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REGIONAL INCOME INEQUALITY IN INDONESIA

AND THE INITIAL IMPACT OF THE ECONOMIC

CRISIS

Takahiro Akita

To cite this article: Takahiro Akita (2002) REGIONAL INCOME INEQUALITY IN INDONESIA AND

THE INITIAL IMPACT OF THE ECONOMIC CRISIS, Bulletin of Indonesian Economic Studies, 38:2, 201-222, DOI: 10.1080/000749102320145057

To link to this article: http://dx.doi.org/10.1080/000749102320145057

Published online: 17 Jun 2010.

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REGIONAL

INCOME

INEQUALITY

IN

INDONESIA

AND

THE

INITIAL

IMPACT

OF

THE

ECONOMIC

CRISIS

Takahiro Akita

InternationalUniversityofJapan,Yamato-machi,Niigata

Armida S. Alisjahbana*

Padjadjaran University,Bandung

This paper estimates regional income inequality from 1993 to 1998, using a Theil

index based upon district-level GDP and population data. Between 1993 and 1997,

when Indonesia’s annual average growth rate exceeded 7%, regional income in

-equality rose significantly. A two-stage nested inequality decomposition analysis

indicates this was due mainly to an increase in within-province inequality, espe

-cially in Riau, Jakarta and West and East Java. In 1997, the within-province compo

-nent represented about 50% of regional income inequality. The crisis caused per

capita GDP growth to revert to its 1995 level, but the impact was spread unevenly

across provinces and districts. In 1998 regional income inequality declined to its

1993–94 level. In contrast to 1993–97, three-quarters of the 1998 decline was due to

a change in between-province inequality,with the Java–Bali region playing a promi

-nent role. The crisis appears particularly to have afflicted urban Java and urban

Sumatra.

facturing sector’s share of GDP rose from 12% to 21% between 1985 and 1995, while agriculture and mining’s combined share declined from 46% to 26%. The change was most conspicuous in exports, in which the share of manufacturing rose from 17% to 53%, while that of agricul

-ture and mining combined fell from 73% to 22%. The economic crisis that began in 1997 suddenly brought Indonesia’s dynamic economy to a standstill, and in 1998 it contracted by 13%. The crisis cast a shadow not only on the financial but also on the real sector of the economy. The construction and non-oil manufac

-INTRODUCTION

During the late 1980s and the 1990s, be

-fore the economic crisis, Indonesia achieved an annual average growth rate of more than 7%, comparable to the rapid growth of the 1970s. However, this later growth was achieved without the ben

-efit of large oil revenue windfalls. In the decade before the economic crisis in 1997, Indonesia underwent remarkable struc

-tural changes in production and trade. These included a significant decline in agriculture and mining’s share of value added and trade, and an increase in the share of manufacturing. According to Akita and Hermawan (2000), the manu

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Takahiro Akita and Armida Alisjahbana 202

turing sectors were hardest hit, and con

-tracted in real GDP terms by 33% and 18% respectively.

The rapid economic growth before the crisis was accompaniedby a remarkably stable level of regional income inequal

-ity, as measured in terms of provincial GDP with the oil and gas sectors ex

-cluded (hereafter ‘non-oil and gas GDP’).

According to Akita and Lukman (1995) and this s tudy’s calc ulatio ns , the weighted coefficient of variation in pro

-vincial non-oil and gas GDP was virtu

-ally constant between 1985 and 1997: from 1985 to 1993 it was in the range 0.54–0.55 as measured at 1983 constant

prices; and from 1993 to 1997, as mea

-sured at 1993 constant prices, it was in the range 0.66–0.67.1The weighted coef

-ficient of variation in provincial GDP with the oil and gas sectors included was much larger, owing to these two sectors’ very uneven geographical distribution, but even this has gradually decreased as the contribution of the oil and gas sec

-tors to total GDP has fallen (Akita and Lukman 1995).

Regional income inequality receives a great deal of public attention in Indo

-nesia, mainly because of the persistence of large differences in socio-economic

indicators among regions and prov

-inces . In 1997, Java, r epres enting slightly over 6% of Indonesia’s land area, accounted for 58.6% of total popu

-lation and 64.1% of total non-oil and gas

GDP, while the resource-rich province

of Irian Jaya, representing 20% of total land area, accounted for a mere 1.0% of population and 1.6% of non-oil and gas

GDP. The per capita non-oil and gas

GDP of the richest province (Jakarta) was almost nine times as large as that of the poorest (East Nusa Tenggara, NTT). Even within Java, large disparities exist in per capita GDP between Jakarta and

the other provinces. With respect to other socio-economic indicators: (1) in

Jakarta, the proportion of people below the poverty line in 1996 was 2.4%, while in East Nusa Tenggara and Maluku it was 39% and 45%, respectively; (2) the number of hospital beds per thousand people in 1997 was 1.6 in Jakarta, but less than 0.3 in Lampung and West Nusa Tenggara (NTB); and (3) the num

-ber of students attending senior high school (either general or vocational) per thousand people in 1997 was 45 in Jakarta and Yogyakarta, but only 15 in South Kalimantan and West Nusa Teng

-gara (BPS 2001).

The main purposes of this paper are to estimate regional income inequality in Indonesia between 1993 and 1998 using district-level GDP and population data

(as compiled by BPS, the Central Statis

-tics Agency), and to analyse factors de

-termining regional income inequality, using the two-stage nested inequality

decomposition method developed by Akita (2002). The study period includes 1998, when living standards declined significantly in the midst of the economic crisis; thus we also analyse the initial impact of the crisis on regional income inequality. Most previous studies have employed provincial GDP and popula

-tion data to measure regional income in

-equality in Indonesia, and have been unable to measure inequality within provinces.2_Our_use_of_district

-level rather

than provincial data provides a means to analyse not only between-province but

also within-province inequalities.

