Inequality Convergence in Inefficiency and Interprovincial Outline

Income Inequality in Indonesia for 1990–2010 1. Summary of Kataoka (2018)

Three in One (3 in 1) program
University of Brawijaya
2. Theoretical framework in Kataoka (2018)
Thursday, 28 October 2021 1. Determinants of regional income
09:30 AM Jakarta (11:30 AM Tokyo) 2. Frontier analysis: Data Envelopment Analysis
3. Measurement of regional income inequality
4. Inequality decomposition
5. Convergence/divergence
3. Kataoka’s (2018) application
1. Research gap from the previous studies
2. Method and data
Mitsuhiko KATAOKA 3. Major findings, and interpretations.
Graduate School of Business, Rikkyo University 1) Efficiency in 1990 and 2010 and growth
2) Reference sets: Role model and followers
This paper is awarded the 30th Oishi Yasuhiko Award (Outstanding Paper Award) in 2021 by
Japan Section of Regional Science Association International. 3) Inequality decompositions

1.1 Summary of Kataoka (2018)

Research questions: 1.2 Expected empirical results
• Regional income inequalities in Indonesia receive great Examine interprovincial income inequality decomposition,
introduced by Cheng & Li (2006)
public attentions. However, the effects of input-output
efficiency on regional inequalities have not been studied.
Objectives: This study
• identifies the input-output efficiency in each province and
• explores the causal factors, such as demographic,
productivity, efficiency factors, contributing to
interprovincial income inequality.
Inequality decomposition:
Methods: This study applied two methods Interprovincial income inequality
• Output-oriented data envelopment analysis (DEA) and = Demographic factor
• Cheng& Li’s (2006) inequality decomposition analysis. + Productivity factor
+ Efficiency factor (Resource utilization and
Data: This study uses the balanced panel dataset of allocation)
• GRDP and production factors covering 26 provinces for
1990−2010.
 1.3 Policy issue in Indoensia 1.4 Summary of major findings
Serious regional income and factor imbalance in Indonesia
• Provinces in Java island accounts for 60% of national economy. • Majority of provinces improved efficiency in resource
• Mining-sector accounts for 16% of national GDP in 1990. utilization and allocation for 1990-2010.
• Rich-mining provinces with higher incomes are scattered around
off-Java provinces. • Rich resource provinces failed efficiency improvement →
• Government tackled the income gaps across sub-national regions Resource curse thesis.
since its independence.
• The more (less) efficiency improvement can be found in
4 times higher than the
national average income. less (more) efficient province. → Efficiency convergence
Aceh Oil and Gas Coal
North
Sumatra
Riau North
• The decrease in interprovincial income inequalities were
Riau
Islands
West
East
Kalimantan
Gorontalo Sulawesi
North
mainly attributed to both decreases in interprovincial
Kalimantan Maluku
West
Sumatra
Jambi Bangka-
Belitung
Central
Kalimantan West
Central
Sulawesi
West
Papua
inequality in resource utilization and allocation efficiencies.
Sulawesi
South

Bengkulu
Sumatra
Lampung
South
Kalimantan
South
Southeast
Sulawesi Maluku
Papua
• The widening interprovincial pure labor productivity gaps
Sulawesi
Jakarta
Central
Java
Bali
may resist the decrease in T(y) and can be a further issue.
Banten East
East Nusa Tenggara
Java
Yogyakarta
West Nusa
Java provinces Tenggara

2. Theoretical framework in Kataoka

(2018)
1. Determinants of regional income
2. Theoretical framework in Kataoka (2018) 2. Frontier analysis: Data Envelopment Analysis
3. Measurement of regional income inequality
4. Inequality decomposition
5. Convergence/divergence
 2.1.1 Determinants of regional income 2.1.2 Regional income determinants in the
The determinants of output (=income) differ by time span. neoclassical model
Assumptions:
Production function in region i: = , (1)
a. Determinants in the short-run: Effective demand. The prices are
inflexible (fixed). where Y, A, L, and K are output (=income), technology, labor, and
b. Determinants in the long-run: Factors of production and capital, respectively.
technology. The prices are flexible. Factors of production: L and K
Regional income
Models Demand-side Supply-side Technology (≈ efficiency), A
(Keynesian) (Neo-classical) Dividing output and inputs in Eq. (1) by population P, we have
Time-span Short run, SR Long run, LR
Price flexibility Inflexible Flexible
= , . (2)
Supply curve Horizontal Vertical where , and are per capita income, capital, and labor.
Determinants to Effective Factor
income (= demand (= endowment and Eq. (2) implies that , and determine .
output) Consumption + technology
Investment) Thus, regional factor imbalances infulence the regioanl income gaps.
LRAS: Long-run aggregate supply
SRAS: Short-run aggregate supply
Source: Mankiw G. 2012, Macroeconomics AD: Aggregate demand
Y: Income (=output), P:Price

