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Economic Growth and Income Distribution
Jurnal Ekonomi Malaysia 39 (2005) 89 - 105 89
Economic Growth and Income Distribution: The
Experience of Indonesia
Jhon Tafbu Ritonga
ABSTRACT
The economy of Indonesia had come into the social and the political
crisis since the second period in 1997. A number of social riots struke
several towns in Indonesia. Consequently, the stability of the state was
disturbed. It caused the efforts to economy recovery to be more and more
difficult to do. Many others pointed out that the social riots were caused
by inequality of economy. The purpose of this study is to find out the
income inequality stage in Indonesia and wether the good income
distribution inequality can ensure the stability of the state. The
measurement method for income distribution used in this study is Gini
coefficient and World Bank’s criteria. The results of the study shows that
the economic growth rose significantly during New Order (sociopolitical
in Indonesia). While, the income distribution based on Gini Ratio and
World Bank’s criteria imply that Indonesia is included the category of
low inequality. However, in the study’s period is found the distortion of
Kuznets hypothesis and Ahluwalia’s analysis on the change forms of
income distribution. The low inequality doesn’t reflect to another
inequality situation such as poverty and absolute inequality. Therefore,
the rising of economic growth and the low inequality during the study’s
period doesn’t guarantee the stablity of politic. The studies about the
income distribution shouldn’t use macroeconomics approach only, but
also other approaches like microeconomics aspects.
ABSTRAK
Ekonomi Indonesia telah mengalami krisis politik dan sosial sejak tahun
1997. Terdapat beberapa rusuhan sosial yang melanda Indonesia yang
menyebabkan kestabilan negara tergugat. Rusuhan ini memberi kesan
kepada usaha untuk pemulihan ekonomi negara menjadi sukar. Ramai
yang berpendapat bahawa rusuhan sosial ini disebabkan oleh ketidak-
seimbangan ekonomi. Tujuan kajian ini adalah untuk mengetahui tingkat
ketidakseimbangan pendapatan di Indonesia dan melihat sama ada
90 Jurnal Ekonomi Malaysia 39
ketidakseimbangan pengagihan pendapatan yang baik menjamin dapat
menjamin kestabilan negara. Kaedah pengukuran yang digunakan dalam
kajian ini ialah pekali gini dan kriteria yang digunakan oleh bank dunia.
Hasil kajian ini menunjukan bahawa pertumbuhan ekonomi meningkat
semasa New Order (sosiopolitik di Indonesia). Sementara itu, agihan
pendapatan berdasarkan pekali gini dan kriteria bank dunia menunjukan
bahawa Indonesia tergolong di dalam kategori ketidakseimbangan yang
rendah. Walaubagaimanapun, dalam tempoh kajian mendapati terdapat
perubahan yang berlaku pada hipotesis Kuznet dan analisis Ahluwalia
ke atas bentuk perubahan agihan pendapatan. Ketidakseimbangan yang
rendah tidak mempengaruhi situasi ketidaksamaan yang lain seperti
kemiskinan dan ketidaksamaan mutlak. Oleh itu, peningkatan
pertumbuhan ekonomi dan ketidaksamaan yang rendah ketika tempoh
pemerhatian tidak menjamin kepada kestabilan politik. Kajian tentang
agihan pendapatan tidak hanya menggunakan pendekatan makroekonomi
sahaja tetapi juga melihat aspek-aspek mikroekonomi.
INTRODUCTION
During the first of Five – Year Development Plan (Repelita) was begun
on 1st April 1969 untill the fifth Repelita ended on March, 31st 1994, the
economic development of Indonesia was done base on the Trilogy of
Development, i.e income distribution of development and its results to
all over Indonesia, the economic growth quite rise, and the national
stability. The emphasizing of the three elements used to change. On the
first Repelita, the sequence of trilogy are the national stability, the eco-
nomic growth and the income distribution. In the second Repelita moved
to be the economic growth, the national stability and the income distri-
bution. Since the third until the fifth Repelita the sequence changed to be
the income distribution, the economic growth, and the national stability.
Nevertheless, in a political perspective, government tended to give
priority to the national stability element. This was caused by assumption
that the instabiltiy of politic surely would disturb the development process.
