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Determinants of Development Inequality in Eastern Indonesia

Endang Setya Lukita1, Muhammad Arif2

1
Muhammadiyah University of Surakarta
Jl. A. Yani Tromol No 157, Pabelan, Kartasura, Sukoharjo, Central Java
2
Muhammadiyah University of Surakarta
*Email: [email protected]

ABSTRACT
The problem of inequality in regional development is a historical problem faced by
every country. One of the efforts to reduce disparities is accelerating development in
underdeveloped areas. This study aims to explain the condition of development
inequality in eastern Indonesia by using five independent variables, namely the
construction cost index, investment, average length of schooling, regional original
income, and forest land cover area. This research method uses Williamson index
analysis and panel data regression. The random Effect Model (REM) is the most
appropriate approach to explain the influence of variables in this study. The results of
the index study show that Williamson for eastern Indonesia has a value of 0.49 which
means moderate inequality. The results of the REM analysis show that investment, local
revenue, and forest land cover have a positive and significant effect on development
inequality. The average length of schooling has a negative and significant effect on
developmental inequality.

Keywords: Williamson index, investment, the average length of schooling, construction

cost index, locally-generated revenue, forest land cover area.

Copyright © 2023 by the Author(s) | This is an open access article distributed under the Creative Commons
Attribution License https://creativecommons.org/licenses/by/4.0/

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INTRODUCTION
Inequality can cause problems within a country, threatening long-term sustainable
growth (Farida, 2021). The problem of inequality in regional development is a historical
problem faced by every nation, starting from the sub-districts, districts or cities, provinces,
islands, and even globally. Evolution is not always evenly distributed. Inequality between
regions has always been a severe problem in various areas (Arif & Wicaksani, 2017). The
development inequality in Indonesia can be said to be still significant, and uneven
development can be seen in each region. The government's attention to regional development
inequality already exists. This issue has become part of the General Conditions of the Long-
Term Development Plan (RPJP) 2005-2025. Empirical facts and several studies have shown
that since mid-1995 until now the disparity in Indonesia between the eastern and western
regions has become increasingly visible compared to the previous period, especially since
2005 (Firdaus, 2013, p. 1).
The eastern region of Indonesia consists of 13 provinces, namely Bali, NTB, NTT,
North Sulawesi, Central Sulawesi, South Sulawesi, Southeast Sulawesi, Gorontalo, West
Sulawesi, Maluku, North Maluku, West Papua, and Papua has always been the focus in
national development planning. This can be seen from the uneven development of
infrastructure, such as roads, bridges, ports, and airports, which are still minimal. Until now,
economic growth, distribution of development results, and regional opportunities in eastern
Indonesia are still being improved, and overall national development results are generally
lagging compared to western Indonesia. Compared with the west of region, the eastern part
is blessed with agriculture, forestry, plantations, oil, natural gas, and large-scale mining.
However, due to a lack of infrastructure, human resources, administration, and capital funds,
the potential of eastern Indonesia's help has not been utilized and managed properly
(Soenandar, 2015).
One of the efforts to reduce inequality is by accelerating development in
underdeveloped areas (Elia et al., 2020). However, economic growth in eastern Indonesia in
2021 will still experience significant inequality. This can be proven by the graph below.

18 16.4
15.11
16
14 11.7
12
10
8 4.65 4.1
6 4.16 INDONESIA
4 2.47 2.3 2.51 2.41 2.56 3.04 3.69
2 0.51
0

Graph 1. Comparison of Indonesia's Economic Growth

with Eastern Indonesia in 2021, Source: BPS (data processed)

