Economic Tertiarization and Regional Income Inequality in a Decentralized Indonesia: A Bi-dimensional Inequality Decomposition Analysis
Armida Alisjahbana Takahiro Akita
This study attempts to explore the determinants of interprovincial income inequality in Indonesia from 2005 to 2013 by using a bi-dimensional inequality decomposition method. It tries, particularly, to analyze how economic tertiarization and concurrent output deindustrialization have affected interprovincial inequality. The bi-dimensional inequality decomposition method decomposes interprovincial inequality as measured by the squared population-weighted coefficient of variation in two dimensions, namely, by regional groups and industrial sectors. While deindustrialization has lowered the relative importance of manufacturing in determining overall interprovincial inequality, manufacturing activities are still very unevenly distributed among regions and provinces. The government needs to implement policies that are conducive to the balanced development of non-oil and gas manufacturing industries based on regional comparative advantages and disadvantages, where further development of economic infrastructures and human resources, particularly outside Java-Bali, is essential. Meanwhile, economic tertiarization has raised the importance of service activities in determining overall interprovincial inequality, particularly inequality within Java-Bali. The tertiary sector accounts for more than half of total GDP in Java-Bali, and many service activities, such as IC, banking, business services and private services, are concentrated in Jakarta and neighboring districts. Particularly, with the advancement of IC technologies, the IC sector has been expanding rapidly. Together with banking, business services and private services, further development of the IC sector is likely to increase interprovincial inequality in Java-Bali unless policies that could facilitate geographical dispersion of these service activities are implemented.