On the other word, the stability element was regarded as a key – factor
for succeeding the income distribution and the economic growth in the
national development process by using the security approach. The security
approach usage in the stabiltiy element was reflected in the government
policy to stifle some incidents from the political surge, like Tanjung Priok
incident, Way – Jepara, Timor – Timur, and Aceh. It appeared in the 6
Economic Growth and Income Distribution 91
times general election went on safely without significantly disturbance.
That’s why, during 30 years the power of The New Order, Indonesia was
recorded as one of the safest and the most stabil states in Asia.
With a very undercontrol of the political stability, the economy
development in Indonesia could be run so smoothly that this state was
included as one of the miracles of Asia economy. But in Mei 1997 general
election, where Golkar Party was constantly as an absolute winner, and
since, Indonesia was struck by monetary crisis in July 1997. It’s started
firstly in Thailand. The decline of the exchange rate of rupiah went down
drastically and continously. The fact had caused the economy of Indonesia
come into a seriously wide range crisis.
In the bad economy crisis condition, General Assembly of People
Consultative Republic of Indonesia (MPR-RI) in March 1998 still appointed
Mr. Soeharto as a president for 1998 – 2003. Because the economy crisis
couldn’t be controlled successfully, then it led to the action of university
students who asked Mr. Soeharto to stepback or called as “reformation”.
The actions were followed by social riots. The riots were begun in Medan
on 4th Mei 1998, then the larger riots happened in Jakarta on 13rd and 14th
Mei 1998 and those had taken more victims.
Beside the actions and the riots, a number of public figures such as
religius and educational ones had said directly to Soeharto in order to
stepback. In the crusial situation, finally, Soeharto steppedback and handed
up the national leadership to the Vice of President Baharuddin Jusuf
Habibie on 21st Mei 1998.
The President BJ.Habibie then formed Development Reformation
Cabinet, released political prisioners, gave a freedom to establish political
parties and also to publish newspaper. Afterthat, scheduled of making a
new political constitution,holding plenary assembly of MPR-RI, general
election, and general assembly of MPR-RI in 1999.
However, in the middle of reformation which was being done by
BJ.Habibie’s, the university students continuosly claimed the government
on the streets to demand Habibie to stepback. Some of them and the polices
became victims in the uncident. The other anarchy acts also happened in
several regions. Since on 15th until 30th July 1998 was recorded more
than ten times the social riots and the anarchy acts happened. Among of
them happened in Sumater Utara, Irian Jaya, Jakarta, Malang, Bogor,
Banyuwangi, Jepara, Jember, Jombang, Kediri, and Sumatere Barat. The
incidents automatically influenced the instability of politic. Those had
influenced the efforts to economy recovery which went down for nearly
a year.
92 Jurnal Ekonomi Malaysia 39
The economists as Didik J. Rachbini and Anggito Abimayu (SWA
1998) and politician like Ryass Rasyid (SWA 1998) pointed out that those
were caused by a long standing inequality of income distribution, poverty,
and a sequeeze difficult of economy and political deadlock. Amien Rais
(Tempo 1999) also said that the riots seeked of ethnic, religions, and racial
relation (SARA) as burning of churches or mosques, etc, have two essential
problems, they are: a serious social inequality and a hard life condition.
Of course, it has become a public opinion that the income inequality as a
source of social jealous, that can stimulate a conflict of SARA in anytime.
That’s why, the conflicts are always connected to the matter of a social
gap or a bad economy inequality.
According to phsycologists as Djamaluddin Ancok and Sartono
Mukaddis SWA 1998), the riots as something phenomenon of happiness
expression for the collapse of a long quo – status beyond Mr. Soeharto’s
regime. But, they also argueded that the exclusive group society were
caused by a long hidden unsatisfaction. Chiness group (non-native) used
to become victims of anarchy acts caused the group were guessed close
to the center of power.
Reference with the description above, this study aims to answer the
problems; Is the inequality of income distribution as a source of social
riots and anarchy acts? Is that true that the economic development can
produce income distribution and the economic growth as a guarantee to
establish the state stability?
LITERATURE REVIEW
Economic development is a process which goes on in long term and
planned to improve the quality of all people lives. There must be two
things inside economic development, ie: the economic growth and the
change of structure, ie. economic, social, and political structure.
The economic growth is usually measured base on the rising of
national income or gross domestic product (GDP). The increasing of income
is followed with the change of structure, and it will cause the decreasing
sum of low income citizens.
