Regional Income Inequality in China and Indonesia A Comparative Analysis. (Draft)

Transcription

1 Regonal Income Inequalty n Chna and Indonesa A Comparatve Analyss (Draft) by Takahro Akta Internatonal Development Program, Internatonal Unversty of Japan amato-mach, Mnam Uonuma-gun, Ngata, Japan E-Mal address: akta@uj.ac.jp Tel and fax: and Kazum Kawamura Economc Research Insttute for Northeast Asa

2 1 1. Introducton As ponted out by Metwally and Jensen (1973), the measure of regonal ncome nequalty based on regonal mean ncomes relatve to the natonal mean ncome fals to explan ether the dsperson of ndvdual ncomes natonally or the dsperson of ncomes wthn regons. It s qute possble for the measure to decrease over tme (.e., a convergence n regonal mean ncomes), whle the dsperson of actual ncomes may be experencng the opposte trend. Despte ths techncal problem, however, there have been a number of studes that measure regonal ncome nequalty based on regonal mean ncomes, usng such nequalty ndces as the weghted coeffcent of varaton (Wllamson, 1965), Thel entropy ndces (Thel, 1967) and the varance of log-ncome. 1 Ths s attrbutable manly to the paucty of data on ndvdual ncomes wthn each regon versus the avalablty of data on regonal mean ncomes. The objectve of ths paper s to analyze regonal ncome nequalty n Chna and Indonesa by the two-stage nested Thel decomposton method, whch was developed by Akta (2000) as an extenson of the ordnary one-stage Thel decomposton method. 2 The method s analogous to a two-stage nested desgn n the analyss of varance (ANOVA). 3 It consders the three-level herarchcal structure of a country: regon-provnce-dstrct as shown n Fgure 1, and decomposes the overall regonal nequalty, as measured by a Thel ndex based on dstrct-level mean ncomes, nto three components: the between-regon, betweenprovnce, and wthn-provnce nequalty components. It should be noted that the method reles on per capta GDP to measure regonal ncome nequalty; thus t does not solve the ntrnsc problem mentoned above. However, t uses a dstrct as the underlyng regonal unt to measure regonal ncome nequalty, rather than a provnce, the unt used by the majorty of prevous studes. By usng the dstrct as the underlyng regonal unt, ths study can analyze the contrbuton of wthn-provnce nequaltes as well as between-provnce and betweenregon nequaltes to the overall regonal ncome nequalty n a coherent framework. Fgure 1 In ths paper, we chose Chna and Indonesa as case studes, snce n these two countres, dstrct-level GDP and populaton data are avalable, and ther wthn-provnce nequaltes seem to have been more promnent than between-provnce nequaltes. The paper s organzed as follows. The next secton presents the two-stage nested Thel decomposton method, whle secton 3 dscusses the data used n the nequalty

3 2 decomposton analyss. Sectons 4 and 5 then apply the two-stage nested Thel decomposton method to dstrct-level GDP and populaton data n Chna and Indonesa, respectvely, and explores factors determnng regonal ncome nequalty. Fnally, secton 6 provdes the summary of the fndngs and some polcy mplcatons. 2. Decomposton of Thel Inequalty Indces: Two-Stage Nested Thel Decomposton Method The Thel nequalty decomposton method s based on two Thel nequalty ndces (T and L). Thel ndces are addtvely decomposable and satsfy several desrable propertes as a measure of regonal ncome nequalty,.e., mean ndependence, populaton-sze ndependence, and the Pgou-Dalton prncple of transfers (Bourgugnon, 1979; Shorrocks, 1980). An nequalty ndex s sad to be addtvely decomposable f total nequalty can be wrtten as the sum of between-group and wthn-group nequaltes. Mean ndependence mples that the ndex remans unchanged f every regon's ncome s changed by the same proporton, whle populaton-sze ndependence means that the ndex remans unchanged f the number of people n each regon s changed by the same proporton,.e., the ndex depends only on the relatve populaton frequences at each regon, not the absolute populaton frequences. Fnally, the Pgou-Dalton prncple of transfers mples that any ncome transfer from a rcher to a poorer regon that does not reverse ther relatve ranks n ncome reduces the value of the ndex. We consder the followng herarchcal structure of a country: regon-provnce-dstrct. By usng a dstrct as the underlyng regonal unt, overall regonal ncome nequalty can be measured by the followng Thel ndex (Thel ndex T). where yjk y jk T d = log, (1) n j k jk N y jk s the ncome of dstrct k n provnce j n regon, s the total ncome of all dstrcts = y jk, j k n jk s the populaton of dstrct k n provnce j n regon, and N s the total populaton of all dstrcts = n jk. j k

4 3 If we defne d T as follows to measure between-dstrct ncome nequalty for regon, jk jk j k jk d N n y log y = T, (2) then d T n equaton (1) wll be decomposed nto BR d d d T T N N log T T + = + = (3) where s the total ncome of regon = j k jk y, N s the total populaton of regon = j k jk n, and = N N log T BR measures ncome nequalty between regons. Therefore, the overall regonal ncome nequalty d T s the sum of the wthn-regon component and the between-regon component. Next, f we defne j T as follows to measure wthn-provnce ncome nequalty for provnce j n regon, j jk j jk k j jk j N n y log y = T then d T n equaton (2) can be further decomposed nto p j j j j j j j j j j d T T N N log T T + = + = (4)

5 4 where j s the total ncome of provnce j n regon = y jk, k N j s the total populaton of provnce j n regon = k n jk, and j j T p = log measures ncome nequalty between provnces n regon j Nj N. By substtutng T d n equaton (4) nto equaton (3), we obtan T d = j j Tj + T p + T BR = WP j j Tj + BP BR T p + T BR = T + T + T (5) Equaton (5) s the two-stage Thel nequalty decomposton equaton, n whch the overall regonal ncome nequalty s decomposed nto the wthn-provnce component ( T ), the between-provnce component ( T BP ), and the between-regon component ( T BR ). The wthn-provnce component s a weghted average of wthn-provnce ncome nequaltes ( T j ), whle the between-provnce component s a weghted average of between-provnce ncome nequaltes ( T p ). In the regon-provnce-dstrct framework, Thel ndex L s defned as: njk n jk L = log N d (6) N y j k jk Thel ndex L n equaton (6) can also be decomposed nto three components. N N = j L d Lj Ld j N + + N = L + L + L WP BP BR L BR It should be noted that nequalty fgures based on provncal ncome and populaton data are comparable to the sum of the between-provnce and between-regon nequalty components n the two-stage nested Thel decomposton analyss. WP