Based on graph 1, it can be explained that most of the eastern regions of Indonesia
have low economic growth. Compared to Indonesia's economic growth in 2021, which has
a value of 3.69 percent, several provinces east of Indonesia are still below Indonesia. In 2021
there are six out of thirteen sections in the eastern region that have economic growth
exceeding Indonesia's, namely North Sulawesi with a value of 4.16 percent, Central Sulawesi
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with a value of 11.7 percent, South Sulawesi with a value of 4.65 percent, Southeast Sulawesi
with a value of 4.1 percent, North Maluku with a value of 16.4 percent, and Papua with a
value of 15.11 percent. Based on the explanation above, it shows that economic interaction
between provinces in the eastern region is still limited (Pribadi et al., 2015). In addition, the
uneven economic growth in eastern Indonesia is also caused by natural resources, especially
oil and gas, and the development of trading industries and other industrial centers, which are
only concentrated in a few areas (Tadjoeddin, 2014).
The majority of underdeveloped areas are in eastern Indonesia. This is caused by
development constraints such as the lack of availability of basic economic infrastructure and
facilities, limited quality and quantity of human resources, and geographical conditions that
are relatively isolated, making eastern Indonesia lag behind other regions. The availability
and quality of services in the east of Indonesia also need to be improved for transportation,
telecommunication, and electricity networks. For example, Papua Province. Compared to
other regions, Papua is still far behind in terms of the economy, infrastructure, and people's
welfare. The condition of regional development in Papua is still challenging due to the
uneven geographical conditions. Most of Papua's territory is still forest and hills, making it
difficult for the government to develop these areas.
The human component in sustainable development has a vital role because it can
increase economic growth, which in turn can reduce inequality (Sianipar et al., 2022). But
the fact is that in 2021 from the Central Statistics Agency, only four provinces in Eastern
Indonesia had a high human development index, namely, Bali, South Sulawesi, Southeast
Sulawesi, and North Sulawesi. Considering that eastern Indonesia is vast and has abundant
natural resources, it is ironic to face delays in development and a low level of social welfare
compared to western Indonesia.The neoclassical school predicts that the disparity in
development between regions will gradually disappear. This prediction departs from the
assumption that less developed areas have a lower ratio of capital to labor, so the marginal
productivity of investment per capital unit is higher in less developed regions. As a result,
there will be a catch-up process from less developed areas to developed areas. Jhingan (2012)
said that development inequality stems from the capitalist system's profit motive so that
economic activity is concentrated in areas with high-profit expectations so that other regions
are neglected. These central areas of economic activity attract investment and absorb active
young workers from less developed areas, thereby increasing the backwash effect.
A study by (Firdaus & Yusop, 2009) regarding the case of how the eastern region can
catch up with the economic progress of the western region, found that during economic
development after the start of industrialization, a catch-up process occurred, but at a very
slow rate of only 0.29 percent. This means that it will take about 200 years for the eastern
regions of Indonesia to catch up with the advances of the western regions if left naturally.
Previous research related to development inequality was also carried out by (Soebagyo et
al., 2019) showing that inequality between regions in Central Java is affected by GRDP. The
issues raised in this study are how much influence investment, average length of schooling,
local own-source income, construction cost index, and area of forest land cover have on
development inequality in eastern Indonesia.

METHOD
This research uses quantitative methods with secondary data from the Central Bureau
of Statistics. The objects that are the scope of this research include development inequality
as measured by the Williamson Index in 13 provinces in eastern Indonesia in 2015-2021.

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The independent variables to be analyzed are an investment, average length of schooling,

local revenue, construction cost index, and forest cover area. To see the inequality between
regions, the Williamson Index calculation is used as follows:

√Σ(𝑌𝑖−𝑌)2 𝑓𝑖/𝑛
IW=
𝑌
Information:
IW = Williamson Index
Y = GRDP per capita on average for all regions
Yi = GRDP per capita area
n = Total population of the entire region
fi = Total population of the area

Based on the formula above, the criterion is determined that if IW is close to 1 (one),
it means unequal. If IW is close to 0 (zero), then it implies development equity (Iek & Blesia,
2019). The criteria in the Williamson Index (IW) are explained in detail as follows:
a) 0 < IW ≤ 0.4 is included in the category of low inequality.
b) 0.4 < IW ≤ 0.5 falls into the category of medium inequality.
c) 0.5 < IW ≤ 1 falls into the category of high inequality.
This study uses independent variables, namely:
1. The construction cost index, as a proxy for measuring the level of geographical difficulty
of an area, the more complex the geographic location of a place, the higher the price level
in that area. The construction cost index data was obtained from the Central Bureau of
Statistics.
2. Investment, used as a placement of funds in the hope of increasing profits. Investment
data was obtained from the Central Bureau of Statistics.
3. Average length of schooling, the average number of years spent by those aged 15 years
and over to pursue all types of education undertaken. Data on the average length of
instruction in annual form is obtained from the Central Bureau of Statistics.
4. Regional Own Revenue, derived from regional revenue sources obtained from provincial
taxes, regional levies, products of Regional Owned Enterprises, and other legitimate
regional original revenues. Local Own Revenue Data received from the Central Bureau
of Statistics.
5. Area of forest land cover, defined as how much forest area is closed to be converted into
specific development goals. Data on forest land cover was obtained from the Central
Bureau of Statistics.