METHODANDDATA

TheTwo-StageNestedInequality

DecompositionMethod

We estimate regional income inequality using a Theil index based upon district

-level GDP and population data. Theil

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Regional Income Inequality in Indonesia 203

indices are additively decomposable and possess several characteristics desirable in measures of regional income inequal

-ity: mean independence, population-size

independence, and the Pigou–Dalton

principle of transfers (Bourguignon 1979; Shorrocks 1980).3 _We _conduct _a _two

-stage nested inequality decomposition analysis to explore factors determining regional income inequality. This method, as developed by Akita (2002), is analo

-gous to a two-stage nested design in the

analysis of variance (ANOVA). It decom

-poses overall regional inequality, as measured by a Theil index based on dis

-trict-level GDP and population data, into

three components: between-region, be

-tween-province and within-province in

-equality. The between-region component

reflects inequalities between the five ma

-jor islands or island groups: Sumatra, Java–Bali, Kalimantan, Sulawesi and

‘Other’. The between-province compo

-nent is an average of between-province

inequalities(calculated for each of the five regions) weighted by GDP shares. The within-province component is an aver

-age of within-province inequalities

(calculated for each of the 27 provinces, then still including East Timor) weighted by GDP shares. (Appendix 1 provides a detailed account of the method.) This approach can therefore analyse in a co

-herent framework the contribution to overall regional income inequality of within-province as well as between-prov

-ince and between-region inequalities.

TheData

In order to estimate regional income in

-equality and conduct a two-stage nested

inequality decomposition analysis, we use district-level GDP data from the BPS

series GrossRegionalDomesticProductof Regencies/Municipalities inIndonesia (BPS 1997b, 1998a, 2000a), where GDP figures

are reported in constant 1993 prices. The district-level statistics provide data on

total GDP and GDP with the oil and gas sectors (including oil and gas extraction, oil refining and LNG) excluded. For Irian Jaya’s Fak-Fak district, the GDP figure

after exclusion of non-oilandgas mining is also reported, owing to that sector’s dominance in the economy.4

Regional GDP shows the amount of income generated within a region, rather than the income received by the region’s inhabitants. Much of the value added generated by a resource-rich region

through extraction activities has not his

-torically accrued to its population, but has gone instead to other regions or abroad (for example, the bulk of income derived from oil and gas has accruedto the central government, with only a small portion going to the governments and people of the producing regions). This is less so since the implementation in 2001 of Law No. 25/1999 on the financial bal

-ance between the centre and regional governments. However, it was the case for the years included in the present study, and for this reason our study, like previous studies of regional income dis

-parities in Indonesia, excludes the oil and gas sectors in the estimation of regional income inequality.5

We also use provincial non-oil and gas

GDP data from BPS’s GrossRegionalDo

-mesticProductofProvincesinIndonesiaby IndustrialOrigin(BPS 2000b) to conduct a shift and share analysis of provincial differences in the growth rate of GDP be

-tween 1997 and 1998 (appendix 2).

REGIONALINCOMEINEQUALITY BEFORETHEECONOMICCRISIS Table 1 and figure 1 present the results of the two-stage nested inequality de

-composition analysis. Before the eco

-nomic crisis, overall regional income

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Alisjahbana

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TABLE1 Two-StageNestedInequalityDecomposition,1993–98

(excludingtheoilandgassector)

1993 1994 1995 1996 1997 1998

Regionand TheilT Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_{T Contrib.}b

Provincea _(%) _(%) _(%) _(%) _(%) _(%)

Sumatra(73) 0.024 1.7 0.025 1.7 0.028 1.9 0.028 1.8 0.031 2.0 0.032 2.3

DIAceh(10) 0.019 0.1 0.019 0.1 0.019 0.1 0.019 0.1 0.020 0.1 0.018 0.1

NSumatra(17) 0.043 1.0 0.042 1.0 0.038 0.9 0.037 0.8 0.038 0.8 0.034 0.8

WSumatra(14) 0.082 0.7 0.084 0.7 0.090 0.7 0.087 0.6 0.088 0.6 0.111 0.9

Riau(7) 0.225 1.8 0.240 1.9 0.257 2.0 0.274 2.1 0.299 2.3 0.303 2.8

Jambi (6) 0.033 0.1 0.033 0.1 0.036 0.1 0.037 0.1 0.037 0.1 0.036 0.1

SSumatra(10) 0.032 0.4 0.033 0.4 0.034 0.4 0.034 0.4 0.036 0.4 0.031 0.4

Bengkulu(4) 0.016 0.0 0.016 0.0 0.015 0.0 0.014 0.0 0.019 0.0 0.016 0.0

Lampung(5) 0.066 0.5 0.065 0.5 0.074 0.5 0.060 0.4 0.065 0.4 0.048 0.3

Java–Bali(116) 0.172 43.4 0.171 42.4 0.170 41.0 0.169 39.9 0.167 38.6 0.146 35.1

DKIJakarta(5) 0.074 5.0 0.079 5.2 0.084 5.4 0.089 5.6 0.090 5.5 0.118 7.1

WJava(25) 0.083 5.7 0.088 6.0 0.098 6.5 0.101 6.7 0.115 7.7 0.101 6.8

CJava(35) 0.161 6.7 0.172 6.9 0.178 6.8 0.186 7.0 0.187 6.7 0.166 6.6

DIYogyakarta(5) 0.059 0.3 0.059 0.3 0.062 0.3 0.064 0.3 0.069 0.3 0.068 0.3

EJava(37) 0.311 19.3 0.326 19.7 0.343 20.0 0.358 20.6 0.377 20.9 0.365 22.0

Bali(9) 0.097 0.7 0.097 0.7 0.097 0.7 0.097 0.7 0.097 0.7 0.090 0.7

Kalimantan(29) 0.066 1.8 0.065 1.7 0.069 1.8 0.070 1.9 0.069 1.8 0.076 2.3

WKalimantan(7) 0.110 0.8 0.109 0.7 0.107 0.7 0.105 0.7 0.105 0.7 0.103 0.8

CKalimantan(6) 0.033 0.1 0.033 0.1 0.036 0.1 0.038 0.2 0.039 0.2 0.039 0.2

SKalimantan(10) 0.066 0.4 0.064 0.4 0.060 0.4 0.054 0.3 0.058 0.3 0.069 0.4

EKalimantan(6) 0.025 0.3 0.022 0.2 0.021 0.2 0.026 0.3 0.024 0.2 0.027 0.3

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TABLE1(continued) Two-StageNestedInequalityDecomposition,1993–98

1993 1994 1995 1996 1997 1998

Regionand TheilT Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_T _Contrib.b _Theil_{T Contrib.}b

Provincea _(%) _(%) _(%) _(%) _(%) _(%)

