The development of inequality and poverty in Indonesia, 1932-1999

van Leeuwen, B. and Foldvari, P.

In this paper we estimate inequality in Indonesia between 1932 and 1999. There was an increase in inequality at the start of this period but then a sharp decline from the 1960s. A shift from domestic to export agriculture over the period up to the Great Depression accounts for the increase in inequality. During the 1930s, as the price of export crops declined, the income of rich farmers suffered a blow. Yet, this was counterbalanced by increasing gap between expenditure in the urban and rural sectors, causing an over-all rise in inequality. As for the second half of the century, we find that the employment shift towards manufacturing and services, combined with an increase in labour productivity in agriculture, accounts for the decline in inequality. These inequality trends had an effect on poverty as well, but prior to the 1940s the negative impact of the rise in inequality was offset by an increase in per capita GDP. Between 1950 and 1980 a decline in inequality, combined with increased per capita GDP rapidly raised a large portion of the population above the poverty line.