Among other of the economic structure change can be seen how the
contribution of economy sector in the national income and opportunities
for employment. The further of the economy structure change will cause
the change of income distribution. Two things need to be discussed
theoritically in this context, ie: a measurement instrument for the income
Economic Growth and Income Distribution 93
distribution and the relation between the development and income
distribution.
THE INDICATOR OF THE INCOME DISTRIBUTION
The inequality level of the income distribution can be analized through
many aspects. For instance, inequality of income inter sector and district
with using indicator and a certain approach. One of the approaches which
is usually used to analyze the condition of distribution in a state is relative
measurement and Gini coefficient. Gini coefficient shows a rate (number)
that’s range from zero (perfect equality) to one (perfect inequality). Gini
coefficient which is getting close to zero indicating a better distribution,
and number which close to one means to be worse. However, if Gini
coefficient is around 0.20 – 0.35 usually the inequality of income
distribution healthy regarded or low inequality. The counting of Gini
coefficient can be done by using a Lorenz curve or automatically (Todaro
2003).
The relative measurement is usually used by World Bank in analyzing
the inequality with deviding population to be three groups, they are 20%
people as a high income group, 40% people as a medium income group,
and 40% people as the lowest income group. Based on the classification,
income distribution in a country become three categories: High inequality;
if 40% people have the lowest income, accept 12% of national income.
Medium inequality; if 40% people have the lowest income, accept 12% –
17% of national income. Low inequality; if 40% people have the lowest
income, accept more than 17% of national income (Djojohadikusumo
1994).
DEVELOPMENT AND DISTRIBUTION
Based on most of states experiences, economic development will support
the increasing standard of living which is quicker for minorities people
who dominate economy’s assets. While, for mayority’s ones which do
not dominate the economy assets, though they get a rise of income but
still remain to stay behind.
At the preliminary stage of development is usually signed by a
situation where the difference income between the poor group and the
rich ones become larger. The study for the growth pattern in some advance
countries by Simon Kuznets shows that is found the rate of income
94 Jurnal Ekonomi Malaysia 39
distribution tend to be worse at the preliminary stage of economy
development. However, the situation will get better on the development
phases. On the other word, at the preliminary stage of Gini coefficient
will tend to be bigger and then getting smaller suit to increasing of income
per capita. If it is drawn in a curved, Kuznets hypothetical called as “The
Inverted-U” Kuznets Curve (Berg 2001).
Gini Coefficient
Per capita income
FIGURE 1. The “Inverted U” Kuznets curve
The other study by Montek S. Ahluwalia, stated that the higher income
per capita, the people who have income under poverty line will be smaller.
Based on the classification of World Bank, found that in communist
countries, 40% low income citizens class accepting 25% from overall
national income. While in advance countries 40% low income citizens
class accepting around 16%. So, the pattern of income distribution in
communist countries are relatively better than in non-communist advance
countries (Sukirno 1985).
Nevertheless, the income distribution in several developing countries
are better than in advance countries, because 40% low income citizen in
the developing countries accepting 18% from overall national income.
The other forms of income distribution also happen in other depeloping
countries, that is, 40% low income citizen only receive 9% from overall
national income. It means that the inequality in the developing countries
are worse, compared to the condition in advance countries (Sukirno 1985).
However, as showed in the second figure, found 2 curves; a concave
curve S1 shows the percentage of national income which is received by
40% low income citizens (poor) in a certain income level. While a dome
Economic Growth and Income Distribution 95
% Income
S2
S1
Per capita income
FIGURE 2. Distribution income
curve S2 shows a portion of state income which are received by 20%
high income citizens (rich).
As above explanation, that the poverty and income inequality can
bring about the disturbance of the state stability. While economic
development is to improve standard of living and to wipe out the poverty.
The further problem is when the result of the development absolutely can
cause the income distribution inequality. That’s why, the success of the
economy development process in a developing countries, like Indonesia,
found a possibility to be a source of national stability disturbance or even
a source of nation disintegration.
S2
OBJECTIVE S1
This study is aimed to explaine the description of development in Indonesia
for questions; Has the rise economic growth succeeded in increasing the
people living standard especially low income citizen? How are the situation
of the income distribution between society group? This study also aims
to expose wether the healthy inequality of income as a guarantee for an
eternity of the political stability of the state.
