Macro | Krisna 'imed' Gupta

The Economic Danger of Inequality

Sun, 16 Nov 2025 15:22:00 +0700

I recently finished Michael Pettis’s book “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.” The book discusses global economic imbalances caused by differences in savings and consumption rates between advanced and developing countries. Pettis argues that these imbalances could trigger a global economic crisis if left unaddressed.

I frequently use this argument when discussing international trade, for instance at a Lembaga Manajemen UI event some time ago.

In this post, I want to try unpacking the mechanism of inequality, saving rates, and their impact on the national (and global) economy, since an imbalance in one country will be mirrored by an imbalance in another. Then I’ll briefly discuss conditions in Indonesia.

Inequality, saving rate, and aftermath

In the book, Pettis argues that changes in saving rates are heavily influenced by income inequality in a country. Countries with high income inequality tend to have higher saving rates, because wealthy individuals tend to save more than poor individuals. Conversely, countries with lower income inequality tend to have lower saving rates, because poor individuals tend to spend most of their income on consumption.

He cites Federal Reserve Board Chairman Marriner Eccles:

“A mass production has to be accompanied by mass consumption.”

If the additional wealth created is not distributed well, then additional consumption will be smaller than that additional wealth, inequality rises along with a rising saving rate.

According to Pettis, this inequality process doesn’t only occur between individuals (for example between fellow workers or fellow capitalists) or between classes, but can also occur between economic agents. That is, inequality (and consequently saving rates) can emerge if companies and the state control more income than the public.

Corporate wealth is different from the wealth of the capitalist class¹. The capitalist class only receives money from companies if the company distributes dividends, or the company pays interest on debt (to bond holders, or banks, whose profits are transferred to bank owners and the public as deposit interest). If the company retains earnings, whether to let it sit or reinvest, it becomes corporate wealth. So national savings also has corporate savings behind it. And Pettis argues, the larger the retained earnings (not distributed as employee bonuses or shareholder dividends), the higher the national saving rate².

To illustrate, it’s roughly like this. First, let’s consider Earth as one closed economic system (we can’t yet trade with the Moon or Mars).

$$ GDP = C + I $$

All output can only become consumption, while the rest becomes investment for tomorrow. C and I are calculated from:

graph TD; A[Producer]-->B[tax income]; A-->M[costs beyond
taxes]; M-->C[worker
wages]; M-->D[Dividends/interest
capitalists]; M-->E[Retained earnings
companies]; C-->F[C workers]; C-->G[Savings
workers]; D-->H[C capitalists]; D-->I[Savings
capitalists]; E-->J[Savings
companies]; B-->K[I government]; B-->L[C state];

Total GDP from the production side is calculated from producer value added, while GDP from the expenditure side is C + I. Total C is workers’ C + capitalists’ C + state C, and total I is workers’ savings + capitalists’ savings + corporate I + government I. GDP from both sides must be equal. BPS calculates this every quarter.

According to Pettis, inequality leads to a higher saving rate vis-a-vis consumption rate. When inequality occurs through rising retained earnings rather than worker wages or capitalist dividends, total C automatically falls because reinvested earnings all become corporate I³.

Of course, the government’s share can also be increased by, for example, raising the tax ratio or expanding SOE roles. After that, it’s up to the government whether to increase C (e.g., subsidies or simply running administration by paying employee salaries) or increase I (e.g., building a high-speed rail or a new city. For example).

Let’s assume a sudden transfer from ordinary parties to wealthy parties, without affecting GDP (a strong assumption, but let’s set it aside for now). This wealthy party could be a transfer from poor to rich people, but could also be from the public to companies or to the state.

Pettis’s framework is quite simple. It can be illustrated with the following diagram:

graph TD; A[Inequality]-->B[Saving rate rises]; A-->C[Saving rate
unchanged]; B-->D[productive investment
rises]; B-->E[unproductive investment
rises]; C-->F[C of wealthy rises
proportionally]; C-->G[C of ordinary rises,
savings fall]; C-->H[Employment
falls]; D-->I[Sustainable]; E-->J[Unsustainable]; F-->K[Sustainable but
impossible]; G-->L[Unsustainable]; H-->M[Sustainable
but bad];

Although the diagram above looks dichotomous, in reality everything could occur in proportions simultaneously.

