Regional income disparities and convergence clubs in Indonesia: new district-level evidence

Abstract

This paper aims to re-examine the regional convergence hypothesis on income in Indonesia over the 2000-2017 period. By applying a non-linear dynamic factor model, this paper tests the club convergence hypothesis using a novel dataset of income at the district level.The results show significant five convergence clubs in Indonesian districts' income dynamics, implying the persistence of income disparity problems across districts even after implementing the decentralization policy. The subsequent analysis reveals two appealing features regarding the convergence clubs. First, districts belonging to the same province tend to be in the same club, and second, districts with specific characteristics (i.e., big cities or natural resources-rich regions) dominate the highest income club. Overall, our findings suggest some insightful policy implications, including the importance of differentiated development policies across convergence clubs and inter-provincial development strategies.

Dynamics of Income Inequality, Investment, and Unemployment in Indonesia

“…Closing gaps in education is vital to improving equality of opportunities (Tomul, 2009). Our results support Aginta et al (2021), who found some convergence in income within districts and within provinces in Indonesia, although noting persistency in income inequality across regions. Inequality primarily results from imbalances in economic and development issues that remain unresolved in Indonesia (Siburian, 2020).…”

Provincial income convergence clubs in Indonesia: Identification and conditioning factors

“…These results highlight the importance of capital accumulation and efficiency improvements in the promotion of growth productivity as well as reducing the disparities among regions in Indonesia. Using a district-level dataset, Aginta et al (2021) evaluate the prospects of regional income convergence in the postdecentralization era. Their results indicate five clubs of convergence for 514 districts with the richest group dominated by big cities and regions with natural resources.…”

Disparities in regional productivity, capital accumulation, and efficiency across Indonesia: A club convergence approach

“…Their results suggests two convergence clubs for each socioeconomic indicator. Using a novel district-level data set, Aginta, Gunawan, and Mendez (2020) apply the club convergence framework of Phillips and Sul (2007) to evaluate regional income convergence in Indonesia. They find five convergence clubs across 514 districts over the 2000-2017 period.…”

“…Most studies about Indonesia, however, have focused on only a narrow set of variables. Sakamoto (2007) and Aginta et al (2020), for instance, only focus on income, while Mendez (2020) only focuses on efficiency. To the best of our knowledge, only Kurniawan et al (2019) evaluate the dynamics of regional convergence across multiple indicators: per-capita GDP, Gini index, enrollment rate, and fertility rate.…”

“…12 The long-run trend of the natural log of each variable is computed using the approach of Hodrick and Prescott (1997) with a smoothing parameter of 6.25. This value is recommended by Ravn and Uhlig (2002) and and it has been used in previous convergence studies about Indonesia (Aginta et al, 2020;Kurniawan et al, 2019;Gunawan et al, 2019). 13 Note that for both distributions (provinces and countries), the cross-sectional mean is normalized to 1 in each year.…”