METHOD
This paper is the result of the study on secondary data to find out the
effect of income inequality on the state stability. The design analysis which
is used is the study of economy development.
96 Jurnal Ekonomi Malaysia 39
SOURCE OF DATA
This paper use secondary data legally issued by Badan Pusat Statistik
(BPS-Statistics Indonesia) and legal data which is issued by another
institution. Basically, using data of time series the year of 1978 until 1998.
In that case, this study will not use a plenty of data after monetary crisis
happened.
METHOD OF ANALYSIS
To see how the development process improve the living standard of
society, explained the change of sum and the portion for low income
citizens. While, the measurement used to see the effects of the economy
growth on the society welfare is the change of low income citizens sum.
Therefore, the poverty line which is used formally criteria, as it is used by
the government, that is the equal consumption 2,100 calorie per capita
per day or about Rp 4.000 per month (current prices 2003).
To see how the inequality of income distribution in the society, used
Gini coefficient and relative inequality base on World Bank’s criteria.
From some analysis of the inequality pattern is aimed to be visible
how is the reality of inequality of income distribution in Indonesia in the
context with the state stability which become a priority of New Order’s
Government.
RESULT AND DISCUSSION
Many progress of economy had been achieved during New Order. The
average of economy growth was high enough, that’s around 7% per year.
The economic’s transformation structurally happened, among other were
signed by the smaller amount of contribution from agriculture sectors on
the national income. In the poverty case, Indonesia had succeeded in
existing in a group of country which were medium income. The sum of
low income citizen decrease absolutely and relatively in a great number.
Hence, Indonesia also succeeded in becoming a group of semi-industrial
country which had an adequate amount of food, from an agriculture
country where was included as the greatest importer for rice in the world
prevously.
The success of controlling macro-economics indicator was quite good,
as rate of inflation which was restrained under one digit, unemployment
rate can can be pressed to the lower rate, sufficient federal reserves to
Economic Growth and Income Distribution 97
import 4 until 6 months. That’s why, the government used to say that the
fundamental of macro-economics was strong enough.
By using indicator which is normally used in economic development
analysis, the development in Indonesia is justified succeeding in achieving
the good economic growth and the income distribution. Hence, Indonesia
was regarded as a successful country in economy development until
included in a set of countries called as the miracle of Asian economy.
DEVELOPMENT AND POVERTY
Development had brought about the significant economic growth, that’s
around 7% a year. The rate of population growth was pressed down
successfully with a program of family planning from 2.34% to be around
1.6%. Because the growth of population could be pressed in one aspect
and the high economic growth in another aspect, the Gross Domestic
Product percapita increased from average US $100 in 1970 to be US $1,115
in 1996. But the economy crisis which was caused by the decrease of
Rupiah exchange rate in 1997, income per capita went down to be US
$1,088.7 and in 1998 went down again become approximately US $449.20
per capita.
As showed in Table 1, since 1970 until 1996, the rate of economy
growth for Indonesia was used to be positive with average rate almost
TABLE 1. Indonesia economic growth 1970-1997
Year % Year %
1970 7.5 1984 7.0
1971 7.0 1985 2.5
1972 9.4 1986 5.9
1973 11.3 1987 4.6
1974 7.6 1988 5.8
1975 5.0 1989 7.5
1976 6.9 1990 7.2
1977 8.9 1991 6.9
1978 7.7 1992 6.5
1979 6.3 1993 6.5
1980 9.9 1994 7.5
1981 7.9 1995 8.2
1982 2.2 1996 8.0
1983 4.2 1997 4.7
Source: Indonesia Statistics
98 Jurnal Ekonomi Malaysia 39
7%. The lowest rate of the economy growth happened in 1982, that’s
2.2% and the highest ones in 1973, that’s 11.3 %.
With that economic growth, the sum of low income citizen also got a
significant decrease. In the year of 1970, the sum of low income citizen
in Indonesia was estimated at 55.4 million people, or around 47.4% from
overall population of Indonesia at the time; 117.0 million people. In 1996,
the sum of low income citizen, remain 22.5 million people or around
11.3% from overall population.
