Structural transformation and regional inequality differential in Indonesia

Indonesia is one of the world's largest developing countries, as evidenced by its position as the fourth most populous nation and its status as an archipelago. Each island and province has unique endowment factors, making national-level studies insufficient to fully capture regional disparities. This study addresses this issue by examining the relationship between structural transformation and regional inequality differentials in both regional and provincial contexts. To analyse the effects of structural transformation on regional inequality differentials, the recentred influence function (RIF) regression is employed. The study utilises data from the National Socioeconomic Survey (Susenas), covering a span of fifteen years (2004–2019). The analysis is categorised by the level of structural transformation across provinces (developed, developing or underdeveloped) and spatial groupings (Jawa versus non-Jawa regions). The key findings are as follows: first, structural transformation is most pronounced on the island of Jawa, though several other provinces also experience significant changes. Second, the composition effect is a major factor contributing to the increase in regional inequality differentials in both provincial and regional contexts, with labour endowment being crucial in explaining regional disparities. Third, the rise in regional inequality differentials is largely driven by urbanisation and sectoral shifts, which are components of structural transformation. These findings contribute to the literature by addressing the gap in the analysis of regional structural transformation in developing countries. Moreover, this study provides valuable insights for policymakers aiming to mitigate inequality disparities between islands and provinces.