Sulawesi(38) 0.002 0.0 0.003 0.1 0.004 0.1 0.006 0.1 0.006 0.1 0.008 0.2

NSulawesi(7) 0.038 0.1 0.038 0.1 0.037 0.1 0.038 0.1 0.041 0.1 0.046 0.2

CSulawesi(4) 0.002 0.0 0.001 0.0 0.001 0.0 0.001 0.0 0.001 0.0 0.002 0.0

SSulawesi(23) 0.068 0.7 0.071 0.7 0.071 0.7 0.072 0.7 0.077 0.7 0.070 0.7

SESulawesi(4) 0.011 0.0 0.010 0.0 0.015 0.0 0.011 0.0 0.013 0.0 0.017 0.0

Other(47) 0.059 0.8 0.055 0.7 0.052 0.7 0.049 0.6 0.059 0.7 0.056 0.8

NTB(7) 0.022 0.1 0.023 0.1 0.023 0.1 0.023 0.1 0.024 0.1 0.025 0.1

NTT(12) 0.047 0.1 0.050 0.1 0.058 0.2 0.063 0.2 0.060 0.2 0.056 0.2

ETimor(13) 0.079 0.1 0.081 0.1 0.081 0.1 0.077 0.1 0.083 0.1 0.073 0.1

Maluku(5) 0.041 0.1 0.046 0.1 0.051 0.2 0.055 0.2 0.063 0.2 0.062 0.2

IrianJaya(10) 0.112 0.4 0.111 0.4 0.109 0.3 0.106 0.3 0.141 0.5 0.136 0.5

Withinprovince 0.119 45.5 0.125 46.5 0.131 47.4 0.136 48.4 0.143 49.7 0.141 52.8

Betweenprovince 0.125 47.7 0.125 46.6 0.125 45.4 0.124 44.2 0.124 43.1 0.108 40.6

Betweenregion 0.018 6.9 0.019 7.0 0.020 7.2 0.021 7.4 0.021 7.2 0.018 6.6

Total 0.262 100.0 0.269 100.0 0.276 100.0 0.281 100.0 0.287 100.0 0.266 100.0

a_Figures_in_parentheses_are_the_number_of_kabupaten_and_kotamadya.

b_{‘Contrib.’}_is _the_% _contribution _to _total_regional_inequality

—Tdinappendix 1, equation (5). Thecontribution figure for a region isthe %

contribution ofthe region’s between-provinceinequality—(Yi/Y)Tpiin equation (5)—while thecontribution figure for a province isthe%

contribution oftheprovince’swithin-provinceinequality—(Y_ij/Y)T_ij inequation(5).

Sources:BPS(1997b,1998aand2000a).

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inequality increased significantly, from 0.262 in 1993 to 0.287 in 1997. Decom

-position of overall inequality into the within-province, between-province and

between-region components reveals that

this increase was due mainly to the rise in the within-province inequality com

-ponent: its contribution to overall in

-equality rose from 45.5% to 49.7%. The between-region component also contrib

-uted to the increase, but only slightly. On the other hand, the between-prov

-ince component was very stable: its con

-tribution fell from 47.7% to 43.1%.

Between-RegionInequality

Among the five regions, Kalimantan had the highest per capita GDP over the 1993–97 period; it was followed by Java–

Bali, Sumatra, Sulawesi and ‘Other’ (table 2). The modest increase in the be

-tween-region inequality component in

the pre-crisisperiod seems to have been

due to an increasing disparity between Sumatra/Java–Bali/Kalimantan and

Sulawesi/’Other’.

Between-ProvinceInequalities

Though the between-province inequality

component remained relatively constant over the 1993–97 period, each region re

-corded a distinct movement in between

-province inequality (figure 2). Largely because of the effect of Jakarta, Java–Bali’s

between-province inequality was the

highest. However, it exhibited a slight decreasing trend, mainly, it seems, be

-cause per capita GDP grew much faster in West Java than in the other Java–Bali

provinces. Accordingly, whereas West Java’s per capita GDP was the second lowest among the Java–Bali provinces in

0.00 0.10 0.20 0.30

93 94 95 96 97 98

Theil T

Within-province inequality component

Between-province inequality component

Between-region inequality component

FIGURE 1 Two-StageNestedInequalityDecomposition, 1993–98

Source: As for table 1.

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TABLE 2 PerCapitaNon-oilandGasGDP

(basedondistrict-leveldata)

Region and Per Capita GDP (Rp ‘000) Growth Rate (%)

Province

1993 1997 1998 1993–97 1997–98

Sumatra 1,342 1,718 1,584 6.4 –7.8

DI Aceh 1,308 1,644 1,522 5.9 –7.5

N Sumatra 1,649 2,187 1,981 7.3 –9.4

W Sumatra 1,449 1,816 1,679 5.8 –7.5

Riau 1,635 2,163 2,119 7.2 –2.0

Jambi 1,078 1,297 1,180 4.7 –9.0

S Sumatra 1,246 1,573 1,442 6.0 -8.3

Bengkulu 1,100 1,226 1,171 2.7 -4.4

Lampung 853 1,060 959 5.6 -9.5

Java–Bali 1,662 2,174 1,853 6.9 –14.8

DKI Jakarta 5,802 7,424 5,979 6.4 –19.5

W Java 1,377 1,882 1,547 8.1 –17.8

C Java 1,070 1,339 1,211 5.8 –9.5

DI Yogyakarta 1,391 1,760 1,563 6.1 –11.2

E Java 1,405 1,828 1,632 6.8 –10.7

Bali 2,010 2,579 2,447 6.4 –5.1

Kalimantan 2,044 2,682 2,585 7.0 –3.6

W Kalimantan 1,506 1,963 1,889 6.8 –3.8

C Kalimantan 1,968 2,539 2,373 6.6 –6.5

S Kalimantan 1,624 2,092 1,965 6.5 –6.1

E Kalimantan 3,516 4,619 4,559 7.1 –1.3

Sulawesi 1,008 1,264 1,201 5.8 –5.0

N Sulawesi 1,091 1,465 1,443 7.6 –1.5

C Sulawesi 949 1,138 1,070 4.7 –6.0

S Sulawesi 1,023 1,284 1,211 5.8 –5.7

SE Sulawesi 861 995 917 3.7 –7.8

Other 873 1,096 1,030 5.9 –6.0

NTB 719 897 859 5.7 –4.3

NTT 610 771 718 6.0 –6.9

E Timor 624 826 813 7.3 –1.5

Maluku 1,220 1,442 1,343 4.3 –6.9

Irian Jaya 1,398 1,829 1,694 6.9 –7.4

Total 1,521 1,974 1,738 6.7 –11.9

Sources: BPS (1997b, 1998a and 2000a).

