Income, Inequality and Poverty Convergence at the Local Government Level in Decentralized Indonesia

Abstract:Since the launch of Indonesia’s decentralization reforms in 2001, the country has achieved significant progress in improving the welfare of its citizens—as seen from increasing income per capita and decreasing poverty levels. However, vertical inequality has increased, raising concerns whether inequality between different parts of the country has also grown. Using spatial econometric models with data covering the 2002–19 period, this paper examines whether there has been a convergence or divergence in income per capita, inequality and poverty across local government areas in Indonesia. The findings indicate that there has been a conditional convergence of these development outcomes across local government areas. This means that the levels of income per capita, inequality and poverty across the country’s municipalities and regencies will converge, but the gaps will not be completely eliminated due to differences in their endowment factors. This conditional convergence occurs across municipalities and across regencies as well as across local government areas in Java and outside Java, but at different rates of convergence. This finding implies that Indonesia needs to maintain its decentralization policy and resist efforts to recentralize revenue sources and responsibilities. In addition, this should be complemented by efforts to assist areas with low income per capita, high inequality and high poverty rates to improve their endowment factors and institutions.