A Model for Income Distribution, Employment, and Growth: A Case Study of Indonesia

Abstract

The growth potential of the Indonesian economy is examined, and a model for the impact of alternative development strategies is presented. Among developing countries there is a growing awareness of the importance of underemployment and unemployment. Indonesia is no exception. Like the rest of the developing world, Indonesia is heading toward a more uneven distribution of income unless the government intervenes with an active distributive policy. Indonesia's growth shows an urban bias, with heavy emphasis on the organized industrial sector. The question of a tradeoff between equity and growth can be explored only in the context of specific policy measures. Within the restricted range of feasible policies in Indonesia a choice between growth and equity seems unavoidable. There is room to select a strategy to optimize growth and income distribution. To eliminiate poverty an employment policy is more effective than a policy directed exclusively toward growth. Finally, the relation between growth and income distribution is significantly affected by the set of policy tools available to the public authorities. For Indonesia particularly, any prospective plan must give high priority to population policy. Tables are appended.

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