The Impact of Changing Economic Structure on Distribution Income Inequality In Indonesia

Abstract

Economic development does not solely pursuit the economic growth, but it must also create a more equitable distribution of income among the people. During 2002-2011, both at nationally and at the provincial level, the level of income distribution inequality in Indonesia remains high and continues to increase. Even in 2011 the Indonesian average gini index reached 0.41 which is the highest gini index that Indonesia has. Mean while, the Indonesian economy has been undergoing structural changes, which is marked by the declining of the primary sector’s contribution and the increasing contribution of other sectors. It can be seen from the data of Indonesian GDP during the 2002 to 2011 period. Most provinces in Indonesia experienced changes of contribution and some provinces had changes of the dominant sectors, although there are some provinces which had not experienced a change in their economic structure. Based on the problems mentioned above, this study’s aims are: 1) analyze the pattern of changes in the economic structure and the pattern of income distribution in Indonesia, and 2) to analyze the impact of changes in the economic structure on the income distribution in Indonesia. This study uses secondary data from Indonesian BPS and other relevant sources. The analyzed data were in the form of panel data which were derived from the period in 2002-2011 and from 33 provinces in Indonesia. The data used are the GDP, GRDP, Susenas, GRDP per capita, gini index, economic growth, and other supporting data. This study uses descriptive and static panel data regression analysis. Economic structure are grouped into three main sectors, namely: 1) the primary sector, which consists of subsector of agriculture, mining and quarrying; 2) the secondary sector, which consists of subsector of processing industry, electricity, natural gas, water and construction; 3) the tertiary sector, which consists of subsector of trade, hotels and restaurants, transport and communications, finance, business services, and other services. The provinces are grouped into developed and developing regions. Provinces with the per capita income above the national are categorized as developed, while some other provinces with per capita income below the national are categorized as developing. During the 10 years period from 2002 to 2011, there wasn’t any change in the economic structure based on the dominant sector in Indonesia. The tertiary sector was still dominating, followed by the secondary and primary sector. Hence there were economic structural changes based on their contribution in each sector with a tendency of increasing in tertiary sector and declining in primary sector. In contrast to what happened nationally, at the provincial level, there were economic structural changes both in terms of dominance and sectoral relative contribution during that period. All provinces in Indonesia experienced economic structural changes in terms of contribution, while based on dominant sector, there were some provinces that experienced changes in economic structure, both in the developed and developing regions. In developing areas, the economic structural change occurred all sectors from the primary sectors to the tertiary sectors, with a pattern of declining in primary sectors, increasing in tertiary sectors and relatively constant in the secondary sectors. In developed regions, the economic structural changes also occurred in all sectors from the primary sectors to the tertiary sectors with the pattern of declining primary sectors, and increasing in the tertiary or secondary sectors. The pattern of income distribution in Indonesia both nationally and regionally (in both developing regions and developed regions) had a developing pattern of increasingly uneven or increas inequality. The results of the fixed effect model analysis found that there were differences in the effect of changes in the economic structure on the income distribution between developing regions and developed regions. In the developing regions, the process of the economic structural changes of the primary sectors to the secondary sectors, the secondary sectors to the tertiary sectors and the primary sectors to tertiary sectors could increase the inequality on income distribution if there was a decrease in the primary sectors contribution.In the developed regions the opposite occurred, the process of economic structural changes of the primary sectors to the secondary sectors, the secondary sectors to the tertiary sectors and the primary sectors to tertiary sectors couldn’t increase the inequality on income distribution. This phenomenon occurred because the most primary sectors which was growing in the developing regions were agriculture and plantation subsector which absorb a lot of labor so that if their contribution decreased, the inequality would increase.While in the developed regions, the growing primary sectors were mining and quarrying subsectors which could only be enjoyed and accessed by a small part of the community. Thus if the primary sector declined, the inequality would also decline. If the variable of initial inequality in developed regions as well as in developing regions is high, the inequality of income distribution would tend to increase. The increasing economic growth variables in developing regions could reduce the level of income inequality when there are economic structural changes of the primary sectors to the secondary sectors and the primary sectors to the tertiary sectors, while in developed regions they actually increase the income inequality when there are economic structural changes of the primary sectors to the secondary sectors. The advice given in this study are: (1) In developing regions, a policy to reduce income inequality suggested that the primary sector (especially agriculture which supports industry) fixed developed followed by the development of the processing of the results of agricultural products (sekuder sector). While in developed regions suggested policy is not only to develop the mining and quarrying subsector, but also further develop the agricultural sector and the plantation industry and followed by the development of the processing of the results of agricultural products (sekuder sector). Industry types are recommended for both the area is agricultural based industries (agroindustry) that are labor intensive; (2) Encourage the development of the tertiary sector, especially trade, hotels and restaurants by implementing cross-subsidy policy on regional developed and developing regions, (3) further studies are expected to be carried out by using data workforce can add variables poverty.