Regional income disparities in Indonesia: measurements, convergence process, and decentralization

The unifying theme of this dissertation is spatial inequality, or regional disparities, driven by two primary motivations. First, spatial inequality can contribute to the overall inequality across households or individuals. Second, spatial inequality can jeopardize the fabric of society, upsetting social and political stability. Regional disparities have increasingly become the focus of policy and academic interests, especially in a diverse society such as Indonesia, where geographic units often align with divisions in economic performance, political and cultural aspirations, language, and religion, among others. This dissertation assesses the spatial inequality and convergence dynamics across districts in the province of East Java and studies the impact of Indonesia’s 2001 fiscal decentralization on regional income disparities across districts. East Java is chosen as a case study because of its economical and geopolitical importance to Indonesia. In addition, East Java has been dubbed a case of “balanced development,” an assessment that this dissertation intends to reexamine. By synthesizing the approaches of sigma and beta convergences and distribution dynamics, and by employing a variety of methods, this dissertation suggests the strong presence of clubs convergence with slow conditional catch-up process. The clusters of poor, medium, and high income districts are expected to remain. The 2001 fiscal decentralization attempted to promote equalization by addressing vertical and horizontal imbalances and by providing district governments with incentives for development. One important research question is whether the Indonesian decentralization delivered on its equity promise. Using fixed-effects panel estimation, this paper addresses the following questions: 1) whether there has been a reduction in income disparities across districts; 2) whether the decentralization was an inequality-reducing force; and 3) how the districts’ level of development may have influenced the effect of decentralization on inequality. The striking findings reveal that a reduction in inequality is associated with greater decentralization. However, the decentralization impact on disparities is affected by the districts’ level of development. Inequality may persist until Indonesian districts reach a certain level of development, which seems to be out of reach for most districts