6 5 3. The Data Ths secton descrbes the data used n a two-stage nested decomposton analyss n Chna and Indonesa Chna For Chna, we use dstrct-level GDP and populaton data from the database compled by a Japanese research nsttute (Soken) under the edtoral supervson of the Chnese Statstcal Bureau (Soken, 1999, 2000). Ths study uses nomnal GDP fgures, snce dstrctlevel real GDP data are not avalable. It should be noted however that over the perod of the study ( ), the nflaton rate was less than 5% per annum. Therefore, the results would not be sgnfcantly dfferent even f constant prce data were used. In ths study, Chna s dvded nto the followng three regons, as adopted by the Seventh Fve ear Plan ( ) for the purpose of regonal development plannng: the Western, Central, and Eastern (or Coastal) Regons. The Western Regon ncludes the provnces of Schuan, Chongqng, Guzhou, unnan, Tbet, Shaanx, Gansu, Qngha, Nngxa, and Xnjang. The Central Regon ncludes the provnces of Jangx, Shanx, Anhu, Henan, Hunan, Hube, Inner Mongola, Jln, and Helongjang. Fnally, the Eastern (or Coastal) Regon ncludes the provnces of Laonng, Fujan, Guangdong, Hanan, Guangx, Zhejang, Jangsu, Shangha, Shandong, Bejng, Tanjn, and Hebe. For the purpose of geographcal convenence n ths two-stage nested nequalty decomposton analyss, the followng separate admnstratve unts have been subsumed nto ts contguous provnce: Shangha nto Jangsu provnce; Bejng and Tanjn nto Hebe provnce; Hanan nto Guangdong provnce; and Chongqng nto Schuan provnce. Wth these reclassfcatons, the Western, Central, and Eastern Regons consst of 9, 9, and 8 provnces, respectvely, and 105, 115, and 115 dstrcts, respectvely. Durng the Seventh Fve ear Plan and throughout the 1990s, the Eastern Regon was targeted for technologcal advancement, foregn nvestment, and export-orented ndustres.

7 6 In contrast, the Central Regon was targeted for key energy projects and the producton of raw materals, partly processed materals, and foodstuff. The Western Regon was targeted for mneral and anmal resource processng (Wang, L, and Lnge, 1997). In ths trpartte regonal classfcaton, the Eastern Regon was expected to serve as a growth center, whch, through nterregonal multpler effects, would generate development lnkages to nland provnces. These condtons would, n turn, produce a gradual growth momentum that s approprate for each provnce s productvty level and comparatve advantages (Wang, L, and Lnge, 1997) Indonesa For Indonesa, we use dstrct-level GDP data from Gross Regonal Domestc Product of Regences/Muncpaltes n Indonesa (BPS, 1997b, 1998a, 2000a), where GDP fgures are reported n constant 1993 prces. The dstrct-level GDP statstcs provdes total GDP fgures and GDP fgures after excludng the ol and gas sectors, where the ol and gas sectors nclude ol and gas mnng, ol refnng, and LNG. However, for Iran Jaya's Fak-Fak, GDP fgure after excludng non-ol and gas mnng s also reported due perhaps to the sector's domnance n the economy. 4 It should be noted that regonal GDP shows the amount of ncome generated wthn a regon, rather than the ncome receved by the regon s nhabtants. Often, much of the value added generated by a resource-rch regon through extractng actvtes does not trckle-down to the people lvng there, but goes nstead to other regons or abroad. For example, the bulk of ncome derved from ol and gas n Indonesa accrues to the central government, wth only a small porton gong to the governments and people of the producng regons. For ths reason, lke prevous studes on regonal ncome dspartes n Indonesa, we exclude the ol and gas sectors n the estmaton of regonal ncome nequalty. 5 In ths study, Indonesa s dvded nto fve regons: Sumatra, Java-Bal, Kalmantan, Sulawes, and Others. Sumatra ncludes DI Aceh, North Sumatra, West Sumatra, Rau, Jamb, South Sumatra, Bengkulu, and Lampung. Java-Bal ncludes DKI Jakarta, West Java, Central Java, DI ogyakarta, East Java, and Bal. Kalmantan ncludes West Kalmantan, Central Kalmantan, South Kalmantan, and East Kalmantan. Sulawes ncludes North Sulawes, Central Sulawes, South Sulawes, and Southeast Sulawes. Fnally, Others are West Nusatenggara, East Nusatenggara, East Tmor, Maluku, and Iran Jaya.

8 7 4. Results: Chna Ths secton apples the two-stage nested Thel decomposton method to dstrct-level GDP and populaton data n Chna. Table 1 presents the results of the two-stage nested nequalty decomposton analyss (see also Fgure 2). The overall regonal ncome nequalty ncreased slghtly from n 1995 to n 1997, and then to n The decomposton of the overall nequalty nto the wthn-provnce, between-provnce, and between-regon components reveals that whle the wthn-provnce nequalty component accounted for most of the ncrease n the overall nequalty between 1995 and 1997, the three nequalty components contrbuted equally to the ncrease from 1997 to Table 1 Fgure 2 Wthn-provnce nequalty accounted for the largest component of overall regonal ncome nequalty at 62 percent. Ths was followed by the between-regon component at 27 percent and the between-provnce component at 11 percent. Ths contrasts sharply wth Indonesa, whch had almost the same level of per capta GDP as Chna n 1997 (n terms of purchasng power party) and s composed of 27 provnces and 303 dstrcts. (a) Between-Regon Inequalty Over the perod, the Eastern Regon had the largest per capta GDP, followed by the Central Regon and the Western Regon (Table 2). In 1998, the Central Regon's per capta GDP was 54 percent of the Eastern Regon's, whle the Western Regon's per capta GDP was an even smaller 42 percent. Ths s n sharp contrast to the stuaton n 1990 when the Central Regon and the Western Regon's per capta GDP were 61 and 56 percent, respectvely, of the Eastern Regon's per capta GDP (Akta, ue, and Kawamura, 1999). Thus, there was a substantal ncrease n ncome dsparty between the Eastern Regon and the