1993, by 1997 it had become the third highest after Jakarta and Bali.6

Data on provincial GDP from Gross RegionalDomesticProductofProvincesin IndonesiabyIndustrialOrigin (BPS 1996,

1998b, 2000b) show that between 1993 and 1997 West Java’s non-oil and gas

manufacturing grew on average by 12.5% per annum—much more rapidly than the

national rate of 10.4%. In 1997 it ac

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counted for 37.5% of total non-oil and gas

GDP; the comparable figure for Indonesia as a whole was 24.5%.

East Java had a growth pattern simi

-lar to that of West Java. Again, the non

-oil and gas manufacturing sector was the engine of growth for the provincial economy, recording an annual average growth rate of 12% between 1993 and 1997, and accounting for 30.2% of total GDP in 1997. Unlike West and East Java, Jakarta’s GDP growth during the 1993–

97 period was led by the construction sector, which experienced an annual av

-erage growth rate of 12.6% and accounted for 15.4% of the province’s GDP in 1997. Jakarta’s gross fixed capital formation grew rapidly over this period, at an aver

-age annual rate of 9.1% (BPS, 1997a, 1999), contributing to the construction sector’s high growth rate.

In contrast with Java–Bali, the regions

of Sumatra, Kalimantan and Sulawesi recorded rising levels of between-prov

-ince inequality over the 1993–97 period

(table 1 and figure 2). Kalimantan had the second highest between-province in

-equality after Java–Bali, and experienced

a very slight increase. In Kalimantan, there are very large differences in per capita GDP between the richest province (East Kalimantan) and the other three provinces, and these differencesseem to have increased in relative terms. In 1997, the ratio of the per capita GDP of Kalimantan’s richest province to that of its poorest was 2.4. In contrast, Sumatra’s GDP was more evenly distributed among its provinces and population, but its be

-tween-province inequality increased over

the 1993–97 period . The disparities

between its richest province (North

FIGURE 2 Between-ProvinceInequalitybyRegion,1993–98

0.00 0.06 0.12 0.18

93 94 95 96 97 98

Theil T

Sumatra Java–Bali Kalimantan Sulawesi Other

Between-province inequality component

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Sumatra) and the other seven provinces seem to have been increasing. While GDP is more evenly distributedamong prov

-inces and population in Sulawesi than in Sumatra, Sulawesi experienced a growth pattern similar to those of Sumatra and Kalimantan, with per capita GDP growing faster in the richest province (North Sulawesi) than in the other provinces. Thus, Sulawesi’s be

-tween-province inequality rose between

1993 and 1997.

Within-ProvinceInequalities

The within-province inequality compo

-nent increased significantly from 0.119 to 0.143 over the 1993–97 period (table 1

and figure 1). As a result, its contribu

-tion to overall regional inequality rose from 46% to 50%. The increase was due mainly to rises in the within-province

inequalitiesof four provinces in particu

-lar: Riau, Jakarta, West Java and East Java. Whereas their combined contribu

-tion to overall regional inequality was 32% in 1993, it had risen to 37% by 1997. Of the 23 other provinces, 15 experi

-enced an increase in within-province

inequality. However, their contributions to the total increase in the within

-province component of inequality were all negligible.

Of the eight provinces in Sumatra, six recorded an increase in within-province

inequality over the 1993–97 period. How

-ever, only Riau’s increase was significant: its contribution to overall regional in

-equality rose from 1.8% to 2.3%. In 1997, Riau had the highest level of within

-province inequality in Sumatra, followed by West Sumatra and Lampung. Riau’s level of inequality is due largely to the special position of Batam Island, located just 20 km southeast of Singapore, which has received preferential treatment from the central government as an export

-oriented industrial zone. Batam’s per capita non-oil and gas GDP of Rp 12.8

million was much higher than that of Riau’s other districts.

Among the Java–Bali provinces, all

but Bali experienced an increase in within-province inequality; in particu

-lar, Jakarta, West Java and East Java re

-corded significant increases. In 1997, East Java had the highest level of within

-province inequality,accounting for 21% of Indonesia’s overall regional inequal

-ity. This is due to the existence of a few very rich districts: urban Kediri, urban Surabaya, and Gresik. With its limited population, urban Kediri’s per capita GDP was the highest in the entire coun

-try at Rp 22.3 million, well above Cen

-tral Jakarta’s figure of Rp 16.8 million. While falling far short of Kediri, Sura

-baya and Gresik had per capita GDP of Rp 5.7 and 3.8 million, respectively,both significantly higher than that of most other districts in East Java.

Within Java–Bali, Central Java had the

second highest level of within-province

inequality in 1997. This was driven mainly by the districts of Kudus and ur

-ban Semarang, both of which had rela

-tively high levels of per capita GDP (Rp 5.0 and 4.2 million, respectively). West Java had the third highest level of in

-equality in 1997, much lower than the levels recorded for Central and East Java. This is due to the fact that, unlike Central and East Java, which include the primary cities of Semarang and Sura

-baya, respectively, West Java does not have an economicallydominant city and is relatively uniformly developed. In West Java, urban Tangerang had the highest level of per capita GDP (Rp 5.3 million), followed by Bekasi and Serang (each Rp 3.4 million), urban Cirebon (Rp 3.3 million), and urban Bandung (Rp 2.7 million). In other districts, per capita GDP ranged from Rp 1.0 to 2.5 million.

Among the Kalimantan provinces, West Kalimantan registered the highest

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level of within-province inequality in

1997. This was driven in part by urban Pontianak, which had the highest level of per capita GDP (Rp 4.2 million). In other districts, per capita GDP ranged from Rp 1.0 to Rp 2.4 million. It is inter

-esting to observe that while East Kali

-mantan had very high per capita non-oil

and gas GDP (Rp 4.6 million), its level of within-province inequality is one of the

lowest in Indonesia if the oil and gas sec

-tors are excluded.

