Structural Changes and Regional Income Inequality in Indonesia: A Bidimensional Decomposition Analysis

Using the bidimensional decomposition method of a population-weighted coefficient of variation, this paper analyzes the changes in the determinants of interprovincial income inequality associated with structural changes in Indonesia from 1983 to 2004. The method unifies two inequality decompositions by regional groups and gross regional product components (industrial sectors) and, therefore, enables us to assess the contributions of gross regional product components to within-region and between-region inequalities, as well as to overall inequality. As the share of mining has decreased, the spatial distribution of manufacturing has played a more important role in the inequality of Sumatra and Kalimantan, while the primacy of Jakarta, with strong urbanization economies, facilitated by globalization and trade and financial liberalization, has determined much of the Java-Bali region's inequality and, therefore, overall inequality in Indonesia. © 2011 The Authors. Asian Economic Journal © 2011 East Asian Economic Association and Blackwell Publishing Pty Ltd.