Regional Inequality in Indonesia: Did Convergence Occur Following the 1997 Financial Crisis?

Regional inequality remains one the most challenging issues to overcome in developing countries due to the large gap between poor and rich regions. This paper is to assess the extent of regional inequality in Indonesia and analyze whether convergence did occur during the 1997 financial crisis and the period of decentralization that was started in 2001 following the crisis. The 1997 financial crisis represents a turning point in the country’s economy as growth levels plummeted to the new low level. A financial crisis could be the factor that triggers economic convergence between regions assuming rich regions are highly affected than poor regions due to the scale and size of economies in rich versus poor regions. The implementation of decentralization in 2001 is also considered as a crucial factor in determining whether regional convergence did occur following the 1997 financial crisis. Despite the argument that decentralization aims to promote regional equality by accelerating growth in the lagging regions through a more efficient and effective fiscal allocation and incentive structure, there is a potential risk of diverging in the regional economy due to the failure in optimizing the benefits of decentralization in supporting growth. The findings of this paper can be used to identify effective policies that balance development and decrease the level of inequality.