The Initial Impacts of the COVID-19 Pandemic on Regional Economies in Indonesia: Structural Changes and Regional Income Inequality

Abstract

The COVID-19 pandemic has exerted an enormous impact on the Indonesian economy. In 2020, the country’s economy contracted by 2.7%. However, the impact has been spatially heterogeneous. Based on provincial GDP across industrial sectors, this study examines how structural changes caused by the pandemic have affected the determinants of inter-provincial inequality in Indonesia by conducting a bi-dimensional inequality decomposition analysis. According to the bi-dimensional decomposition analysis, after the outbreak of COVID-19, the tourism sector reduced its contribution to inter-provincial inequality. On the other hand, the IC and financial services sectors were not affected by the pandemic and raised their contributions. When Indonesia recovers from the pandemic, it is likely that the tourism sector will regain its position as an important determinant of inter-provincial inequality. However, the most important sectors in determining inter-provincial inequality will be the IC, financial, and business services sectors, particularly in the Java–Bali region. With the rapid advancement of IC, financial, and e-business technologies, the roles of these high-inequality sectors are likely to increase unless policies that could facilitate spatial dispersion of these services and activities are implemented.