9 8 Central and Western Regons over the perod. Accordng to Akta, ue, and Kawamura, regonal ncome nequalty between provnces, as measured by a Thel ndex, ncreased sgnfcantly between 1990 and 1995 (from to 0.086), but ths ncrease was mostly attrbutable to a rse n ncome dsparty between the Eastern Regon and the Western and Central Regons. 6 Table 2 A relatvely large between-regon nequalty n Chna seems to have been brought about by export-orented regonal development polces based on comparatve advantages, all of whch were ntroduced durng the open-door polcy ntated by Deng Xaopng n In the 1980s, the central government desgnated several specal economc zones (SEZs) and economc and technologcal development zones (ETDZs) n coastal provnces, partcularly n the southeast coastal provnces of Guangdong and Fujan. The SEZs and ETDZs were meant to promote economc development through nternatonal trade and FDI. 7 Preferental treatment gven to these selected areas and the geographcal proxmty of many of these areas to Hong Kong and Tawan have led to massve nflows of export-orented and hghly productve FDI nto these areas n the 1980s and the 1990s, thus wdenng regonal ncome dspartes between nland and coastal provnces. (b) Between-Provnce Inequaltes Overall between-provnce nequalty has been stable between 1995 and 1997 at approxmately 0.024, but there was an ncrease n 1998 to (see Table 1). Each regon s between-provnce nequalty exhbted dstnct trends from as seen n Fgure 3. The Eastern Regon had the hghest levels of between-provnce nequalty n every year except 1995 when the Western Regon had a slghtly hgher level of between-provnce nequalty. Whle the Eastern Regon s between-provnce nequalty remaned constant from at 0.026, t jumped to n The man factor seems to have been much

10 9 faster growth n per capta GDP n the Eastern provnces of Zhejang and Fujan vz. other provnces n the Eastern Regon. In 1998, Zhejang became the provnce wth the largest per capta GDP n Chna at 12,584 yuan. Other provnces wth hgh per capta GDP, n descendng order, were Jangsu, Guangdong, and Fujan (see Table 2). Further compoundng the hgh level of between-provnce nequalty n the Eastern Regon n 1998 s the large negatve growth n per capta GDP n Guangx, the poorest provnce of the Eastern Regon. Fgure 3 The Central Regon recorded ncreasng levels of between-provnce nequalty durng the perod; n contrast, the Western Regon experenced decreasng levels of between-provnce nequalty. Thus, by 1998, the Central Regon had approxmately the same level of between-provnce nequalty as the Western Regon. In the Central Regon, Helongjang had the largest per capta GDP, followed by Hube and Jln; ths order remaned the same over the perod. These three rcher provnces per capta GDP grew faster than the three poorest provnces (.e., Jangx, Anhu, and Henan) over ths perod; thus, the Central Regon s level of between-provnce nequalty rose from to The Western Regon had the hghest levels of between-provnce nequalty n 1995 at 0.027, but ths decreased dramatcally to n The man reason seems to have been due to much slower growth n per capta GDP n Xnjang, the rchest provnce of the Western Regon, when compared to the per capta GDP growth rates of other Western provnces. Xnjang, n fact, recorded negatve growth n per capta GDP n Despte ths, Xnjang stll had the hghest per capta GDP n 1998 at 5,894 yuan, followed by Schuan and unnan. (c) Wthn-Provnce Inequaltes Overall wthn-provnce nequalty ncreased from to durng the perod (see Table 1 and Fgure 2). But, the ncrease was due mostly to the rsng levels of wthn-provnce nequalty n the Eastern Regon s provnces of Guangdong, Jangsu,

11 10 Laonng, Zhejang, and Fujan. These provnces combned contrbuton to overall regonal nequalty rose from 32 percent n 1995 to 34 percent n Of the remanng twenty-one provnces, eleven experenced an ncrease n wthn-provnce nequalty. However, ther contrbuton to the ncrease n overall wthn-provnce nequalty was neglgble. Provnces n the Western Regon had relatvely hgh levels of wthn-provnce nequalty as ther Thel T ndces were all greater than 0.1 n In 1998, unnan had the largest wthn-provnce nequalty n the Western Regon at 0.329, followed by Xnjang, and Gansu. In these provnces, there were a small number of key dstrcts that had per capta GDP levels that were approxmately 10 tmes larger than the per capta GDP levels of the poorest dstrct n each provnce. These key dstrcts nclude ux and Kunmng n unnan, Urumq and Karamay n Xnjang, and Lanzhou and Jayuguan n Gansu. It should be noted that Tbet experenced a sgnfcant decrease n wthn-provnce nequalty ths was due to narrowng dspartes between Lhasa and the other dstrcts. In contrast to the Western Regon, provnces n the Central Regon had relatvely low levels of wthn-provnce nequalty. Wth the sole excepton of Helongjang, the levels of wthn-provnce nequalty were all less than 0.1, and the per capta GDP levels of the rchest dstrcts n each provnce were only four tmes larger than the poorest dstrcts n Overall, Helongjang had the largest wthn-provnce nequalty n the Central Regon at n 1998, followed by Hube, Jangx, and Shanx. The Central Regon has thus far been the most successful n mantanng balanced regonal development, not only across provnces but also wthn provnces. In the Eastern Regon, all but Hebe experenced an ncrease n wthn-provnce nequalty over the perod. There s much varaton n wthn-provnce nequalty n the Eastern Regon. Guangdong regstered the largest wthn-provnce nequalty at n 1998, accountng for 18 percent of overall regonal nequalty. At less than half the level of Guangdong s nequalty, Jangsu had the second hghest level of wthn-provnce nequalty at