Among the Sulawesi provinces, three experienced a slight increase in within

-province inequality. South Sulawesi had the highest level in 1997, due in large part to Ujung Pandang’s per capita GDP of Rp 2.5 million. Sulawesi had a very even distribution of income, however, not only among but also within provinces. Within the ‘Other’ category, Irian Jaya had the highest level of within-province inequal

-ity in 1997.

THEINITIALIMPACTOF THEECONOMICCRISISON REGIONALINCOMEINEQUALITY In this section, we assume that most of the change to be observed in 1998 reflects the initial impact of the economic crisis, and use 1998 district-level and provin

-cial GDP data to analyse this impact on regional income inequality.

The economy contracted significantly in 1998 as a result of the crisis. Accord

-ing to district-level data at 1993 constant

prices, national average per capita non

-oil and gas GDP fell by 11.9% in 1998 (table 2), retreating to its 1995 level.7_How

-ever, the impact was very uneven across regions and provinces: while most prov

-inces in Java recorded a fall of 10–20% in

per capita GDP, the effects were much less severe in the Outer Islands.

Overall regional income inequality, as measured by the Theil index T based upon district-level GDP and population

data, declined from 0.287 in 1997 to 0.266

in 1998, which is essentially the same level as in 1993–94 (table 1 and figure 1).

The two-stage inequality decomposition

analysis reveals that about three-quarters

of the decline was due to the fall in the between-province inequality component;

its contribution to overall regional in

-equality decreased to 40.6% (from 43.1% in 1997).8_{Consequently,}_the_contribution

of the within-province inequality compo

-nent to overall regional inequality rose sharply to 52.8% in 1998 (from 49.7%), even though the within-province inequal

-ity component itself recorded a slight fall. The between-region inequality compo

-nent declined also, though only slightly.

Between-RegionInequality

The economic crisis reduced Java–Bali’s

per capita non-oil and gas GDP by 14.8%

in 1998 (table 2), bringing it to the same level as in 1994–95. Sumatra’s per capita

GDP also declined significantlyin 1998, though less so than that of Java–Bali; it

fell to the same level as in 1995–96. On

the other hand, the crisis seems to have affected Kalimantan and Sulawesi very little. As a result, between-region inequal

-ity fell somewhat from 0.021 in 1996 and 1997 to 0.018 in 1998 (table 1).

Between-ProvinceInequalities

Java–Bali’s between-province inequality

played a major role in the reduction of the between-province component of in

-equality: its contribution to overall re

-gional inequality fell from 38.6% to 35.1% in 1998 (table 1). Upon examining the trend in Java–Bali’s between-province

inequality since 1993, we find that the fall in 1998 is the continuationof a trend that began before 1997 (figure 2), though it is much sharper than in previous years and is due to different factors from those of the pre-crisis period, as explained

below.

The economic crisis affected Jakarta in a significant way. Its economy con

(12)

tracted by 19% in 1998, a reduction of almost 20% in per capita GDP. The re

-sulting level is equivalent to that re

-corded in 1993 (table 2). The economies of West and East Java also contracted substantially,though by less than that of Jakarta.9_The_primary _reason _Java

–Bali

recorded a significant fall in between

-province inequality between 1997 and 1998 appears to have been Jakarta’s large decline in per capita GDP relative to other Java–Bali provinces. This con

-trasts with the 1993–97 period, which

saw a slight decline in Java–Bali’s

between-province inequality, because

per capita GDP grew much faster in West Java than in the other Java–Bali

provinces.

To analyse regional differences in the growth rate of GDP between 1997 and 1998, a shift and share analysis was per

-formed using provincial GDP data (ap

-pendix 2). Shift and share analysis aims to examine the factors determining the growth of a region by comparing the region’s growth with the growth of the nation as a whole. It decomposes the region’s actual total growth into three components: the regional share compo

-nent, the industry-mix shift component

and the competitive shift component. The sector classification used in this analy

-sis was: agriculture; non-oil and gas min

-ing; non-oil and gas manufacturing;gas,

electricity and water; construction; trade; transport and communication; finance; and services. The results are presented in table 3. The provinces of Jakarta, West Java and East Java contracted at much faster rates than the nation as a whole; thus the fall in their GDP exceeded the calculated fall if these provinces had con

-tractedat the same rate as the nation, i.e. total growth minus regional share was negative for these provinces. However, there are differences in the pattern of con

-traction between Jakarta and the prov

-inces of West and East Java: while the

industry-mix shift component played an

important role in the contraction of Jakarta, the competitive-shift component

played a dominant role in the contrac

-tion of West and East Java.10

In Jakarta, the non-oil and gas manu

-facturing, finance, and construction sec

-tors contributed significantly to a large negative industry-mix shift, reflecting the

region’s industrial structure, in which the combined GDP share of these three worst crisis-hit industries was about 60%. The

declines in these three sectors in the coun

-try as a whole were 18.2%, 17.3% and 33.3%, respectively, much larger than the negative growth rate of the total national economy. In Jakarta these three sectors contracted by 18.0%, 9.6% and 38.3%, respectively.

In West Java the non-oil and gas manu

-facturing, finance and construction sec

-tors contributed to a large negative competitive shift, with growth rates of

–21.4%, –40.3% and –46.2%, respectively.

The non-oil and gas manufacturing and

trade sectors contributedsignificantly to East Java’s large negative competitive shift, with growth rates of –24.3% and –17.8%, respectively. In West Java and

East Java the industry-mix shift compo

-nent was also negative, owing to very large negative growth in the non-oil and

gas manufacturingand construction sec

-tors, whose combined GDP shares in West and East Java were 44% and 36%, respectively. Nonetheless, the industry

-mix shift component (which is based upon the growth rates of industries in the nation) was much less significant than the competitive shift component, because of the prominence of the agricul

-tural sector in these provinces and be

-cause the agricultural sector was much less affected than other sectors by the cri

-sis in the nation as a whole.11

In contrast to Java–Bali, Kalimantan

and Sulawesi both recorded an increase in between-province inequality in 1998

(13)

(table 1 and figure 2). The reason seems to have been that in both regions the richest province—East Kalimantan and North

Sulawesi, respectively—performed better

than the others , though all the provinces experienced negative growth in per capita GDP (table 2). According to the shift and share analysis, East Kalimantan and North Sulawesi had a positive total shift (= total regional growth minus regional

share of national growth), and more than three-quarters of the total shift was ac

-counted for by the competitive shift com

-ponent (table 3). East Kalimantan and North Sulawesi seem to have had a com

-petitive advantage in non-oil and gas

manufacturing and trade. In North Sula

-wesi these two sectors achieved large posi

-tive growth, whereas in East Kalimantan they neither grew nor contracted.

