by Rainer Heufers

This article was originally published on CIPS.

Consider Indonesia another Southeast Asian success story. About 20 years ago the vast archipelago with the world’s 4thlargest population transitioned to democracy. It happened during the Asian financial crisis when parts of the economy collapsed and 24% of Indonesians lived below the poverty line. Since then, the poverty rate dropped to just over 10% and 10 million Indonesians managed to escape poverty. Add a remarkable increase in the population from 200 to 260 million and additional 60 million Indonesians now have sufficient incomes to cover their basic living expenses.

Those remaining poor suffer most from the country’s extraordinary food prices. Spending up to 70% of their income on food makes them extremely vulnerable to price hikes caused by protectionist policies consisting of food import quota, a restrictive licensing system, and various tariffs and non-tariff barriers on food imports.

The Center for Indonesian Policy Studies (CIPS) has calculated that, if Indonesian households were buying their basic food items in neighboring, and even much richer countries, they would save up to 24 USD every month. This is a lot considering that each month low-income households only take home about 100 USD.

Protectionist food policies do not only cause people to stay poor but they also throw others back into poverty. Surging rice prices in 2015 made 1 million Indonesians fall below the poverty line and put their families at risk of malnourishment. In response, CIPS runs the ‘Affordable Food for the Poor’ project that studies the impact of import restrictions on domestic food prices and calls for opening up the Indonesian food trade.

Protectionist food policies do not only cause people to stay poor but they also throw others back into poverty.

Poverty is particularly rampant in the Indonesian agriculture. Farming incomes are low and make this sector so unattractive that employment stagnates. A person who wishes to escape poverty appears better off working in the service sector. However, moving to the services industry requires formal education that is hard to obtain. The current education system fails the 50 million children in more than 250,000 schools. According to the latest PISA study, 36% of all Indonesian girls and 46% of the boys are incompetent in science, math and reading. They score far worse than their neighbors in Thailand, Malaysia or Vietnam.

Money does not seem to be the problem with 20% of the national budget dedicated to education. The problem lies with the 2.6 million teachers who are frequently absent from classes and then tweak their classes’ performance by leaking exam questions to the students.

Many attempts have been made to train and motivate the teachers but to no real avail. In the end, only if schools face serious competition for students will they enhance the quality of education. CIPS, therefore, argues that effective school reforms require rules and regulations that facilitate the establishment of new low-cost private schools for the poor. CIPS also studies school vouchers and education savings accounts that give parents the choice to send their children to better schools in their neighborhood.

Given the problems with school education, better options for those with only basic education should come from the manufacturing sector. Unfortunately, this sector has taken a hit by populist policies. A few years ago, the spoils of the commodities boom did not only widen the income gap between the rich and the poor, it also provided politicians with the opportunity to call for minimum wage increases. From 2004 to 2014, cities like Jakarta, Surabaya and Semarang raised them exponentially by 200% to 260%. That, in turn, reduced the competitiveness of several industries and prevented employment opportunities for low-skilled workers. As a result, employment in the manufacturing sector got stuck below 20% of the workforce and cannot absorb a larger share of the 2.3 million new entrants to the workforce every year.

Indonesia’s protectionist food self-sufficiency policy, a lack of competition in the school education system, and economic populism that stifles the manufacturing sector, these are key factors responsible for keeping 28 million Indonesians in poverty.

Indonesia’s protectionist food self-sufficiency policy, a lack of competition in the school education system, and economic populism that stifles the manufacturing sector, these are key factors responsible for keeping 28 million Indonesians in poverty. Following its vision of a free and prosperous Indonesia CIPS addresses these factors with its research-based advocacy activities. It advocates for food trade reforms to ease the financial burden on low-income households. It also advocates for competition between schools and for the empowerment of parents to improve school education. With academic rigor and emotionally compelling messages, the aim is to prove that overly protective policies and a lack of competition will, in the end, harm the poor. Instead, poverty can only be overcome if the poor are free to prosper.

Rainer Heufers is the Co-Founder and Executive Director of the Center for Indonesian Policy Studies.

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