12 , whch accounted for 10 percent of overall regonal nequalty. The next hghest provnces were Laonng, Shandong, and Fujan. Guangdong, n fact, had the hghest level of wthn-provnce nequalty n Chna. 9 In contrast, Zhejang regstered n 1998, whch was one of the lowest levels of nequalty n Chna. At the dstrct level n Guangdong, Shenzhen had the largest per capta GDP at 112,500 yuan n 1998, whch was more than 40 tmes as hgh as Heyuan, the dstrct wth the smallest per capta GDP at 2,500 yuan. In Jangsu, a smlar comparson yelded a much less extreme dvergence between the dstrct wth the largest per capta GDP and the dstrct wth the smallest: Shangha s per capta GDP at 25,200 was 7.7 tmes greater than Suqan s per captal GDP at 3,200 yuan. Ths s roughly comparable to condtons n the provnces of Laonng and Shandong, whch generated ratos of 7.0 and 8.7, respectvely, when comparng the dstrct wth the hghest per capta GDP wth the lowest. In Laonng, Panjn dstrct recorded a per capta GDP of 19,400 yuan versus Chaoyang dstrct s 2,700 yuan. In Shandong,, the dstrct of Weha had a per capta GDP of 21,600 yuan n comparsons to Heze dstrct s 2,500 yuan. Fnally, n the provnce of Zhejang, the rato of the dstrct wth the hghest per capta GDP to the dstrct wth the lowest was only 3.9: the dstrct of Hangzhou recorded a per capta GDP of 18,600 yuan versus Lshu s 4,700 yuan. These observatons suggest that each provnce n the Eastern Regon had ts own dstnct pattern of economc development as engendered by the economc reforms n the past two decades. 5. Results: Indonesa Ths secton apples the two-stage nested Thel decomposton method to dstrct-level GDP and populaton data n Indonesa. Snce Indonesa s one of the hardest ht countres by the Asan economc crss, the study perod ( ) s dvded nto two sub-perods: before the economc crss ( ) and durng the economc crss ( ).

13 Before the Economc Crss Table 3 presents the result of the two-stage nested nequalty decomposton analyss (see also Fgure 4). Before the economc crss, the overall regonal ncome nequalty ncreased sgnfcantly from n 1993 to n Decomposton of overall nequalty nto the wthn-provnce, between-provnce, and between-regon components reveals that the ncrease was due mostly to the rse n the wthn-provnce nequalty component; ts contrbuton to the overall nequalty thus rose from 45.5% to 49.7%. The between-regon component also contrbuted to the ncrease but only slghtly. On the other hand, the between-provnce component was very stable; thus, ts contrbuton fell from 47.7% to 43.1%. Table 3 Fgure 4 (a) Between-Regon Inequalty Among the 5 regons (.e., Sumatra, Java-Bal, Kalmantan, Sulawes, and Others) Kalmantan had the hghest per capta GDP over the perod; ths was followed by Java-Bal, Sumatra, Sulawes, and Others (Table 4). The modest ncrease n the betweenregon nequalty component n the pre-crss perod seems to have been due to an ncreasng dsparty between Sumatra/Java-Bal/Kalmantan and Sulawes/Others. Table 4 (b) Between-Provnce Inequaltes Though the between-provnce nequalty component remaned relatvely constant over the perod, each regon recorded a dstnct movement n between-provnce nequalty (Fgure 5). 10 Due largely to the exstence of Jakarta, Java-Bal s between-provnce nequalty was the hghest. However, t exhbted a slght decreasng trend. The man factor behnd the

14 13 slght decrease seems to have been West Java s much faster per capta GDP growth rate compared to the other Java-Bal provnces. Accordngly, whereas West Java s per capta GDP was the second lowest among Java-Bal provnces n 1993, by 1997 t had become the thrd largest after Jakarta and Bal. 11 Fgure 5 Accordng to the data on provncal GDP from Gross Regonal Domestc Product of Provnces n Indonesa by Industral Orgn (BPS, 1996, 1998b, 2000b), West Java s non-ol and gas manufacturng grew very rapdly over the perod; ts annual average real GDP growth rate n non-ol and gas manufacturng was 12.5%, whch s much larger than the country s growth rate of 10.4% n non-ol and gas manufacturng. In West Java, non-ol and gas manufacturng accounted for 37.5% of total GDP after excludng the ol and gas sectors n 1997; the comparable fgure n Indonesa as a whole s 24.5%. East Java had a smlar growth pattern to West Java. Agan, the non-ol and gas manufacturng sector was the engne of growth for the provncal economy as t recorded an annual average growth rate of 12% durng and accounted for 30.2% of total GDP n Unlke West and East Java, Jakarta s GDP growth durng was led by the constructon sector, whch experenced an annual average growth rate of 12.6% and accounted for 15.4% of the provnce s GDP n Accordng to the data on provncal GDP from Gross Regonal Domestc Product of Provnces n Indonesa by Expendture (BPS, 1997a, 1999), Jakarta s gross fxed captal formaton grew rapdly at an average annual rate of 9.1% durng , contrbutng to the constructon sector's hgh growth rate. Contrary to the Java-Bal regon, the regons of Sumatra, Kalmantan, and Sulawes recorded rsng levels of between-provnce nequalty over the perod (Table 3 and Fgure 5). Kalmantan had the second hghest between-provnce nequalty next to Java-Bal and experenced a very slght ncrease. In Kalmantan, there are very large dfferences n per capta GDP between the rchest provnce (East Kalmantan) and the other three provnces, and

