Sectoral Decomposition of Regional Income Inequality in Indonesia A Comparison with Postwar Japan
Even after excluding mining activities, which are distributed very unevenly, Indonesia still has very large regional income disparities. By the Theil T index, regional inequalities in per capita GDP and labor productivity after excluding the mining sector were, respectively, 0.14 and 0.16 in 1999. The ratio between the largest and smallest per capita GDP was also very large at 8.2 in 1999. Japan has much smaller regional inequalities in per capita GDP and labor productivity. In the postwar period (1955-2000), Japan's regional inequality in per capita GDP, as measured by the Theil T index, ranged between 0.03 and 0.06. The ratio between the largest and smallest per capita GDP was 3.4 in 1955, but declined to 2.8 in 2000. According to the sectoral inequality decomposition analysis based on the weighted coefficient of variation, Indonesia's present pattern of regional inequalities corresponds to Japan's inequality pattern in the 1950s or before, in which the primary sector had the smallest regional inequality in per capita GDP among the three sectors. In Japan, per capita GDP was about $500 in current U.S. dollars and the share of the primary sector was 16% in GDP and 41% in employment in 1955, whereas in Indonesia, per capita GDP was about $1,000 in current U.S. dollars and the share of the primary sector was 17% in GDP and 42% in employment after excluding the mining sector in 1997. Japan was successful in reducing its regional inequalities in the 1960s and 1970s, during which secondary and tertiary sectors' inequalities in per capita GDP declined steadily, while primary sector's inequality rose rapidly. In the period, there was a marked shift in GDP from the primary sector to the secondary sector, in which the secondary sector raised its share by more than 10 percentage points. Whether Indonesia could reduce its regional inequality in per capita GDP in the near future as Japan did in the 1960s and 1970s is uncertain.