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

Abstract

This article 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 article 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.

Keywords:

• Regional inequality
• convergence
• Indonesia

JEL CODES:

• O40
• O47
• R10
• R11

Acknowledgments

The authors would like to thank the anonymous reviewers for their helpful comments and suggestions which helped to improve this article. The authors also sincerely appreciate the members of QuaRCS lab (https://quarcs-lab.org) for their support throughout the development of this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Funding

The authors declare that they received no specific funding for this work.

Notes

1 Although the original conception of the Solow growth model aims to explain the evolution of a single economy over time, its convergence prediction has been empirically tested across multiple countries, regions, industries and firms. As a result, the convergence hypothesis has been studied from multiple perspectives. The recent work of Johnson and Papageorgiou (2020) provides a survey of the cross-country convergence literature. Magrini (2004) provides a survey of the regional convergence literature. The work of Rodrik (2013) is one of the most influential papers in the industrial convergence literature, and the work of Bahar (2018) evaluates convergence across firms.

2 The study examines the dynamics of four socio-economic indicators: per capita gross regional product, the Gini coefficient, the school enrolment rate and the fertility rate.

3 We combined actual data of the new districts and the reference districts and compared them to ensure that measurement error caused by the interpolation is minimum. Details of this interpolation process are provided in Appendix A.

4 For the robustness check of our interpolation results, we implemented sigma and beta convergence tests using the number of districts in the year 2000 (342 districts). As reported in Appendix E, we found no significant difference in sigma and beta convergence coefficients between the full sample of 514 districts and the smaller number of districts.

5 In the convergence literature, the IQR is also used to study sigma convergence (Mendez-Guerra 2018).

6 As regions can change their ranking in the income distribution, the quantiles of Figure 4 do not necessarily track the performance of a unique region over time.

7 The study of Hill, Resosudarmo, and Vidyattama (2008) shows the variability in the pace of beta convergence across subperiod during 1975–2002; 2% during the oil boom (1975–1981), 2.8% in the era of major policy reforms (1981–1986), 1.7% for the period 1986–1992 as the export-oriented reforms took place, 1% during the 1990s, and no convergence in the crisis and post-crisis period.

8 See Appendix B for complete members of each club.

9 The clubs merging steps are outlined in Appendix C.

Additional information

Notes on contributors

Harry Aginta

Harry Aginta is an economist at Bank Indonesia, the central bank of Republic of Indonesia. He is currently pursuing a PhD degree at the Graduate School of International Development, Nagoya University, Japan. His research interests include regional economics, development economics and applied econometrics.

Anang Budi Gunawan

Anang Budi Gunawan works at Ministry of National Development Planning of Indonesia. He earned his PhD in International Development from the Graduate School of International Development, Nagoya University, Japan. His research areas include regional economics, industrial economics, development economics, structural transformation and economic growth.

Carlos Mendez

Carlos Mendez is an Associate Professor at the Graduate School of International Development, Nagoya University, Japan. He completed his PhD in the same institution. His research interests focus on the integration of econometrics, data science and machine learning methods to understand and inform the process of economic growth and development of countries, regions, industries and firms.