15 14 these dfferences seem to have ncreased n relatve terms. In 1997, the rato of the per capta GDP of the rchest provnce to the poorest provnce was 2.4 n Kalmantan. In contrast, Sumatra s GDP s more evenly dstrbuted among ts provnces and populaton than n Kalmantan, but Sumatra s between-provnce nequalty ncreased over the perod. In Sumatra, the dspartes between the rchest provnce (North Sumatra) and the other seven provnces seem to have been ncreasng. Whle Sulawes s GDP s more evenly dstrbuted among ts provnces and populaton than n Sumatra, t experenced a smlar growth pattern to Sumatra and Kalmantan, n whch the per capta GDP of the rchest provnce (.e., North Sulawes) grew faster than n the other provnces. Thus, ts between-provnce nequalty rose over the perod. (c) Wthn-Provnce Inequaltes The wthn-provnce nequalty component ncreased sgnfcantly from to over the perod (Table 3 and Fgure 4). 12 As a result, ts contrbuton to overall regonal nequalty ncreased from 45.5% to 49.7%. However, the ncrease was due mostly to the ncreases n the wthn-provnce nequaltes of 4 provnces n partcular: Rau, Jakarta, West Java, and East Java. Whereas ther combned contrbuton to overall regonal nequalty was 31.8% n 1993, t had rsen to 36.5% by Of the twenty-three other provnces, ffteen provnces experenced an ncrease n wthn-provnce nequalty. However, ther contrbutons to the ncrease n the wthn-provnce nequalty component were all neglgble. Of the eght provnces n Sumatra, sx provnces recorded an ncrease n wthn-provnce nequalty over the perod. However, only Rau experenced a sgnfcant ncrease, as ts contrbuton to the overall regonal nequalty rose from 1.8% to 2.3%. In 1997, Rau had the hghest level of wthn-provnce nequalty n Sumatra, whch was followed by West Sumatra and Lampung. The man reason why Rau had a very hgh level of nequalty s due to Batam Island, whch s located just 20km southeast of Sngapore and has receved

16 15 preferental treatment from the central government as an export-orented ndustral zone. Batam Island's per capta GDP of Rp12.8 mllon was much larger than other dstrcts' per capta GDP after excludng the ol and gas sectors. Rau s ncreasng wthn-provnce nequalty s attrbutable manly to the rsng dsparty between Batam Island and other dstrcts. Among Java-Bal provnces, all but Bal experenced an ncrease n wthn-provnce nequalty; n partcular, Jakarta, West Java, and East Java recorded sgnfcant ncreases. In 1997, East Java had the hghest level of wthn-provnce nequalty, accountng for 20.9 percent of overall regonal nequalty. East Java's very hgh level of nequalty s due to the exstence of a few very rch dstrcts: urban Kedr, urban Surabaya, and Gresk. Wth ts lmted populaton, urban Kedr's per capta GDP was the hghest n the entre country at Rp22.3 mllon, whch was sgnfcantly larger than Central Jakarta's per capta GDP at Rp16.8 mllon. Whle much lower than Kedr s, Surabaya and Gresk had per capta GDP of Rp5.7 and 3.8 mllon, respectvely, both of whch are sgnfcantly hgher than most other dstrcts n East Java. Wthn Java-Bal, Central Java had the second hghest level of wthn-provnce nequalty n Ths s drven manly by the dstrcts of Kudus and urban Semarang, both of whch had relatvely hgh levels of per capta GDP (Rp5.0 and 4.2 mllon, respectvely). West Java had the thrd hghest level of nequalty n 1997, whch s much smaller than the levels recorded by Central Java and East Java. Ths s due to the fact that, unlke Central Java and East Java, whch nclude the prmary ctes of Semarang and Surabaya, respectvely, West Java does not nclude any domnant cty and s relatvely unformly developed. In West Java, urban Tangerang had the hghest level of per capta GDP (Rp5.3 mllon), whch was followed by Bekas (Rp3.4 mllon), Serang (Rp3.4 mllon), urban Crebon (Rp3.3 mllon), and urban Bandung (Rp2.7 mllon). In other dstrcts, per capta GDP ranged from Rp1.0 to 2.5 mllon. Among Kalmantan provnces, West Kalmantan regstered the hghest level of wthn-

17 16 provnce nequalty n Ths s drven n part by urban Pontanak, whch had the hghest level of per capta GDP (Rp4.2 mllon). In other dstrcts, per capta GDP ranged from Rp1.0 to 2.4 mllon. It s nterestng to observe that whle East Kalmantan had a very large per capta GDP (Rp4.6 mllon after excludng the ol and gas sectors), ts level of wthnprovnce nequalty s one of the lowest n Indonesa (after excludng the ol and gas sectors). Among Sulawes provnces, three provnces experenced a slght ncrease n wthnprovnce nequalty. The provnce of South Sulawes had the hghest level of wthn-provnce nequalty n 1997 due n large part to Ujung Pandang s per capta GDP of Rp2.5 mllon. Sulawes, however, had a very even dstrbuton of ncome not only across provnces but also wthn provnces. Fnally, wthn Others, Iran Jaya had the hghest level of wthn-provnce nequalty n Durng the Economc Crss In ths secton, we analyze the ntal mpact of the economc crss on regonal ncome nequalty based on 1998 dstrct-level and provncal GDP data, by assumng that most of the change we observed n 1998 reflects the ntal mpact of the economc crss. The Indonesan economy contracted by a substantal amount n 1998 due to the economc crss. Accordng to the dstrct-level GDP data at 1993 constant prces, the natonal average per capta GDP after excludng the ol and gas sectors fell by 11.9% n 1998 (Table 4); thus, per capta GDP n 1998 had retreated to the 1995 level. 13 However, the mpact was very uneven across regons and provnces: whle most provnces n Java recorded a reducton n per capta GDP of more than 10%, the effects were much less severe n the Outer Islands. Overall regonal ncome nequalty, as measured by the Thel ndex T based upon dstrct-level GDP and populaton data, declned from n 1997 to n 1998, whch s essentally the same level as n (Table 3 and Fgure 4). The two-stage nequalty decomposton analyss reveals that about three quarters of the declne was due to the decrease

