Academic journal article Journal of Southeast Asian Economies

Regional Income Disparity in Indonesia: A Panel Data Analysis

Academic journal article Journal of Southeast Asian Economies

Regional Income Disparity in Indonesia: A Panel Data Analysis

Article excerpt

I. Introduction

Since the beginning of the 1990s, the disparity of income per capita across regions in Indonesia has become a crucial topic. From then onwards, regions that fell behind started showing their dissatisfaction with the central government, demanding larger income transfers and greater authority in constructing their development plans. Rapid political change finally took place a few years after the economic crisis of 1997: Indonesia drastically shifted from a highly centralistic government system to a highly decentralized one in 2001 (Alm, Aten, and Bahl 2001; Tadjoedin, Sjuharyo, and Mishra 2001; Balisacan, Pernia, and Asra 2002). Yet the issue of regional income per capita disparity has not disappeared, and the reasons for this have not yet been discovered. Figure 1 shows that income per capita disparity, measured by coefficient variations of GDP per capita, has remained relatively the same throughout the 1990s as well as throughout the decentralization era.

[FIGURE 1 OMITTED]

Not only in Indonesia but throughout the world, the existence of income, or output, per capita disparity among regions or countries has been an important issue. In the past two decades, a huge amount of research has been conducted on this subject; particularly on finding the determinants of income or output per capita and whether there is evidence of income or output per capita convergence. For example, Barro and Sala-I-Martin (1990), Dowrick and Quiggin (1997), and Mankiw, Romer, and Weil (1992) are some of the well-known econometric works on this issue. Nevertheless, the debate as to what the determinants of income or output per capita are and whether there is evidence of income or output per capita convergence is still far from resolved. One important criticism, as mentioned by Casselli, Esquivel, and Lefort (1996), is that most of this econometric work suffers from the problem of omitted variables and endogeneity bias.

The three specific goals of this paper are as follows. First, the paper will show that disparity of provincial income per capita is relatively severe and will outline the debate as to whether there is a convergence of provincial income per capita. To pursue this goal and to provide a better understanding of provincial income per capita disparity in Indonesia, the paper will briefly present historical patterns of provincial income per capita for the country from the early 1970s until early 2002, as well as describe historical data and previous works related to the convergence or divergence of provincial income per capita.

Second, the paper will intensively research the existence of a provincial income per capita growth convergence. Lastly, it will investigate the determinants of provincial growth of income per capita. To achieve the last two goals, this paper will utilize a panel data technique that recognizes fixed effect or random effect terms (Wooldridge 2002) and the general specification growth model suggested by Barro (1991) to estimate a regional growth model. The novelty of this paper is that it uses the regional panel data within a country, namely the 1993-2002 Indonesian provincial data set, (1) whereas most works on growth have relied on an inter-country data set.

The outline of the remainder of this paper is as follows. Section II describes brief historical patterns of provincial income per capita and its growth in Indonesia. Section III explains the basic growth model developed in this paper while section IV describes the data set. The fifth and sixth sections present the estimation results and discussion. Finally, section VII is on the shortcomings and conclusions of this paper.

II. Brief Historical Pattern of Regional Income Disparity

The indicator utilized in this paper for regional income per capita is the provincial gross domestic product (GDP) per capita. Data on provincial GDP is available and has been used by the majority of works in this area. …

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