International Commodity Prices and Inequality in Indonesia

There has been an increasing attention to the recent increase in Indonesian inequality. From 2009 to 2011, Gini coefficient increased from 0.37 to 0.41, the highest ever recorded in Indonesian history. During the same period, the world prices of many Indonesian export commodities doubled. As those sectors, particularly mining, is highly capital intensive and skilled-labor intensive, this may increase the returns to factors more intensively used in those sectors, and thus has a tendency to increase inequality. Using the INDONESIA-E3 model, a Computable General Equilibrium model of an Indonesian economy, this paper investigates to what extent the increase in the world prices of Indonesian main commodity export (estate crops and mining) contributes to the increase in inequality in Indonesia. The impact of increases in the prices of 8 main Indonesian export commodities was simulated during the period of 2009-2011. The result suggests that they indeed increase inequality, yet with a magnitude of only a quarter of the increase in Gini coefficient observed during the period of 2009 to 2011. The dominant factors behind the increase in Gini coefficient can be traced to the increase in the world price of mining commodities rather than estate crops. The effect of increases in the world prices of rubber, palm oil, coffee, and tea is negligible and poverty-reducing in rural areas. On the other hand, the effect of the increase in the world price of coal, oil, gas, and metals generates a significant increase in inequality. These findings suggest that, from the perspective of equality, restricting export of estate crops commodities in the midst of the commodity booms will not be favorable to the poverty reduction agenda, particularly in rural areas.