TABLE 3 ShiftandShareAnalysisforProvinces,1997–98,BasedonNon-oilandGasGDP

(Rpbillion)

Total Regional Total Shift Industry Competitive

Growth Share (C) = (A) –(B) Mix Shift Shift

Province (A) (B) = (D) + (E) (D) (E)

DI Aceh –380 –824 444 169 275

N Sumatra –2,733 –3,139 406 368 38

W Sumatra –520 –1,010 490 203 287

Riau –155 –1,080 925 –57 982

Jambi –282 –398 116 56 60

S Sumatra –1,082 –1,551 470 127 342

Bengkulu –109 –220 110 64 46

Lampung –500 –909 409 91 317

DKI Jakarta –12,163 –8,776 –3,387 –2,742 –645

W Java –12,744 –8,583 –4,161 –567 –3,595

C Java –5,750 –5,201 -549 170 –719

DI Yogyakarta –596 –667 71 31 40

E Java –10,424 –8,108 –2,316 –49 –2,267

Bali –306 –954 648 173 475

W Kalimantan –340 –911 571 94 476

C Kalimantan –297 –541 244 161 83

S Kalimantan –404 –781 377 135 242

E Kalimantan –317 –1,440 1,122 256 866

N Sulawesi –89 –475 386 88 299

C Sulawesi –92 –292 201 83 118

S Sulawesi –570 –1,248 678 302 377

SE Sulawesi –95 –207 112 36 77

NTB –125 –424 300 122 178

NTT –77 –358 281 119 162

Maluku –183 –388 205 49 156

Irian Jaya 931 –916 1,847 518 1,329

Total –49,402 –49,402 0 0 0

Source: BPS (2000b).

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Sumatra’s between-province inequal

-ity was stable between 1997 and 1998 (table 1 and figure 2). Among Sumatra’s provinces, Riau performed relatively well. In 1998, it became the richest prov

-ince in Sumatra in terms of per capita GDP (table 2). Like East Kalimantan and North Sulawesi, it appears to have had a strong competitive advantage in non-oil

and gas manufacturing and trade; its competitive shift component explained most of its total shift (table 3).

Within-ProvinceInequalities

In Java–Bali, all provinces except Jakarta

experienced a fall in within-province

ineq uality between 1997 and 1998 (table 1). Jakarta’s within-province

inequality rose in 1998, but this was the continuation of a pre-crisis trend.

Jakarta’s rise in within-province in

-equality over the 1993–98 period seems

to have been due to a rising disparity between Central Jakarta, the second rich

-est district in Indonesia next to urban Kediri, and the other Jakarta districts. In 1998, Central Jakarta experienced an 8% fall in per capita GDP, while the other Jakarta districts recorded falls of 20% or more. Together with the fact that the dis

-tricts in West Java adjacent to Jakarta (Tangerang, Bekasi and Bogor) also re

-corded falls of 20% or more in per capita GDP, this indicates that the economic crisis had very strong adverse effects on the greater Jakarta metropolitan region (Jabotabek). The severe economic down

-turn in Jabotabek would have had enor

-mous direct and indirect effects not only on the other districts of Java–Bali but

also on the Outer Islands, for Jabotabek generated about a quarter of total Indo

-nesian non-oil and gas GDP, and there

are numerous interindustry linkages be

-tween Jabotabek and other regions, es

-pecially provinces in Java.

East Java had a slight decline in within-province inequality, but it still

had the highest level of inequality of all the provinces of Indonesia. Like Jabota

-bek, East Java’s major urban area seems to have been affected very adversely by the crisis; the relatively rich districts of Surabaya, Sidoarjo and Gresik experi

-enced per capita GDP growth rates of

–17%, –18% and –13%, respectively. On

the other hand, Indonesia’s richest dis

-trict, Kediri, recorded only a minor reduc

-tion in per capita GDP (–3%). Central

Java’s within-province inequality de

-clined significantly, almost retreating to its 1993 level. Again, the crisis hit Cen

-tral Java’s major urban areas hardest: Semarang, Kendal, Demak and Kudus recorded significant falls in per capita GDP (19%, 13%, 12% and 13%, respec

-tively). These observations, together with Jabotabek’s very severe economic condi

-tions in 1998, confirm that Indonesia’s economic crisis was a crisis afflicting urban Java (Booth 2000). It also hit most of the other parts of the Java–Bali region,

but to a lesser extent.

Figure 3 depicts the frequency distri

-bution of per capita GDP (using the natu

-ral log scale) of Java–Bali’s districts in

1995, 1997 and 1998. First, the mode of the distribution shifted from the 7.0–7.2

range in 1997 (corresponding to a per capita GDP range of Rp 1.10 to Rp 1.34 million) to the 6.8–7.0 range in 1998 (cor

-responding to a per capita GDP range of Rp 0.90 to Rp 1.10 million). Second, the number of districts whose natural log of per capita GDP is less than or equal to 7.0 (corresponding to per capita GDP of less than or equal to Rp 1.10 million) increased from 40 to 55 (of 116 districts) in 1998, slightly more than in 1995 (53 districts). Third, the number of districts whose natu

-ral log of per capita GDP is greater than or equal to 7.6 (corresponding to per capita GDP of greater than or equal to Rp 2 mil

-lion) fell from 42 to 33 in 1998, a smaller number than in 1995 (36 districts). In sum, the economic crisis seems to have shifted

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Java–Bali’s distribution to its pre-1995

level.

In Sumatra, all provinces except West Sumatra and Riau experienced a fall in within-province inequality in 1998. Lam

-pung recorded a significant decrease in its within-province inequality, owing

mainly to a substantial reduction in the per capita GDP of Bandar Lampung, the richest district in the province. Among Sumatra’s districts, Banda Aceh, Tebing Tinggi, Medan, Binjai, Sawah Lunto, Palembang and Bandar Lampung regis

-tered relatively large falls in per capita GDP (around 15%). But Batam, the rich

-est district in Sumatra, was not signifi

-cantly affected by the crisis, suffering only a 4% decline in per capita GDP. As in Java–

Bali, the economic crisis in Sumatra seems to have hit major urban areas hardest.

