Dutch Disease is likely relevant to portray negative impact of commodity prices boom. The term was originally used to describe situation experienced by the Dutch in the late 1970s. The Dutch benefited (foreign exchange reserve accumulated) from the increased of natural gas price. But in contrast, it caused economic trouble and more unemployment rate. Economists define Dutch Disease is a condition when the commodity prices boom led to by the inflows of foreign exchanges.

According to Econ 101, large foreign reserves causing appreciation of exchange rate. It means that domestic products are relatively more expensive in the global market. So that, competitiveness of other products, including manufactured commodities, would decline. Only certain people who are involved in the production of commodities get the most gain from the commodity boom. But, the rest might get harmed.

In the near future, there is a potential of another commodity price boom. According to the Central Statistics Agency (BPS), Indonesia's cumulative exports rose by 18.63 percent in the January-April period this year from the same period in 2016.

The rise in export is mainly caused by higher price of commodities. Moreover, according to the World Bank's Commodity Price Outlook as of April 2017, it is forecasted that prices of energy commodities and non-energy commodities are going to be in upward trends this year.

The government should prevent the potential negative impact of commodity prices boom to widening income inequality. The government should more focus on two sectors to keep the income inequality narrowed down.

First is focusing on developing tourism sector. Over the past years, foreign exchange reserve from tourism industry has shown a positive trend. And it has been in the top four sectors for foreign exchange reserve contributors.

Moreover, tourism industry has relatively high multiplier effect comparing to other industries. By definition, multiplier effect is a condition occurred when a growth in one sector has positive effects on its sector and other sectors, also encourages growth in the local economy. According to World Travel and Tourism Council, tourism industry in Indonesia has multiplier effect 1.7. It implies that every one dollar spent on tourism would create 1.7 dollar income for the region.

Second is speeding up implementation of financial inclusion. According to the latest World Bank's Financial Inclusion Data, less than half of total adults (age 15+) in Indonesia has been reached out by financial services, including formal saving and formal borrowing. In other words, there are many potential financial services users.

Many studies have shown that financial inclusion gives many benefits, for instance: manage cash flow through saving; finance business, particularly micro, small, and medium enterprises, through borrowing; mitigate risk of unexpected events, through insurance.

To make sure more people are included in financial services, policies in financial inclusion and financial access must get along together. All stakeholders, central and local government, the central bank, financial service authority (OJK) must collaborate to implement financial inclusion successfully.

Indonesia should stop relying on commodities. History has recorded that commodity price boom is not last for a long period of time. It is good for economic growth for a while, but it affects income equality widen.