The Economic Crisis and Regional Income Inequality in Indonesia

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This paper estimates regional income inequality in Indonesia during 1993-1998 using a Theil index based upon district- level GDP and population data. The overall regional income inequality increased significantly over the 1993-1997 period (from 0.262 to 0.287), during which Indonesia achieved an annual average growth rate of more than 7%. According to thetwo-stage nested inequality decomposition analysis, the increase is due mostly to the increase in the within-province inequality component, especially in the provinces of Riau, Jakarta, West Java, and East Java. In 1997, the within-province inequality component accounted for about a half of overall regional income inequality. In terms of per capita GDP, the economiccrisis caused the Indonesian economy to revert to the 1995 level. The impact was, however, very uneven across provinces and districts. The overall regional income inequality declined to 0.266 in 1998, which corresponded to the level prevailing in 1993-94. Contrary to the 1993-1997 period, about three-quarters of the decline was due to the decrease in the between-province inequality component, in which the Java-Bali region played a prominent role through a significant decrease in its between-province inequality. The economic crisisappears to have been a crisis afflicting urban Java and urban Sumatra.
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