In the Table 2, seen that’s found the real difference decrease from
the sum of low income citizen in town or out of town. In 1970 the sum of
low income citizen in out of town is 44.2 million people or 40.4% become
15.3 million people or 12.3% in 1996. While in the town are down from
10.0 million people (38.8%) to be 7.2 million people (9.7%). This change
indicates that the decrease sum of low income citizens are quicker in out
of town than in the town.
TABLE 2. Indonesia population under poverty line 1970-1998
Poverty Line (Rp/Month) Population (Million)
Year Rural Urban Rural Urban Indonesia
1970 999 1.240 48.3 7.1 55.4
1976 2.849 4.522 44.2 10.0 54.2
1980 4.449 6.831 32.8 9.5 42.3
1990 13.295 20.614 17.8 9.4 27.2
1996 27.413 38.246 15.3 7.2 22.5
1998 41.588 52.470 56.8 22.6 79.4
Source: Indonesia Statistics
The monetary crisis was started in the middle of 1997 had caused the
sum of low income citizens in Indonesia increased. Until, in the middle
of 1998 the formal data from the government showed the low income
citizens increase to be 79.4 million people or 39.1% from overall
population which meant to be worse than the situation in 1970.
RELATIVE INEQUALITY
By using an out put data or consumption can be understood that the pattern
of income distribution inequality in Indonesia didn’t improve consistently.
Economic Growth and Income Distribution 99
As a general description, a number of Gini coefficient based on the variety
results of the study can be seen in Table 3.
Although the source of data are not uniform, but number of Gini
coefficient showed in Table 3 indicated that from 1965 until 1996, that
the beginning of income distribution tended to be better, but worse then.
Gini coefficient which is prevously moves down, then go up again
showing that the hypothetical “up side down U” Kuznets is not in effect.
If those numbers are made in a curve, the result will be curve “V and U”
or opposite hypothetical Kuznets.
TABLE 3. Indonesia Gini Coefficient 1965-1996
Year Gini
1970 0.35
1975 0.33
1978 0.38
1980 0.34
1981 0.33
1984 0.32
1987 0.32
1990 0.32
1993 0.34
1996 0.36
Source: Indonesia Statistics
Gini Coefficient
Gini Curve
8
Level of development
FIGURE 3. Indonesia Gini Curve
By using World Bank’s approach found that the rate of income
distribution inequality classified in low inequality in Indonesia. Therefore,
government always believes that Indonesia, the problem is not carried
out, so the government doesn’t regard the problem of income distribution
100 Jurnal Ekonomi Malaysia 39
inequality become a source of the state stability and the social jealous in
Indonesia.
Eventhough, as showed clearly on Table 4 that the pattern of the low
inequality empirical shows a bad phenomenon. Based on a number on
the Table 4 can be concluded that the case in Indonesia shows a distorted
situation from the World Bank’s theory or Ahluwalia’s reference with
the portion of income which is received by 40% low income citizens and
20% high income citizens. It seems that the analysis of Ahluwalia is not
completely in effect in Indonesia. The percentage of income which is
accepted by 40% low income citizens, of course tend to go down than go
up again. But the percentage of income which is accepted by 20% high
income citizens, after rise up, then rise down, and in fact it returns to rise
up, so its curve can be seen in Figure 4.
TABLE 4. Distributon of income by group 1969-1970
Distribution of Income by Group
Year 40% Low 40% Middle 20% High
1969 20,65 38,70 40,65
1978 18,13 36,53 45,34
1980 19,55 38,28 42,27
1984 20,75 37,28 41,97
1987 20,87 37,48 41,65
1990 21,31 36,75 41,94
1993 20,34 36,90 42,76
1996 20,25 35,05 44,70
Source: Indonesia Statistics
% Income
S2
S1
L l
Level of development
FIGURE 4. Distributon of income by group
Economic Growth and Income Distribution 101
By using Kuznets method, World Bank and Ahluwalia are found
that is the income distribution in a long term is not consistent in Indonesia.
The share of income which is accepted by high income citizens, certainly
become bigger. While the rise of portion which is received by low income
citizens is not going on consistently. Then, the portion or the share for
medium income citizens extremly seems to be decrease.
Data which is analyzed base on user data or consumption. Therefore,
in a daily life appear the difference in a consumption pattern as a sensitive
factoron the social jealous problem. That’s why, seen through the relative
inequality factor, the national stability also become very sensitive because
the problem of income distribution inequality.
