Impact of institutional determinants on income inequalities in Indonesia during the Era Reformasi

Abstract

This article examines the links between a selected group of institutional factors and income inequalities. The Indonesian transformation process, referred to as the Era Reformasi, which started in 1999, was a substantial institutional change in the social, political, and economic sphere that could have impacted income inequalities. We conducted an analysis based on Engle and Granger’s (1987) cointegration technique and the autoregressive distributive lag (ARDL) model, which allowed us to assess the short-run and long-run links, as well as causal relationships between variables. Particular attention was paid to governance indicators and economic freedom as factors that influence other economic and political institutions. The results show that improvements in institutional factors, namely economic freedom, corruption control, government effectiveness, regulation quality, and voice and accountability, significantly reduced income inequalities during the Era Reformasi in Indonesia.