Then the estimation stage used in this study includes parameter estimation of econometric
models using the Pooled Least Square (PLS) approach, Fixed Effect Model (FEM), and
Random Effect Model (REM). Selection of the best-estimated model by Chow test and
Hausman test, and Lagrange Multiplier test if necessary. Test the goodness of the model on
the selected estimated model, and test the validity of the effect of the independent variables
on the selected estimated model. The type of data used in this research is panel data, a
combination of time series and cross-section data. The econometric model used is as follows:

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IWit = 𝛽0 + 𝛽1IKKit + 𝛽2LOG(INV)it + 𝛽3LOG(RLS)it+ 𝛽4 LOG(PAD)it + 𝛽5

LOG(LPLH)it + 𝜀it
Where :
IW = Development Inequality (index)
IKK = Construction Cost Index (per cent)
INV = Investment (billion of rupiah)
RLS = Average Length of Study (years)
PAD = Local Own Revenue (billions of rupiah)
LPLH = Forest Land Cover Area (hectares)
Log = Logarithmic Operations
𝜀 = Error Term
𝛽0 = Constant
𝛽1… 𝛽5 = Regression Coefficient
i = Cross Section
t = Time Series

RESULT AND DISCUSSION

Below is an explanation of development inequality in eastern Indonesia based on
calculations from the Williamson Index and results from panel data regression to determine
what variables affect development inequality in east Indonesia.
Conditions of Inequality in the Eastern Region of Indonesia
Calculation of regional development inequality in eastern Indonesia using the
Williamson Index is summarized in the following table:

Table 1. Willamson Index by Province in Eastern Indonesia 2015-2021

Williamson Index
Province Average
2015 2016 2017 2018 2019 2020 2021
Bali 0.22 0.31 0.32 0.32 0.31 0.38 0.35 0.32
NTB 0.83 0.82 0.74 0.57 0.54 0.70 0.69 0.70
NTT 0.61 0.62 0.62 0.62 0.61 0.59 0.57 0.61
North Sulawesi 0.50 0.50 0.49 0.50 0.51 0.48 0.49 0.50
Central Sulawesi 0.46 0.48 0.51 0.55 0.59 0.37 0.46 0.49
South Sulawesi 0.62 0.61 0.61 0.62 0.64 0.70 0.69 0.64
Southeast Sulawesi 0.58 0.57 0.60 0.60 0.60 0.59 0.49 0.58
Gorontalo 0.14 0.14 0.13 0.13 0.12 0.17 0.18 0.14
Weat Sulawesi 0.37 0.36 0.36 0.35 0.34 0.34 0.39 0.36
Maluku 0.26 0.25 0.24 0.23 0.22 0.39 0.40 0.28
North Maluku 0.28 0.28 0.27 0.27 0.27 0.36 0.66 0.34
West Papua 0.64 0.59 0.58 0.58 0.57 0.57 0.58 0.59
Papua 0.81 0.81 0.82 0.82 0.83 0.78 0.79 0.81
Eastern Indonesian Average 0.49
Source: BPS (data processed)

Based on table 1, it can be seen that the difference in the average value of regional
inequality during 2015-2021 has quite a big difference. Six provinces in eastern Indonesia
have a Williamson Index score of between 0.5 ≤ and 1, which means that these regions fall
into the category of high inequality, including NTB, NTT, South Sulawesi, Southeast
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Sulawesi, West Papua and Papua. The highest value of inequality during the study period
was in Papua Province, with a value of 0.81, while the value of low inequality was in
Gorontalo Province, with 0.14. However, the average Williamson Index value during the
study period shows that eastern Indonesia is in moderate inequality with a value of 0.49.
This is happening because, in 2021, North Maluku will have a growth rate of 16.4 per cent
originating from export activities abroad and metal ore mining, especially nickel, gold and
silver ores, so that it can boost the economy.
Panel Data Regression Results
The estimation results of the econometric model using the Pooled Least Square (PLS)
approach, Fixed Effect Model (FEM), and Random Effect Model (REM), along with the
results of the model selection test, are summarized in table 2.

