Inequality, Regional Economic Development and Access to Public Services in Decentralizing Indonesia

This thesis aims to answer what is happening to inequality in Indonesia for the past years. This empirical research consists of two parts, first, how is the relationship between inequality and development in Indonesia along with various aggregation levels; second, whether the accessibility to basic public services is the implication of inequality. The key messages of the first part of this thesis are as follows: over the last decades relatively high economic growth in Indonesia is associated with rapidly increasing income inequality. Regional convergence of inequality across islands and provinces is driven by the fact that incomes of the rich in poor regions grow faster than those of the poor in rich regions. In other words, the middle class and especially the top incomes seem to benefit most from the economic growth dynamics in Indonesia. In relation to urbanization, our examination shows that if the current trend of increasing average agglomeration size continues, we can expect that inequality will further go up. Further, high inequality in the past will increase the subsequent growth, this high growth is then associated with high inequality in the current period. If this current inequality is too high, then the change in inequality will be positive and large enough to reduce growth in the future. In other words, the impact of high inequality in the past is associated with the slowing down economic growth and worsening existing inequality. It seems that our results support the Piketty (2014) argument that inequality keeps increasing as societies accumulate wealth. With regards to the institutional quality, the type of institutional quality plays a significant role in shaping the association with economic growth in the future. This role looks more important if we interact with the initial inequality suggesting that a combination of a certain degree of inequality and institutional quality is required to boost the economic growth. The key messages of the second part of this thesis are as follows: given the health reform promoting inclusiveness in health access and given the complexity of connecting all people including from all the relatively small islands with huge disparities in terms of income and geography, insured people behave differently than uninsured people, and within the insured group, the subsidized people behave differently from the non-subsidized people. Ex ante moral hazard exists in insured and subsidized groups. The disparity in access to electricity and its supply is high across Indonesia. Despite the fact that electrification already started more than one hundred years ago, the electrification ratio remains low and the speed of technology diffusion is slow. Population density as an internal factor and power supply availability as an external factor contribute to increasing the electrification ratio at the province level. This external factor can be translated as island barrier. Hence, the heterogeneity at the province level contributes in shaping the diffusion patterns.