An Empirical Study on Spatial Inequality of Regional Economy in South Sumatera Province, Indonesia

Abstract

The spatial inequality of regional economy has become a crucial topic in Indonesia. There were several studies on the spatial inequality of the Indonesia’s regional economy, but most of these studies investigated economic inequality on a broad basis, i.e. at inter-provincial level. We think our study is unique because we use panel data for the period of 1993 to 2007 for regencies and municipalities in South Sumatra Province. Thus, this study attempts to fill an important gap where we provide a better insight on how decentralization policy affects income distribution within a province. The focus of this study is to investigate the role of public investment on economic growth and income inequality at a lower level of government. The economic inequality measure is computed using Williamson Index. This study employs the Partial Adjustment Model (PAM) and Error Correction Model (ECM) in the analysis.We found that on the average, the distribution of income within a province was getting worse after the decentralization policy in Indonesia. In fact, an area that was rich in natural resources, such as oil and gas, experienced a high growth rate but has a big problem in income distribution.