REGIONAL GROWTH AND SECTORAL SPECIALIZATION IN THE CASE OF INDONESIA

This study tries to discuss the relationship between sectoral developments and economic growth. To be more specific, by examining a panel of the regional data in Indonesia (province level) over the 26 years time span (1983-2009). This study investigate whether the specialization in certain sector facilitates economic growth and whether the specialization (in a particular sector) contributes to regional economic development. This study finds that specialization in sectors such as agriculture and services has a negative impact on economic growth. However, specialization in manufacturing has a positive effect on economic growth in Indonesia. Furthermore, local specialization in economic sectors has different effects. Local specialization in agriculture and services sector will harm regional development. On the other hand, local specialization in manufacture has positive impact to economic growth. Our findings suggest that for a balanced regional development, the policy authority should not encourage specialization in certain sector or regional specialization. Although in most cases this specialization is determined by the comparative advantage in each region, specialization will widen the gap of wealth inequality for each regional