In relation to that case, generally, in the beginning of the reformation
and the decline of New Order regime, a number of riots happened in the
towns. Concern with this aspect, the inequality of income distribution
has affects on the riots or the disturbance of the state stability. Need to be
recorded that the pattern which is described above, it appears that the
portion 40% for medium income citizens which decrease showing a sign
of threat of social problem in the medium class, especially in the towns.
As it appears on the indicator of the growth of low income citizen
sum and the changes of inequality pattern which is above explained, so it
can be concluded that the economy matters as a trigger for happening a
social riot.
ABSOLUTE INEQUALITY
Meanwhile, that can be seen absolutely how the comparation of income
per capita for high income citizens, medium class, and lower class. For
this thing, can be used formal data about population and Gross Domestic
Product.
In Table 5, showed that in 1996 amount 80% or 158.72 million people
of Indonesia accepting smaller income than income per capita, that is
only US$ 564.47 for 40% low income citizens, and US$ 577.02 for 40%
medium ones. It is in proportion to average national income percapita
US$ 1,115.00. While, average income is 20% more for high income class
over gross national product, that is US$ 2,492.03 amount.
The condition is getting worse again after monetary crisis when
income per capita go down from US$ 1,115 become US$ 449.20. While,
the sum of low income citizens return increase to be 39.1% or 79.3 million
people. This means that it has been more than in 1970 which is only 55.4
million people.
102 Jurnal Ekonomi Malaysia 39
TABLE 5. Income per capita by group 1996
Group % PDB Population GDB Per Capita
(Million) (Million US$) Income (US$)
20% High 44,70 39,68 98.883,55 2.492.03
40% Midle 35,05 79,36 77.536,21 977,02
40% Low 20,25 79,36 44.796,24 564,47
National 100,00 198,40 221.216,00 1.115.00
Source: Indonesia Statistics
Same with another inequality as showed above, the absolute inequality
between high class, low class, and this medium class. Strengthen a
conclusion that the problem of income inequalityas a very influential factor
for creating social jealous and further to be very potential to disturb the
stability of the country.
CONCLUSION
This study shows that Gini coefficient 0.36 (close to zero) and 40% low
income citizens accepting 20.05% from national income. Therefore, it
can be concluded that the income distribution in Indonesia well-classified
or include in low inequality category.
This study shows that the income distribution in Indonesia different
from which is described by hypothetical Kuznets curve and a concave
curve and a dome curve of Ahluwalia. But, in Indonesia is curve “V” and
“U” and two curves.
The portion of national income which is accepted by high income
group getting bigger. While, the portion which is received by low income
ones do not improve consistently. Then, the portion that is gained by
medium income class actually become smaller.
Meanwhile, the high economic growth has supported the increase of
areal income per capita. But, the increase of income per capita based on
the classification of society is not same. The increase of income 20% for
high income citizens going on faster than 80% for low income citizens.
Hence, the absolute inequality of income between 20% for high income
citizens and 40% for low income citizens is very big (US$ 2,452.03 and
US $ 567.47). Consequently, found the difference of contrastive
consumption pattern as well. This condition indicates a worse situation,
that is Gross Domestic Product which is accepted by 80% low income
Economic Growth and Income Distribution 103
citizens and medium income citizens tend to decrease, while the portion
accepted by high income citizens actually increase.
In the context of socialized life harmony, the equality which is
described above, that is obviously a source of social-jealous where anytime
become a sensitive issue among the groups threatening the national
stablity. On the other word, because the unsatisfaction feeling and social
jealous from the larger society groups seem to be cristalized, then the
government is not capable to do any controlling.
According to that case, it can be concluded that the high economic
growth and the good income distribution do not guarantee a social
harmony yet. Therefore, if the income distribution is taken as a determining
factor for the social stability, the inequality distribution problem may not
inference with conventional methode only, as Gini’s index and World
Bank’s criteria.
This tudy shows that many other indicators must be considered to
understand income distribution situation in the developing country, like
Indonesia. For instance, the sum of low income citizens, absolute
inequality, consumption inequality, structural inequality, and ethcnic
inequality.
Without concerning these factors, which studies show that the income
distribution inequality can’t be guessed, that the country will not be
stricken social riots dissaster.
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