18 17 n the between-provnce nequalty component; ts contrbuton to the overall regonal nequalty decreased to 40.6% (from 43.1% n 1997). 14 Consequently, the contrbuton of the wthn-provnce nequalty component to overall regonal nequalty rose sharply to 52.8% n 1998 (from 49.7%), although the nequalty component tself recorded a slght decrease. Fnally, the between-regon nequalty component decreased also, but only slghtly. (a) Between-Regon Inequalty The economc crss reduced Java-Bal s per capta GDP by 14.8% n 1998, brngng t to the same level as n (Table 4). Sumatra also experenced a large decrease n per capta GDP, but the decrease was not as sgnfcant as t was n Java-Bal; Sumatra s per capta GDP n 1998 had fallen to the same level as n On the other hand, the economc crss does not seem to have affected Kalmantan and Sulawes very much. As a result, the between-regon nequalty fell to n (b) Between-Provnce Inequaltes Java-Bal s between-provnce nequalty played a major role n the reducton of the between-provnce nequalty component. Ths s translated nto a fall n ts contrbuton to the overall regonal nequalty from 38.6% to 35.1% (Table 3 and Fgure 5). Upon examnng the trend n Java-Bal s between-provnce nequalty snce 1993, the decrease n 1998 s a contnuaton of the declnng trend that exsted before 1997, though the decrease between 1997 and 1998 s much larger than before and s due to dfferent factors than those of the precrss perod, as explaned below. The economc crss affected Jakarta n a sgnfcant way. In terms of GDP, Jakarta s economy contracted by 19% n 1998, or a reducton of almost 20% n per capta GDP. The resultng level s equvalent to the level that was recorded n 1993 (Table 4). The economes of West Java and East Java also contracted substantally, though the rates of decrease were not as large as n Jakarta. 15 The prmary reason why Java-Bal recorded a sgnfcant decrease n

19 18 between-provnce nequalty between 1997 and 1998 appears to have been Jakarta s large decrease n per capta GDP relatve to other Java-Bal provnces. Ths contrasts wth the perod, whch experenced a slght decreasng trend n Java-Bal's between provnce nequalty due to West Java's much faster per capta GDP growth rate compared to the other Java-Bal provnces. To analyze regonal dfferences n the growth rate of GDP between 1997 and 1998, a shft and share analyss was performed by usng provncal GDP data. 16 The sector classfcaton used n ths analyss s: agrculture, non-ol and gas mnng, non-ol and gas manufacturng, gas and water, constructon, trade, transportaton/communcaton, fnance, and servces. The results are presented n Table 5. The provnces of Jakarta, West Java, and East Java contracted at much faster rates than the naton as a whole; thus ther GDP decrease exceeded the calculated decrease f these provnces had contracted at the same rate as the natonal rate (.e., total growth mnus regonal share was negatve for these provnces n Table 5). However, there are dfferences n the pattern of contracton between Jakarta and the provnces of West Java and East Java: whle the ndustry-mx shft component played an mportant role n the contracton of Jakarta, the compettve-shft component played a domnant role n the contracton of West Java and East Java. Table 5 In Jakarta, the non-ol and gas manufacturng, fnance, and constructon sectors contrbuted sgnfcantly to a large negatve ndustry-mx shft, sgnfyng ts unfavorable ndustral structure, as the combned share of these three worst crss-ht ndustres was about 60% n Jakarta. The declnes n these 3 sectors n the country as a whole were 18.2%, 17.3%, and 33.3%, respectvely, whch were much larger than the negatve growth rate of the total natonal economy. It should be noted that n Jakarta these three sectors contracted by 18.0%, 9.6%, and 38.3% respectvely. In West Java, the non-ol and gas manufacturng, fnance, and constructon sectors

20 19 contrbuted to a large negatve compettve shft, as ther growth rates were -21.4%, -40.3%, and 46.2%, respectvely. On the other hand, n East Java, the non-ol and gas manufacturng and trade sectors contrbuted sgnfcantly to ts large negatve compettve shft, as ther growth rates were 24.3% and 17.8%, respectvely. It should be noted that n West Java and East Java, the ndustry-mx shft component was also negatve due to a very large negatve growth n the non-ol and gas manufacturng and constructon sectors whose combned GDP shares n West Java and East Java were 44% and 36%, respectvely. Nonetheless, the ndustrymx shft component was much less sgnfcant than the compettve shft component because of the promnence of the agrcultural sector n these provnces. 17 In contrast to Java-Bal, Kalmantan and Sulawes both recorded an ncrease n betweenprovnce nequalty n 1998 (Table 3 and Fgure 5). The reason seems to have been that the rchest provnce n each regon East Kalmantan for Kalmantan and North Sulawes for Sulawes performed better than the other provnces n each regon, though all the provnces experenced negatve growth n per capta GDP (Table 4). Accordng to the shft and share analyss, East Kalmantan and North Sulawes had a postve total shft (= total regonal growth - regonal share of the natonal growth), and more than three-quarters of the total shft was accounted for by the compettve shft component (Table 5). East Kalmantan and North Sulawes seem to have had a compettve advantage n non-ol and gas manufacturng and trade. In North Sulawes, these two sectors acheved large postve growth, whereas n East Kalmantan, they nether grew nor contracted. Sumatra s between-provnce nequalty was stable durng Among Sumatra s provnces, Rau performed relatvely well. In 1998, Rau became the rchest provnce n Sumatra n terms of per capta GDP (Table 4). Lke East Kalmantan and North Sulawes, Rau appears to have had a strong compettve advantage n non-ol and gas manufacturng and trade; ts compettve shft component explaned most of ts total shft (Table 5).

21 20 (c) Wthn-Provnce Inequaltes In Java-Bal, all but Jakarta experenced a fall n wthn-provnce nequalty (Table 3). Jakarta's wthn-provnce nequalty rose n 1998, but ths s a contnuaton of the trend that exsted n the pre-crss perod. The reason why Jakarta experenced ncreasng wthnprovnce nequalty over the perod seems to have been a rsng dsparty between Central Jakarta, the second rchest dstrct n Indonesa next to urban Kedr, and the other Jakarta dstrcts. In 1998, Central Jakarta experenced an 8% decrease n per capta GDP, whle the other Jakarta dstrcts recorded a 20%+ decrease. Ths mples, together wth the fact that the dstrcts n West Java adjacent to Jakarta (.e., Tangerang, Bekas and Bogor) recorded a 20%+ decrease n per capta GDP, that the economc crss had unprecedented adverse effects on the greater Jakarta metropoltan regon (Jabotabek). The severe economc downturn n Jabotabek would have had enormous drect and ndrect effects not only on the other dstrcts of Java-Bal but also on the Outer Islands, for Jabotabek generated about a quarter of total Indonesan GDP, after excludng the ol and gas sectors and there exst numerous nterndustry lnkages between Jabotabek and other regons, especally provnces n Java. East Java had a slght decrease n wthn-provnce nequalty, but t stll had the hghest level of nequalty n all the provnces of Indonesa. Lke Jabotabek, the crss seems to have affected East Java's major urban area very adversely; the relatvely rch dstrcts of Surabaya, Sdoarjo, and Gresk experenced sgnfcant negatve per capta GDP growth rates of 17%, - 18%, and -13%, respectvely. On the other hand, the rchest dstrct n Indonesa, Kedr, recorded only a mnor reducton n ts per capta GDP (-3%). Central Java s level of wthnprovnce nequalty decreased sgnfcantly; the 1998 level of nequalty had almost retreated to the 1993 level. Agan, the crss ht Central Java's major urban areas the most: Semarang, Kendal, Demak, and Kudus recorded sgnfcant decreases n per capta GDP (-19%, -13%, - 12%, and -13%, respectvely). These observatons, together wth Jabotabek's very severe economc condtons n 1998, confrm that Indonesa's economc crss was a crss afflctng

