Special Economic Zones, COVID-19 Pandemic, and Interprovincial Income Inequality in the Indonesian Manufacturing Industry

Using provincial GDP by manufacturing sectors, this study examines how structural changes have affected interprovincial inequality in manufacturing GDP in Indonesia. Particularly, it investigates the impact of structural changes associated with the establishment of special economic zones (SEZs) and the COVID-19 pandemic. The center of manufacturing growth appears to have shifted from labor-intensive to capital-intensive sectors. Interprovincial inequality in manufacturing GDP declined slightly prior to the pandemic and stabilized afterward. However, disparity among the five regions - Sumatra, Java-Bali, Kalimantan, Sulawesi, and Eastern Indonesia - declined markedly, reducing its contribution to overall interprovincial inequality. This reduction became particularly pronounced in the late 2010s, when several SEZs became operational. However, it was accompanied by rising interprovincial inequality within Sumatra and Sulawesi, likely driven by the establishment of SEZs. Most manufacturing sectors were severely affected by the pandemic. The transport equipment sector was hit hardest, followed by the textiles and machinery sectors. However, overall interprovincial inequality remained largely unaffected. The manufacturing industry exhibits very high interprovincial inequality. With further development in the eastern parts of Indonesia, particularly Sulawesi and Eastern Indonesia, disparities among the five regions are likely to decline. However, if such development is enclave-type, concentrated in a few SEZs, it may lead to rising interprovincial inequality. To alleviate rising interprovincial inequality, it is imperative to promote labor-intensive sectors, particularly in the eastern parts of Indonesia, as they are inequality-reducing. Industrial infrastructure and supporting manufacturing activities must also be strengthened.