Table 2. Estimation of Panel Data Regression Econometric Model - Cross section

Regression Coefficient
Variable
CEM FEM REM
C 0,504018 0,747077 0,659025
IKK -0,000939 -0,001251 0,000430
LogINV 0,032509 0,015113 0,017250
LogRLS -0,695879 0,040251 -0,486894
LogPAD 0,113546 -0,053108 0,075940
LogLPLH 0,079550 0,010351 0,023902
R2 0,682315 0,950620 0.197133
Adjusted. R2 0,660253 0,936629 0,141378
Statistik F 30,92789 67,94478 3,535718
Prob. Statistik F 0,000000 0.000000 0.006484
Uji Pemilihan Model
A. Chow
Cross- Section F(12,60)= 27,167250; Prob. F(12,60) = 0,0000
B. Hausman
Cross-Section random χ2 (5) = 10,481692; Prob. χ2 = 0,0627
Source: Eviews 10

The Chow test and Hausman test show that (REM) was chosen as the best-estimated
model, as seen from the probability or significance in the Chow test having a prob value of
0.0000 <0.05 and the Hausman test having a prob value of 0.0627 > 0.05. The complete
estimation results from the REM model are shown in Table 3.

Table 3. Model Estimasi Random Effect Model (REM)

𝐼𝑊𝑖𝑡 = 0,659025 + 0,000430 IKK 𝑖𝑡 + 0,017250 𝑙𝑜𝑔𝐼𝑁𝑉𝑖𝑡 − 0,486894 𝑙𝑜𝑔𝑅𝐿𝑆𝑖𝑡 +
(0,6051) (0,0265)** (0,0090)**
0,075940 𝑙𝑜𝑔𝑃𝐴𝐷𝑖𝑡 + 0,023902𝑙𝑜𝑔𝐿𝑃𝐿𝐻𝑖𝑡
(0,0209)** (0,0162)**
R2 = 0,197133; DW =1,224078; F. = 3,535718; Prob. F = 0,00648
Source: Eviews 10.
Description: *Significant at α = 0.01; **Significant at α = 0.05; ***Significant at α = 0.10; The
number in brackets is the probability of the t statistic.

From table 2, it can be seen that the estimated REM model exists with a probability or
empirical statistical significance F value of 0.00648 (<0.05), with a coefficient of
determination (R2) of 0.197133. This means that 19.71 per cent of the Williamson Index
variable is influenced by the Variable Construction Expensive Index, Investment, Average
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Length of School, Local Original Income, and Area of Forest Land Cover. The remaining
80.3 per cent is influenced by other variables that are not included in econometric models.
Separately from the other variables, four independent variables have a significant influence,
namely the variable Investment, Average Length of School, Regional Original Income, and
Area of Forest Land Cover, with a probability or empirical statistical significance t of 0.0265
(< 0.05 ); 0.0090 (< 0.05); 0.0209 (< 0.05); and 0.0162 (<0.05).
The investment variable has a regression coefficient of 0.017250 with a linear-linear
relationship pattern. If the Williamson Index increases by 1 per cent, the investment will
increase by 0.017250 per cent. Preferably, if the Williamson Index decreases by 1 per cent,
the investment will reduce by 0.017250 per cent.
The Average Length variable of School has a regression coefficient value of -0.486894
with a linear-logarithmic relationship pattern. This means that if the Williamson Index
increases by 1 per cent, the average length of school will decrease by -0.486894/100 = -
0.00486894 per cent. Conversely, if the IW decreases by 1 per cent, then the RLS will
decrease by –0.486894/100 = -0.00486894 per cent.
The local Original Income variable has a regression coefficient of 0.075940 with a
linear logarithmic relationship pattern. This means that if the Williamson Index increases by
1 per cent, the Local Revenue will increase by 0.075940/100 = 0.0007594 per cent.
Preferably, if IW decreases by 1 per cent, PAD will reduce by 0.075940/100 = 0.0007594
per cent.
The Area of Forest Land Cover variable has a regression coefficient value of 0.023902
with a linear-logarithmic relationship pattern. This means that if the Williamson Index
increases by 1 per cent, then the area of forest land cover will increase by 0.023902/100 =
0.00023902 per cent. Preferably, if the Williamson Index decreases by 1 per cent, then the
area of forest land cover will reduce by 0.023902/100 = 0.00023902 per cent.

DISCUSSION
The Effect of Investment on Development Inequality
The selected estimation model explains that the investment variable has a positive
effect, meaning that the Williamson index will increase when investment increases. Or it
could be said that the Williamson Index will also increase with the influence of increased
investment. According to theory (Adisasmita, 2005), investment is a means for processes
that have good luck and lead to areas that are not faring well. An increase in demand will
encourage income to increase investment, and so on. This study's results align with research
(Iranto & Solehati, 2020) which states that investment positively affects regional inequality
in eastern Indonesia. Analysis by (Nogués & González-González, 2022) also says that
investment has a positive effect on inequality in Spain.
The Effect of Average Years of School on Development Inequality
The selected estimation model explains that the average length of school variable has
a negative effect, meaning that the Williamson Index will decrease when the average length
of school increases. The results of this study are in line with research conducted by (Checchi,
2001) which states that the average length of schooling negatively affects inequality in
Washington City. Research by (Wan et al., 2006) also says that the size of education hurts
regional disparities in China. According to (Garcia & Soelistianingsih, 1998) education is
needed to reduce inequality and optimize all the potential of the community so that it can
make a positive contribution to regional growth.