22 21 urban Java (Booth, 2000). However, the crss also ht most of the other parts of the Java-Bal regon, though to a lesser extent. In Sumatra, all except West Sumatra and Rau experenced a fall n wthn-provnce nequalty n In partcular, Lampung recorded a sgnfcant decrease n ts wthnprovnce nequalty; ths s due manly to a substantal reducton n the per capta GDP of Bandar Lampung, the rchest dstrct n the provnce. Among Sumatra dstrcts, Banda Aceh, Tebn Tngg, Medan, Bnja, Sawah Lunto, Palembang, and Bandar Lampung regstered relatvely large decreases n per capta GDP (around -15%). But, Batam, the rchest dstrct n Sumatra, was not sgnfcantly affected by the crss (4% decrease n per capta GDP). Lke Java-Bal, the economc crss seems to have ht major urban areas n Sumatra. In Kalmantan, South Kalmantan recorded a sgnfcant ncrease n ts level of wthnprovnce nequalty. Ths s due to the fact that Kota Baru, the rchest dstrct n South Kalmantan, experenced postve growth n ts per capta GDP (3%), whle the second and thrd rchest dstrcts (Barto Kuala and Banjarmasn) recorded substantal decreases n ther per capta GDP (-9% and -14%, respectvely). It should be noted that among Kotamadyas n Kalmantan (.e., Pontanak, Palangka Raya, Banjarmasn, Balkpapan, and Samarnda), only Banjarmasn had a large decrease n per capta GDP, sgnfyng that the crss dd not have much adverse effects on urban Kalmantan. In Sulawes, all except South Sulawes experenced a slght ncrease n wthn-provnce nequalty n The man reason why South Sulawes experenced a fall n wthnprovnce nequalty s that Ujung Pandang, the rchest dstrct n South Sulawes, experenced a sgnfcant decrease n ts per capta GDP (-9%). In North Sulawes, four out of seven dstrcts (.e., Mnahasa, Sangle Talaud, Gorontalo, and Btung) recorded ncreases n ther per capta GDP, though the growth rates were much lower than the pre-crss perod (1% to 3% vs. 6% to 12%). The crss affected other Sulawes dstrcts adversely, but the effects seem to have been unform across dstrcts.

23 22 6. Concludng Remarks The paper presented an nequalty decomposton method, the two-stage nested Thel nequalty decomposton method, as an extenson of the ordnary one-stage Thel nequalty decomposton method. The method uses a dstrct as the underlyng regonal unt, rather than a provnce, to measure regonal nequalty n per capta GDP; thus, t can analyze wthnprovnce nequaltes as well as between-regon and between-provnce nequaltes n a coherent framework. Though the method cannot solve the ntrnsc problem that the measure of regonal nequalty based on per capta GDP fals to explan the dsperson of ncomes wthn the underlyng regonal unt, t provdes a much clearer pcture of regonal nequaltes at a more granular level wthn a country, especally n such large, developng countres as Chna and Indonesa. Gven unequal dstrbuton of natural resources and transportaton facltes, some regonal ncome dspartes are nevtable from the perspectve of effcency. Chna and Indonesa are stll at a relatvely early stage of economc development, and thus ncomeenhancng economc actvtes tend to have concentrated n a few dstrcts n each provnce n order to take advantage of agglomeraton economes. In fact, the results of ths study show that very hgh levels of regonal ncome nequalty stll exst among the dstrcts of Chna and Indonesa. Applyng the two-stage nested decomposton method to dstrct-level GDP and populaton data reveals that n Chna, the wthn-provnce component accounted for 64 percent of the overall regonal nequalty, whle n Indonesa, t accounted for about a half of the overall regonal nequalty. Thus, wthn-provnce nequaltes are much more promnent than between-regon and between-provnce nequaltes, at least n these two countres. These observatons suggest that polcy makers should look not only at between-regon or betweenprovnce nequaltes but also wthn-provnce nequaltes to formulate better regonal polces. References Akta, T. (2000), Decomposng Regonal Income Inequalty usng a Two-Stage Nested Thel Decomposton Method, Internatonal Development Workng Paper Seres 2, IUJ Research Insttute, Internatonal Unversty of Japan. Akta, T., and R.A. Lukman (1995), Interregonal Inequaltes n Indonesa: A Sectoral