According to Pettis, the dominant scenario that occurred in Spain, Portugal, Italy, Greece, and the United States is the scenario where ordinary people’s consumption rises while their saving rate falls. This can manifest as rising household debt to finance daily consumption, or at minimum, people who struggle to save because their salary is barely enough to survive. In other words, savings that increase among the wealthy (for example tech companies in the US), are “compensated” by falling savings among ordinary people. High asset prices from wealthy people’s investments make ordinary people feel rich, so the inequality doesn’t feel so acute. But can asset prices keep rising forever?

But when talking about the US, which is a deficit country, their aggregate saving rate is actually very low despite tech companies having lots of money. This happens because the US’s low saving rate is offset by other countries’ high saving rates, especially China, Taiwan, Japan, and Germany. Particularly in China and Japan, state assets are quite high due to high foreign reserve accumulation. So the one saving abroad is the Central Bank. This is explained more fully in Pettis’s book and articles.

Which scenario is playing out in Indonesia?

What about Indonesia?

Recently, Pak Haryo also posted Indonesia’s GINI figures. The higher the number, the higher the income inequality in a country.

Dari data SWIID (Standardized World Income Inequality Database) saya bandingkan Gini IDN vs 3 negara tetangga

Negara2 lain gini_disp (Gini setelah pajak, biru) lebih rendah dari gini-mkt (Gini sebelum pajak, merah). Tapi data IDN kebalik. Apa perpajakan di IDN ~> REGRESIF? https://t.co/27CeKEot3l pic.twitter.com/kNi71CFShk
— Haryo Aswicahyono (@Aswicahyono) September 14, 2025

Indonesia’s GINI coefficient increased quite significantly (especially the post-transfer/tax measure) around the period after 2001. Around that time, China joined the WTO and prices for mineral and vegetable oil commodities surged sharply. This commodity price increase roughly plateaued after around 2011. The commodity industry is one with quite high inequality because it’s capital-intensive. When this industry grows, the income gains are enjoyed by relatively fewer workers. Pasaribu and Hill discuss this more fully.

I’m not too surprised because I once checked saving rates in this post. I tried to examine the dynamics of inequality and saving rates in Indonesia. My premise at the time was that I was quite taken aback by Indonesia’s net exports surging dramatically in 2022. This means our external savings rose significantly. I then started exploring BPS data, and yes, the saving rate of the bottom 20% of households was negative. I also found World Bank research showing a declining labor share of income. I ended up looking at GINI ratios not just recently but also during the commodity boom years, finding charts that are broadly similar to what Pak Haryo presented.

Clearly this doesn’t look great, especially since recently there has been a lot of discontent among the public, who increasingly feel that Indonesia’s economic growth isn’t being shared broadly. I also wanted to write about the government’s efforts to increase the saving rate, including converting SOEs from mandatory PNBP payments to the state (which is spent on consumption, presumably) into fresh funds for Danantara to be invested. Also the rising SAL balance, essentially reducing government consumption in favor of savings for financial sector injection.

Well, at least let’s hope this rising saving rate becomes productive investment and not unproductive speculation! That’s it for this post, hope it’s useful.

My use of the term “class” is completely value-neutral and purely definitional. The “classes” I describe aren’t really dichotomous. Workers who receive wages can also own capital that generates returns. ↩︎
Income inequality through capital income (interest and dividends) vs. wage income is also called “compositional inequality,” discussed quite thoroughly by Branko Milanovic, author of “Capitalism, Alone.” ↩︎
Why does it all become I? Because all income not consumed becomes I. Of course, if retained earnings just sit in a bank account, they’re still counted as I. This is simply accounting. ↩︎

Demographic bonus: blessing or curse?

Thu, 25 May 2023 06:35:25 +1100

On Thursday, July 6, 2023, the Fiscal Policy Agency (BKF) at the Ministry of Finance held an event called fiscal day. One of the themes raised was a policy discussion on Indonesia’s demographic bonus. This discussion is highly relevant, especially now as Indonesia pursues investment and economic growth, trying to prevent “growing old before growing rich.”

BKF opened with interesting statistics. According to them, in 2020, Indonesia’s working-age population reached 191 million people, or about 70.7% of the total population. This is positive because it means the ratio of working to non-working population is quite high. By 2028-2031, this figure will begin to decline. Unfortunately, according to BKF, this demographic bonus could become a problem if the population isn’t productive.

