With rising economic growth often comes a worry about the accompanying risk of rising economic inequality.
The argument for this originates from the observation that developing societies with high economic growth tend to have worse Gini ratios.
According to economist Tony Prasetiantono, there should not have to be a trade-off between rapid growth and a better Gini ratio.
“Is the choice between pursuing a good Gini ratio at the cost of sacrificing economic growth? I don’t think so,” Tony said, at the Forum Merdeka Barat 9 ( FMB9 ) media forum on reducing income inequality, held in Central Jakarta on Sept. 8.
At the event, Tony cited Russo-American economist Simon Kuznets’s inverted-u-curve hypothesis to demonstrate how rapid growth should not be something to fear
Kuznets’ theory stipulates that as an economy develops, market forces will first increase and then decrease economic inequality. Inequality will decrease when a certain level of average income is reached. The benefits of rapid growth will then trickle down. This results in an increased per-capita income.
The resulting trend, when graphed, shows inequality following an inverted “U” shape as it rises and then falls again with the increase in per-capita income.
“We need a comprehensive understanding of the Gini ratio,” Tony said. “So maybe the improvement of the Gini ratio could come when per capita income is around 4,000 or 5,000 dollars per person per year.”
Tony warned against narrow interpretations of data.
“I want to invite everyone to look at the data more comprehensively. The numbers don’t just stand on their own. Variables in the economy are interrelated. We can’t just look at one individual snapshot.”
So what should the government do? There is no single policy, but Tony said that efforts should begin with infrastructure development, which has the short-term benefit of absorbing jobs and a long-term benefit of improving the cost of logistics and distribution of goods
“I still think economic growth needs to be pursued. Employment absorption needs to be pursued. Quality of infrastructure, human resources and health need to be pursued together. The combination of all this will reduce income inequality,” Tony said.