24 23 Decomposton Analyss for , Bulletn of Indonesan Economc Studes 31(2): Akta, T., N. ue, and K. Kawamura (1999) Inter-provncal ncome nequalty n Chna, : an nequalty decomposton analyss, Journal of Econometrc Studes of Northeast Asa 1(2): Anand, S. (1983), Inequalty and Poverty n Malaysa: Measurement and Decomposton, A World Bank Research Publcaton, Oxford Unversty Press, New ork. Armstrong, H.W., and J. Taylor (1985), Regonal Economcs and Polcy, Blackwell Publshers. Booth, A. (2000), 'The Impact of the Indonesan Crss on Welfare: What Do We Know Two ears On', n C. Mannng and P. van Dermen (eds), Indonesa n Transton: Socal Aspects of Reformas and Crss, Insttute of Southeast Asan Studes, Sngapore, pp Bourgugnon, F. (1979), Decomposable Income Inequalty Measures, Econometrca 47(4): BPS (1996), Gross Regonal Domestc Product of Provnces n Indonesa by Industral Orgn, , Jakarta. BPS (1997a), Gross Regonal Domestc Product of Provnces n Indonesa by Expendture, , Jakarta. BPS (1997b), Gross Regonal Domestc Product of Regences/Muncpaltes n Indonesa, , Jakarta. BPS (1998a), Gross Regonal Domestc Product of Regences/Muncpaltes n Indonesa, , Jakarta. BPS (1998b), Gross Regonal Domestc Product of Provnces n Indonesa by Industral Orgn, , Jakarta. BPS (1999), Gross Regonal Domestc Product of Provnces n Indonesa by Expendture, , Jakarta. BPS (2000a), Gross Regonal Domestc Product of Regences/Muncpaltes n Indonesa, , Jakarta. BPS (2000b), Gross Regonal Domestc Product of Provnces n Indonesa by Industral Orgn, , Jakarta. Chen, Jan, B.M. Flesher (1996), Regonal ncome nequalty and economc growth n Chna, Journal of Comparatve Economcs 22: Danere, A. (1996), Growth, nequalty and poverty n south-east Asa: the case of Thaland, Thrd World Plannng Revew 18(4):

25 24 Das, S.K., A. Barua (1996), Regonal nequaltes, economc growth and lberalsaton: a study of the Indan economy, Journal of Development Studes 32(3): Esmara, H. (1975), Regonal Income Dspartes, Bulletn of Indonesan Economc Studes 11(1): Garca, J.G., and L. Soelstanngsh (1998), Why Do Dfferences n Provncal Income Persst n Indonesa?, Bulletn of Indonesan Economc Studes 34(1): Glbert, A.G., Goodman DE (1976), Regonal ncome dspartes and economc development: a crtque, In Glbert AG (ed) Development plannng and spatal structure, John Wley & Sons, New ork Green, A.G. (1969), Regonal nequalty, structural change, and economc growth n Canada: , Economc Development and Cultural Change 17(4): Jensen, R.C. (1969), Regonal ncome nequaltes and employment shfts n New Zealand, New Zealand Economc Papers 3(2):27-50 Mathur, A. (1983), Regonal development and ncome dspartes n Inda: a sectoral analyss, Economc Development and Cultural Change 31(3): Metwally, M.M., and R.C. Jensen (1973), A note on the measurement of regonal ncome dsperson, Economc Development and Cultural Change 22(1): Montgomery, D.C. (1984), Desgn and analyss of experments, John Wley & Sons, New ork Mutlu, S. (1991), Regonal dspartes, ndustry and government polcy n Japan, Development and Change 22(3): Shorrocks, A.F. (1980), The Class of Addtvely Decomposable Inequalty Measures, Econometrca 48(3): Soken (1999, 2000), Chnese provnce and dstrct-level database, Kank Publsher, Tokyo State Statstcal Bureau (1999), Chna statstcal yearbook, Chna Statstcal Publshng House, Bejng Tabuch, T. (1988), Interregonal ncome dfferentals and mgraton: ther nterrelatonshps, Regonal Studes 22(1): 1-10 Thel, H. (1967), Economcs and nformaton theory, North-Holland, Amsterdam Tsu, K.. (1991), Chna's regonal nequalty, , Journal of Comparatve Economcs 15: 1-21 Tsu, K.. (1993), Decomposton of Chna s Regonal Inequaltes, Journal of Comparatve Economcs 17(3): Tsu, K.. (1996), Economc reform and nterprovncal nequaltes n Chna, Journal of Development Economcs 50: Uppal, J.S., and Budono Sr Handoko (1986), Regonal Income Dspartes n Indonesa, Ekonom dan Keuangan Indonesa 34(3): Wang, Hujong, Shantong L, and Godfrey Lnge (1997), Regonal Plannng: Developng an Indgenous Framework, In Godfrey Lnge, Ed., Chna's New Spatal Economy: Headng Toward 2020, pp New ork: Oxford Unversty Press.

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27 26 Table 1. Two-Stage Nested Inequalty Decomposton Analyss for Chna, Regon Provnce Thel T Contrb Thel T Contrb Thel T Contrb Thel T Contrb Western Regon (105) Schuan (20) Guzhou (9) unnan (17) Tbet (7) Shaanx (10) Gansu (14) Qngha (8) Nngxa (4) Xnjang (16) Central Regon (115) Jangx (11) Shanx (11) Anhu (16) Henan (17) Hunan (14) Hube (12) Inner Mongola (12) Jln (9) Helongjang (13) Eastern Regon (115) Laonng (14) Fujan (9) Guangdong (22) Guangx (15) Zhejang (11) Jangsu (14) Shandong (17) Hebe (13) Wthn Provnce Between Provnce Between Regon Total (Notes) (a) 'Contrb' s the % contrbuton to total regonal nequalty (T d n equaton (5)). Contrbuton fgure for a regon s the % contrbuton of the regon's betweenprovnce nequalty (( /)T p n equaton (5)), whle contrbuton fgure for a provnce s the % contrbuton of the provnce's wthn-provnce nequalty (( j /)T j n equaton (5)). (b) Numbers n parentheses ndcate the number of dstrcts

28 (Source) Soken wth Chnese Statstcal Bureau (1999, 2000) 27

29 28 Table 2. Per Capta GDP, Chna n yuan Regon Provnce Western Regon 2, , , , Schuan 3, , , , Guzhou 1, , , , unnan 3, , , , Tbet 2, , , , Shaanx 2, , , , Gansu 2, , , , Qngha 2, , , , Nngxa 3, , , , Xnjang 4, , , ,894.9 Central Regon 3, , , , Jangx 2, , , , Shanx 3, , , , Anhu 3, , , , Henan 3, , , , Hunan 3, , , , Hube 4, , , , Inner Mongola 3, , , , Jln 4, , , , Helongjang 5, , , ,420.2 Eastern Regon 6, , , , Laonng 7, , , , Fujan 6, , , , Guangdong 7, , , , Guangx 3, , , , Zhejang 8, , , , Jangsu 8, , , , Shandong 5, , , , Hebe 6, , , ,103.2 Total 4, , , ,974.3 (Source) Soken wth Chnese Statstcal Bureau (1999, 2000)