According to BKF’s briefing document:

Unfortunately, human resource issues in Indonesia still face numerous challenges. Among them, Indonesia’s workforce is still dominated by primary school graduates and below at 39.76%. Workers with junior high school education make up 18.24%, senior high school 19.18%, and vocational high school 9.31%. Meanwhile, workers with higher education degrees remain very limited: Diploma I/II/III at 2.20%, and Diploma IV, Bachelor’s, Master’s, and Doctoral degrees at 9.31% (BPS, February 2023). This condition impacts relatively low labor productivity and competitiveness.

BKF also notes Indonesia’s low Human Development Index score.

Compared to neighboring countries, Indonesia’s HDI is similar to Vietnam’s, still higher than India’s, and still below Malaysia and Thailand. What’s quite surprising is how China and Vietnam are catching up with Indonesia while Indonesia appears to be standing still.

Several interesting points for discussion:

Is Indonesia’s current demographic bonus showing signs of becoming a blessing, or is it signaling trouble?
Are current government policies adequate? What sectors should be prioritized to maximize the demographic bonus?
What policies should the government prepare for the aging population era after the demographic bonus ends?
Discuss and formulate better policy recommendations and innovations related to the demographic bonus!

Blessing or disaster?

Looking at some youth statistics, there are indeed signs pointing toward disaster. The 2 charts below show Indonesian youth who are idle (NEET) or unemployed. The numbers are below India’s but still above neighboring countries.

Open unemployment by education level (%)

Education level	2020	2021	2022
Primary school and below	3.61	3.61	3.59
Junior high	6.46	6.45	5.95
Senior high	9.86	9.09	8.57
Vocational high	13.55	11.13	9.42
Diploma	8.08	5.87	4.59
Bachelor’s and above	7.35	5.98	4.80

The lowest unemployment rate is actually among primary school graduates and below, while vocational school graduates – who are supposed to be trained for work – have the highest rate. So blaming education per se may not be entirely accurate, since more education actually correlates with more unemployment, to some extent. Could there be a mismatch? This is of course on top of . According to SMERU:

Currently, only 37% of teachers have teaching qualifications as stipulated by the 2005 Teacher Law, and about 15% of teachers are absent on any given workday across Indonesia.

Not only that, according to BPS statistics, of those employed work in the informal sector. According to research, workers in the informal sector are at higher risk of income loss, especially during shocks.

Poorly educated youth lacking job opportunities may be prone to involvement in vigilantism. Incidentally, Indonesia also has a vigilantism problem. This has been studied by , who examines the prevalence of vigilantism in Indonesia and India, a country with similar youth unemployment. Additionally, according to , local vigilante activity increases near local election periods.

In short, it’s hard to be optimistic about Indonesia’s demographic bonus.

Are current policies sufficient?

According to BKF, several policies are related to leveraging the demographic bonus:

Allocating 20% of the state budget (APBN) for education spending. In 2023, this allocation reached IDR 612.2 trillion, distributed across several ministries/agencies (Kemendikbudristek, BRIN, Kemenag, etc.) and through Regional Transfers and Village Funds.
The Kartu Prakerja (pre-employment card) program. In 2020, the budget was IDR 10 trillion for 2 million participants. In 2023, the budget allocation dropped to IDR 2.67 trillion targeting 1 million participants.
Vocational education development through super tax deduction governed by Presidential Regulation No. 68/2022 on Vocational Education and Training Revitalization.

According to BKF, these policies seem inadequate. For example, the 20% APBN allocation hasn’t improved school quality or graduates (evident from PISA scores that have ).

That’s probably fair. If asked what the recipe for improving school quality is, I’d probably be confused too. But school improvement won’t change things quickly. Currently, even those responsible for improving education in Indonesia don’t seem to know what to do, while the demographic bonus will end soon. Education systems certainly need fixing, but we also seem to need quick-win policies.

The pre-employment card can also be critiqued. If education is problematic, then graduates’ ability to learn new concepts and skills may also be problematic.

We must also not forget that quality humans come from healthy mothers and non-stunted children. Indonesia’s policies are (both supply-side and demand-side policies) which may actually promote diabetes while lacking macro and micro nutrients from other foods. Maternal and child nutrition is critical, and access to nutritious food at affordable prices is essential. in this regard.

Lastly, employment also faces problems because investment may be insufficient. This is a classic issue. Indonesia is actually quite competitive, but many things discourage people from starting investments. There are many problems – legal uncertainty, bureaucratic red tape, and .