In Kalimantan, the province of South Kalimantan recorded a significant in

-crease in within-province inequality,be

-cause per capita GDP grew (by 3%) in Kota Baru, its richest district, but fell sub

-stantially in its second and thirdrichest districts (Barito Kuala and Banjarmasin) (by 9% and 14%, respectively). Among the municipalities (kotamadya) in Kali

-mantan (Pontianak, Palangka Raya, Banjarmasin, Balikpapan and Sama

-rinda), only Banjarmasin had a large decine in per capita GDP, signifying that the crisis had few adverse effects on ur

-ban Kalimantan.

In Sulawesi, all provinces experienced a slight increase in within-province in

-equality in 1998, with the exception of South Sulawesi, in whose richest district, Ujung Pandang, per capita GDP fell sig

-nificantly (by 9%). In North Sulawesi, four of the seven districts (Minahasa, Sangile Talaud, Gorontalo and Bitung) recorded rises in per capita GDP, though growth rates were much lower than in the pre-crisis period (1–3% vs 6–12%).

FIGURE 3 FrequencyDistributionofthePerCapitaGDPofJava–BaliDistricts

(naturallogscale)

0 10 20 30 40

6.0 6.4 6.8 7.2 7.6 8.0 8.4 8.8

Per capita GDP (log scale) No. of districts

1995 1997 1998

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The crisis affected other Sulawesi dis

-tricts adversely, but the effects seem to have been uniform across districts.

Figure 4 presents the frequency distri

-bution of per capita GDP (using the natu

-ral log scale) in Outer Island districts in 1995, 1997 and 1998. First, the distribu

-tion shifted to the left in 1998 and back

-tracked to appro ximately the 1995 pattern, but the number of districts in the 6.8–7.2 range (corresponding to per

capita GDP of Rp 0.90–1.34 million) was

much smaller in 1998 than in 1995 (61 vs 69 districts). Second, the number of dis

-tricts falling in the 6.2–6.8 range (corre

-sponding to per capita GDP of Rp 0.49–0.90 million) in 1997 was the same

as in 1995, at 35, but by 1998 it had in

-creased to 39. Third, the number of dis

-tricts whose natural log of per capita GDP is greater than or equal to 7.6 (correspond

-ing to per capita GDP of Rp 2 million or more) fell from 49 to 38 in 1998, only one

more than in 1995. In sum, the economic crisis shifted the Outer Islands’ per capita GDP distribution to the left, but the ef

-fects were not as large as in Java–Bali. It

is interesting to note that, in contrast to Java–Bali, the Outer Islands had more dis

-tricts in the 6.4–6.6 range (correspond

-ing to per capita GDP of Rp 0.60–0.74

million) than in the 6.6–6.8 range (corre

-sponding to per capita GDP of Rp 0.74–

0.90 million). This is because the Outer Islands include the very poor provinces of West and East Nusa Tenggara and (at the time of the study) East Timor.

CONCLUDINGREMARKS

As measured by a Theil index based on district-level GDP and population data,

overall regional income inequality in

-creased significantly over the 1993–97

period (from 0.262 to 0.287), during which time Indonesia achieved an an

-nual average growth rate of more than

FIGURE 4 FrequencyDistributionofthePerCapitaGDPofOuterIslandsDistricts

(naturallogscale)

0 10 20 30 40

6.0 6.4 6.8 7.2 7.6 8.0 8.4 8.8

Per capita GDP (log scale) No. of districts

1995 1997 1998

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7%. This finding does not conflict with the fact that GDP and population data from the provincial income statistics (BPS 1996, 1998b and 2000b, which do not include district-level data) suggested

quite stable regional inequality over the same period because, according to the two-stage nested inequality decomposi

-tion analysis, the increase is due mainly to a rise in the within-province inequal

-ity component, especially in the prov

-inces of Riau, Jakarta, West Java and East Java.12_The_between

-province inequality

component increased also, but only very slightly, whereas the between-region in

-equality component was very stable. Within-province inequality thus played

an increasingly important role in the de

-termination of overall regional income inequality, as measured using district

-level data. In 1997 it accounted for about half of overall regional income inequal

-ity, whereas the between-province and

between-region inequality components

contributed 43.1% and 7.2%, respectively. This result suggests that it would be very misleading to base a judgment about whether regional inequality is increas

-ing or decreasing solely upon provincial data, especially when the economy is growing very rapidly and undergoing significantstructural change.

In terms of per capita GDP, the eco

-nomic crisis caused the Indonesian economy to revert to its 1995 level. The impacts were very uneven across prov

-inces and districts, however. Overall re

-gional income inequality, as measured using district-level data, declined to 0.266

in 1998, which corresponded to the level prevailing in 1993–94. The two-stage

nested inequality decomposition analy

-sis shows that about three-quarters of the

decline was due to the fall in the between

-province inequality component. The Java–Bali region played a prominent role

in the fall in this component. Jakarta was the hardest-hit province in Indonesia,

owing to its heavy reliance on the non

-oil and gas manufacturing, finance, and construction sectors, which were most adversely affected by the crisis; Jakarta’s per capita GDP fell by almost 20%, re

-verting to the level recorded in 1993. The economies of other Java provinces also contracted significantly,but the impacts were less severe than in Jakarta. As a re

-sult, the per capita GDP gap between Jakarta and the other Java–Bali provinces

narrowed. Among the Outer Islands, Sumatra experienced a 7% fall in per capita GDP, but the economic crisis does not seem to have affected Kalimantan and Sulawesi very severely. As a result, the between-region inequality compo

-nent fell in 1998.

The impact of the economic crisis was borne disproportionately by Java–Bali’s

major urban areas. In Jakarta and West Java, the Jabotabek districts were severely affected; with the exception of Central Jakarta, all of them recorded a decline of 20% or more in per capita GDP. As a re

-sult, within-province inequality fell in

West Java. It also fell in Central and East Java, again because of a very large de

-cline in per capita GDP in their major urban districts. These observations con

-firm that Indonesia’s economic crisis was a crisis afflicting urban Java. However, with the exception of Batam, Sumatra’s major urban districts also experienced a relatively large decline in per capita GDP. Thus the crisis seems to have adversely affected Sumatra’s urban areas, as did those of Java–Bali.