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The Effect of Regional Original Income on Development Inequality

The selected estimation model explains that the regional original income variable has
a positive effect, meaning that the Williamson Index will increase when local revenue
increases. The results of this study are in line with research conducted by (Sukmaadi &
Marhaeni, 2021) which states that original regional income positively influences inequality
in the Province of Bali.
The Effect of Area of Forest Land Cover on Development Inequality
The selected estimation model explains that the forest land cover area variable
positively influences the Williamson Index, meaning that when the forest land cover area
increases, the Williamson Index will increase. However, the results of this study are not in
line with research conducted by (Bou Dib et al., 2018) which states that changes in land use
do not affect inequality in rural areas of Indonesia.
The Effect of the Construction Cost Index on Development Inequality
The selected estimation model explains that the construction cost index variable does
not affect the Williamson Index. This means that the size of the construction cost index does
not affect the level of development inequality in eastern Indonesia. This happened because
the construction cost index could not be used to measure an area to reduce development
inequality. Based on (Bappeda & Litbang Tana Tidung, 2020) the construction cost index
aims to describe price comparisons between different regions in a specific period. Another
study used the construction cost index to compare general allocation funds (GAF).

IMPLICATIONS
The research results show that investment encourages increased development
inequality in eastern Indonesia. The government needs to get investors interested in investing
in areas still rare in demand so that investment in east Indonesia is evenly distributed. Each
region has the same opportunity to develop the potential of their respective areas so that
inequality can be reduced.
A good and quality education program from the government will help the community
obtain a more proper education. In addition, the free education program can also help the
community get a more comprehensive education at a higher level, so that later they can
produce quality human resources.
The increase in original regional income must be used to develop regions in eastern
Indonesia. With more funds from the government, it can be used for equitable development.
Then little by little, the development gap will be overcome. The government also needs to
make policies that make it easier for people to carry out economic activities, especially in
leading sectors in eastern Indonesia.
The study results show that the area covered by forest land has increased development
inequality in Eastern Indonesia. The location of forest land cover, or land conversion, is an
essential issue in inequality. Forest land is usually converted into housing, malls, or other
buildings. However, these changes were not accompanied by changes in skills, so the
development process could not absorb farmers.

CONCLUSION
Measurement of regional inequality using the Williamson Index shows that inequality
in Eastern Indonesia is classified as moderate inequality in the 2015-2021 period with a value
of 0.49. Furthermore, inequality between provinces in Eastern Indonesia is still relatively
high. There is a Williamson Index value between 0.5 ≤ and 1, including NTB, NTT, South

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Sulawesi, Southeast Sulawesi, West Papua and Papua.Based on the results of panel data
testing, the best estimation model selected in this study is the Random Effect Model (REM).
Based on the validity test of the effect on the significance (α) of 0.05, the value of the
investment variable, regional original income, and the area of forest land cover has a positive
effect—the variable average length of school with a negative influence. Meanwhile, the
construction cost index variable had no significant impact on regional inequality in Eastern
Indonesia in 2015-2021.
The authors provide several suggestions for reducing development inequality in
eastern Indonesia based on the results above. First, the infrastructure development policy
aimed at reducing regional disparities in east Indonesia is focused on increasing electric
power distribution. Such development will increase inequality at an early stage and minimise
inequality when development occurs on an ongoing basis. Second, the government needs to
implement policies encouraging investment in less developed areas in eastern Indonesia so
that the economy can develop more and inequality between regions will be reduced.

ACKNOWLEDGEMENT
Thank you, and praise Allah SWT. who has given grace and health to the writer so that
the writer can finish this research smoothly. The author would like to thank Mr Muhammad
Arif, S.E, M.Ec.Dev as the supervisor. My beloved parents, especially my mother,
continually support and pray for the writer. To my sister, who always encourages the writer.
To my friends who have been involved in this research. Finally, the author would like to
thank the Faculty of Economics and Business, Muhammadiyah University of Surakarta.

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Medan, Sumatera Utara, Indonesia 26th January 2023

Faculty of Economics and Business Universitas Muhammadiyah Sumatera Utara
1841