Interest rates are high, banks don’t accept production equipment as collateral, and the government keeps issuing bonds with attractive yields (crowding out). Domestic investors lack liquidity, while foreign investors are happy to enter Indonesia because interest rates abroad are low and Bank Indonesia is very committed to keeping the currency stable (by raising interest rates haha). Crowding out becomes more apparent when the export sector doesn’t help boost domestic liquidity.

For quick wins, we need jobs that can hire our current demographic, which is dominated by 12-year compulsory education graduates. Instead, we have Industry 4.0 policies that require educated workers and employ few 12-year-education graduates.

Post-demographic-bonus policies

This is actually a very difficult question. Indonesia currently doesn’t have a sufficient saving rate. It seems like it’ll be hard to prepare. The currency and economy are too insignificant for cheap refinancing like Japan or China. The only current path is to boost healthy economic growth and improve education. But this means massive investment and reaping returns as quickly as possible, preferably before 2035. Is it possible? The fear is that going all-out might lead to another 1998. It’s still difficult without strengthening education and institutions, which takes time.

Perhaps one way out is to prepare for overseas employment, if domestic conditions are this difficult to fix. There are many overseas jobs that provide decent wages and enough money for remittances. We’ve heard a lot about TKI (Indonesian migrant workers), but there are opportunities in sectors like senior care or nursing homes, given that other countries will age first. Recently, Indonesia and Australia established an engineering cooperation that may make it easier for Indonesian engineers to work in Australia in the future. But this is certainly not easy either.

Evaluation of existing programs must continue. BKF isn’t in a position to halt a policy, but at least they can conduct evaluation studies.

Goodbye dollar? Not quite yet

Thu, 25 May 2023 06:35:25 +1100

The topic of de-dollarization has been a hot-button issue lately. De-dollarization – the effort by many countries to reduce dependence on the US dollar (USD) – is reportedly being championed especially by BRICS nations (Brazil, Russia, India, China, and South Africa).

Indonesia is no exception. Bank Indonesia has established Local Currency Settlement (LCS) agreements with South Korea, Japan, China, Malaysia, and Thailand. In other words, Indonesia and its partner countries can now use their respective domestic currencies to settle cross-border payments without using the US dollar.

According to this article, LCS is important for minimizing exchange rate risk in bilateral transactions. That may be true if the currency usage focuses solely on trade in goods and services. But these days, currencies are also used for asset transactions. In fact, the use of currencies for asset trading may well dominate their use for goods and services.

Currency as a medium for asset exchange?

To answer this, some technical knowledge of the balance of payments (BoP) is needed. The BoP consists of two main accounts: the current account and the financial account.

In an open economy, we have:

$$ Y=C+I+G+(X-M) $$

Meanwhile, saving is income that is neither consumed nor taxed, so S=Y-C-G (assuming total taxes = G). Therefore:

$$ Y-C-G-I=X-M $$

Replacing Y-C-G with S:

$$ S-I=X-M $$

S-I is the financial account, while X-M is the current account. One balances the other.

Put simply, a current account surplus means you sell goods but get paid with IOUs. Or more precisely, you accumulate savings that you don’t spend right away.

Back to the currency question: for countries with trade surpluses, it means they store the proceeds from their exports in the form of foreign assets or investments. This is where a problem emerges: why would we hold another country’s currency?

Holding foreign currency may be useful if you plan to import from that country. But this logic breaks down when the countries in these partnerships are NEARLY ALL IN SURPLUS! See for yourself:

Above I show the trade balance deficit (as % of GDP) for BRICS, Indonesia, Japan, and South Korea. As you can see, nearly all of them run surpluses. In other words, they generally supply more goods to the world than they buy, and the proceeds are stored as assets rather than spent.

Undervaluation

This may be because these countries largely follow a mercantilist philosophy – an economic doctrine that prioritizes export promotion and dislikes imports to boost industrial competitiveness. Export-oriented countries typically prefer a weak currency, because a weak currency makes exports cheap and imports expensive, pushing X-M into surplus.

For these countries, currency intervention is fully justified to keep their currencies weak, even though they should arguably be valued higher. We can check for this by looking at undervaluation – comparing the nominal exchange rate with the “true” value. One approach is to use the Big Mac Index from The Economist.