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NOTES

* Takahiro Akita, International Develop

-ment Program, International University

of Ja pa n, Yam a to-ma ch i, M in am i

Uonuma-gun, Niigata 949-7277, Japan;

e-mail address: akita@iuj.ac.jp; Armida

S. Alisjahbana, Department of Econom

-ics and Development Studies, Faculty of

Economics, Padjadjaran University,

Bandung, Indonesia. The authors are

grateful to the International University

of Japan and the Japan Society for the

Promotion of Science (Grant-in-Aid for

Scientific Research No. 12630073) for

their financial support, and to anony

-mous referees for their helpful com

-ments.

1 William son (1 96 5) intr od uced the

weighted coefficient of variation (the

coefficient of variation weighted by

population) as a measure of regional

income inequality. The large increase in

the coefficient between the 1985–93 and

the 1993–97 periods is due solely to the

change in base year for constant price

estimates between these periods.

2 These include Akita and Lukman (1995);

Es ma ra (1 97 5); Ga rcia Garcia a nd

Soelistianingsih (1998); and Uppal and

Budiono Sri Handoko (1986).

3 An inequality index is said to be addi

-tively decomposable if total inequality

can be written as the sum of between

-group and within-group inequalities.

‘Mean independence’ implies that the

in dex re ma ins un cha ng ed if eve ry

region’s income is changed by the same

proportion, while ‘population-size in

-dependence’ indicates that the index re

-mains un chan ged if the n umbe r of

people in each region is changed by the

same proportion, i.e. the index depends

only on the relative population frequen

-cies in each region and not on the abso

-lute population frequencies. Finally, the

Pigou–Dalton principle of transfers im

-plies that any income transfer from a

richer to a poorer region that does not

reverse their relative ranks in income

reduces the value of the index.

4 In Fak-Fak, non-oil and gas mining ac

-counts for more than 90% of total GDP.

5 For Irian Jaya’s Fak-Fak district, non-oil

and gas mining is also excluded, for the

same reason as the oil and gas sectors.

6 For an unknown reason, West Java’s

GDP is shown as much larger in Gross

Regional Domestic Product ofRegencies/ Municipalities inIndonesiathan in Gross RegionalDomesticProductofProvincesin Indonesia. For example, West Java’s non

-oil and gas GDP in 1997 was Rp 76,150

billion in the district (regency/muni

-cipality ) stati sti cs (BPS 20 00a ), but

Rp 68,010 billion in the provincial sta

-tistics (BPS 2000b). In other provinces,

the discrepancy is significantly smaller

over the 1993–97 period (all are within

3% of each other).

7 If provincial GDP data are used, the de

-cline is 13.9% (BPS 2000b).

8 Since we use only 1998 data, care should

be taken in interpreting the results.

District-level GDP data for 1999 were not

available at the time of writing, so we

do not know whether the within-prov

-ince inequality component fell or rose

in that year. But regional income in

-equality as measured on the basis of pro

-vincial GDP data (BPS 2000b) declined

further in 1999, mainly because of the

fall in the between-province inequality

component.

9 The 1997 figure for East Java’s GDP in

GrossRegionalDomesticProductofRegen

-cies/MunicipalitiesinIndonesiawas smaller

than that in GrossRegionalDomesticProd

-uctofProvincesinIndonesia(Rp 62,815 vs

Rp 64,259 billion); in 1998 the former

became larger (Rp 56,606 vs Rp 53,825

billion) (BPS 2000a, 2000b). Therefore,

the rate of decline in GDP appears much

smaller when the statistics of regencies/

municipalities are used than when pro

-vincial statistics are used (–10% vs –16%).

10 The industry-mix shift component ex

-plains that part of the growth differ

-ence that is due to the difference in the

composition of industries between the

r e gion an d the n a tion , wh e r e th e

gr ow th diffe re nce is tota l re gion al

growth minus regional share of na

-tional growth. The competitive shift

component explains that part of the

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growth difference that is due to the

difference in the growth rates of in

-dustries between the region and the

nation.

11 This is true even though the agricultural

sectors in West and East Java contracted

by 7.6% and 5.0%, respectively, both of

which rates exceeded the 2.6% negative

growth rate in the agricultural sector of

the country as a whole.

12 Household expenditure data from the

National Socio-Economic Surveys (Su

-senas) also indicate an increase in in

-equality, as measured by Theil indices

and the Gini coefficient, between 1993

and 1996 (Akita and Szeto 2000).

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APPENDIX1:

TWO-STAGENESTEDINEQUALITY

DECOMPOSITION METHOD

This appendix presents the two-stage

nested inequality decomposition method, an extension of the one-stage method of

inequality decomposition(Anand 1983). Numerous studies have used the latter to analyse factors determining income in

-equality, but most have applied it to analysis of interpersonal or interhouse

-hold income inequality (see, for example, Akita and Lukman 1999; Akita, Lukman and Yamada 1999; Akita and Szeto 2000; Anand 1983; Ching 1991; Estudillo 1997; Glewwe 1986; Ikemoto 1985; Jenkins 1995; Mookherjee and Shorrocks 1982; Tsakloglou 1993; and Tsui 1993).

We consider the following hierarchi

-cal structure of a country: region–

province–district. With a district as the

underlying regional unit, overall re

-gional income inequality can be mea

-between-district income inequality for re

-gion i,

measures income inequality between re

-gions.

Therefore, the overall regional income inequality T_d is the sum of the within

-region component and the between

-region component. Equation (3) is the ordinary one-stage inequality decompo

-sition equation.

Next, if we define T_ijas follows to mea

-sure within-province income inequality

for province j in region i,

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measures income inequality between provinces in region i.

equality decomposition equation, in which overall regional income inequality is decomposed into the within

-province component (T_WP), the between

-province component (T_BP), and the between-region component (TBR). The

within-province component is a weighted

average of within-province income in

-equalities (T_ij), while the between-province

component is a weighted average of be

-tween-province income inequalities (Tpi).

APPENDIX2:

SHIFTANDSHAREANALYSIS Shift and share analysis is a technique that has been widely used to examine the factors determiningregional growth (see, for example, Armstrong and Tay -output. The formula for calculating RS for a particular sector can be expressed

ing industries should grow faster than the nation as a whole. IMS for a single

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Takahiro Akita and Armida Alisjahbana

gion may have a competitive advantage in some industries relative to other re

-gions because its environment is condu

-cive to the growth of these industries.CS