Regional Income Disparities and Convergence Clubs in Indonesia: New District-Level Evidence 2000-2017

Abstract

Abstract Reducing regional income disparities is a central challenge for promoting sustainable development in Indonesia. In particular, the prospect for these disparities to be reduced in the post-decentralization period has become a major concern for policymakers. Motivated by this background, this paper aims to re-examine the regional convergence hypothesis at the district level in Indonesia over the 2000-2017 period. By using non-linear dynamic factor model, this study analyzes novel data set to investigate the formation of multiple convergence clubs. The results indicate that Indonesian districts form five convergence clubs, implying that the growth of income per capita in Indonesian 514 districts can be clustered into five common trends. From the lens of spatial distribution, two common occasions can be observed. First, districts belonging to the same province tend be in the same club and second, the highest club is dominated by districts with specific characteristic (i.e., big cities or natural resources rich regions). From a policy standpoint, this findings of multiple convergence clubs at significantly different levels of income allows regional policy makers to identify districts facing similar challenges. It may have meaningful implications for regional development policies, including the call of inter-provincial development policy.