#import wbdata as wb

import datetime

## Read data from the economist

url='https://raw.githubusercontent.com/TheEconomist/big-mac-data/master/output-data/big-mac-raw-index.csv'

bmi=pd.read_csv(url,parse_dates=['date'])

## Create the 'real' exchange rate measures

bmi['bmi']=bmi['dollar_ex']+bmi['dollar_ex']*bmi['USD']

bmi.iso_a3.unique() # Showing unique iso_a3 codes for the next cell

array(['ARG', 'AUS', 'BRA', 'GBR', 'CAN', 'CHL', 'CHN', 'CZE', 'DNK',
'EUZ', 'HKG', 'HUN', 'IDN', 'ISR', 'JPN', 'MYS', 'MEX', 'NZL',
'POL', 'RUS', 'SGP', 'ZAF', 'KOR', 'SWE', 'CHE', 'TWN', 'THA',
'USA', 'PHL', 'NOR', 'PER', 'TUR', 'VEN', 'EGY', 'COL', 'CRI',
'PAK', 'SAU', 'LKA', 'UKR', 'URY', 'ARE', 'IND', 'VNM', 'AZE',
'BHR', 'HRV', 'GTM', 'HND', 'JOR', 'KWT', 'LBN', 'MDA', 'NIC',
'OMN', 'QAT', 'ROU'], dtype=object)

b=[]

ctr=('CHN','IDN','IND','ZAF','RUS','BRA','JPN','KOR')

for i in ctr:

 bmii=bmi.loc[(bmi['iso_a3'] == i)]

 b.append(bmii)

b=pd.concat(b)

sns.lineplot(data=b,x='date',y='USD',hue='name',palette='tab10')

plt.axhline(0,color='grey')

<matplotlib.lines.Line2D at 0x2b17256fa48>

As we can see, except perhaps for Brazil, BRICS countries, Indonesia, Japan, and South Korea all have currencies that are undervalued relative to the USD. In other words, there are indications that these countries deliberately suppress their currencies to keep their products “competitive” in global markets.

Using the Big Mac Index isn’t exactly rigorous, but if you’re interested in diving deeper into currency misalignment, check out my colleague Wishnu Mahraddika’s publication here.

In other words, these countries appear to actively pursue trade surpluses! But not everyone can be in surplus at the same time, can they? This becomes even more stark when we compare trade balances in USD terms:

Who can absorb China’s surplus??

Uncle Sam to the rescue

So far, the surpluses of these net-exporter countries have been absorbed by none other than the United States.

As you can see, it is the US that has been absorbing these countries’ surpluses. How does the US government manage this? Through debt, of course! Everyone wants to sell to the US because it has deep pockets, and because everyone sells to the US, everyone holds US dollars, which makes the dollar the world’s primary reserve currency – a self-fulfilling network effect!

On top of that, the US has a relatively open financial account. It’s very easy for anyone to trade assets in the US. You can easily buy stocks and other financial products there. Capital controls are lax, so everyone feels safe parking their money in the US. The US is also where many creative and promising startups emerge.

Does de-dollarization reduce exchange rate risk?

The problem is that the countries in these partnerships (including Malaysia and Thailand) are almost all surplus countries. They maintain their surpluses by exchanging goods for foreign assets. The most popular foreign assets? Those of the country with the largest deficit in the world – the United States. Consequently, even if bilateral trade is settled in local currencies, those currencies end up being exchanged for dollars anyway to purchase US assets. Or perhaps bilateral trade is only a fraction of total trade with the US.

Again, as long as the US remains the world’s number one buyer of goods and services, it will be hard to avoid holding US dollars. And since we’ll ultimately transact with the US (whether buying assets or selling goods), the exchange rate relative to the USD will remain relevant.

That said, de-dollarization pressures may actually be coming more from the US side itself! US sanctions against Russia have made the entire world rethink the safety of USD-denominated assets. Additionally, the possibility of a US government bond default due to the debt ceiling may also erode global confidence in US assets.

And beyond exchange rates, the changing global order going forward could have even bigger implications for our economy. If BRICS and many countries do push through with de-dollarization, the giant surplus countries will need to rethink their domestic industries because they won’t be able to export like before (since the main buyer for many countries is the US). The impact could be far greater than “mere” exchange rate effects.

That said, I think LCS options like these are still attractive. The more payment systems available, the better, and efforts like LCS deserve our appreciation.

That’s it for this post – hope it’s useful.