2.2.1 Frontier analysis 2.2.2 What is DEA?：Its basic concept

•Frontier analysis (FA) measures the relative distance DEA measures the relative efficiency of a decision
(= efficiency) by comparing the projected frontier making unit (DMU), using inputs to produce outputs.
and the observed values. Input Output

Process
•FA derives the production possibility frontier /cost DMU a
frontier. Input Output

• Two methods: Data Envelopment Analysis (DEA) / DMU b Process

Stochastic Frontier Analysis (SFA) Input Output

– DEA: No assumptions about a specific production DMU c Process

function and error terms, but sensitive to outliers.
– SFA: Requiring assumptions about a specific Multiple inputs and outputs can be applied in analysis.

production function and error terms, insensitive to Relative Actual output Minimum input
outliers
=
Efficiency Maximum output = Actual input
The frontier derives the maximum output or minimum input values.
 2.2.3 Data Envelopment Analysis (DEA) 2.2.4 Efficiency scores, oe = pe ×se
• DEA: A liner programming method to measure the efficiency of
economic units, given actual inputs and outputs.
• DEA derives two frontiers under VRS/CRS assumptions. Overall tech. efficiency (oe, Y/Ye )
VRS: variable returns to scale / CRS: constant returns to scale
VRS where all units operate at maximum level, but not at optimal scale (ABCD1). = Pure tech. efficiency (pe, Y/Ys)
CRS where all units operate at optimal scale (0D2).
• Given 5 actual units A－E, the output-oriented DEA model estimates
× Scale efficiency (se, Ys/Ye)
D1 and D2 under VRS and CRS frontiers, respectively. 0< Score <1. (efficient: score = 1; inefficient: score < 1).
Case in D
Y: Actual observed output values pe: Efficiency in resource utilization (managerial performance)
Ys: Estimated output value without pure
tech. inefficiency se: Efficiency in resource allocation (scale optimality = operation
Ye: Estimated output value without total size)
inefficiency

Y/Ye = (Y/Ys) × (Ys/Ye)

Overall tech. efficiency (oe)
= Pure tech. efficiency (pe)
× Scale efficiency (se)
Each score ranges between 0 and 1.
Xc
(efficient: score = 1; inefficient: score < 1).

2.3.1 Measurement of regional income 2.3.2 Income inequality measure: Theil L index
inequality Kataoka (2018) measures regional income inequality by Theil L index,
2 types inequality measures: Absolute / Relative measures. µy (3)
a. Absolute measures conceptualizes differences in money where andµ y is an per capita income in region i and provincial
terms (or the same unit as the variable). mean income. Theil L index is a relative measure that compares
b. Relative measure refers to the average disproportionality region i’s income with the mean income.
of the variable. Greater values in T(y) indicates the greater regional inequality.
Example: Standard deviation, SD; Coefficient of variation, CV Theil L index satisfies the following five properties.
a) Absolute measure: SD(y) = ⁄ ∑ − 1. The anonymity principle
b) Relative measure : CV(y) = ⁄ = ⁄ ⁄ ∑ − 2. Scale (Income) independence principle
∑ !
where = ⁄ and = are an per capita income in 3. Population size independence principle
region i and regional mean income, respectively. A nation consists of 4. Transfer principles
n regions in total. 5. Decomposability
SD(y) is expressed as the monetary term while CV(y) is
expressed as the relative ratio.
 2.3.3 Scale independence 2.3.4 Desirable properties of inequality measures
Scale independence: The measurement values do not depend I(y) denotes an inequality measure of variable y.
on the scale of economy. We explain by using the follwing 1. The anonymity principle
– It does not matter who earns the income.
a) SD(y) = ⁄ ∑ − yi={0.5, 4.0, 1.0, 1.5, 3.0}, yi’={4.0, 0.5, 1.0,3.0, 1.5}, i = {a, b, c, d, e}
b) CV(y) = ⁄ = ⁄ ⁄ ∑ − yi’ has the same income distribution pattern as yi, but the recipients are different.
When every region’s income is multiplied by any positive constant λ, 2. Population size independence principle
The measurement value in (a) changes and in (b) remains unchanged. – It should not depend on the number of income recipients.
– The measurement value remains unchanged when the number of income
If all regions' income increases by λ (λ>1), recipients changes as long as it has the same income distribution pattern.
yi={0.5, 4.0, 1.0, 1.5, 3.0}, yj={4.0, 0.5, 1.0, 3.0, 1.5}, The economy in i and j has
SD(λy)= λ −λ = λ − =λSD. Thus, SD(y)≠SD(λy). the same income pattern I(yi)=I(yj). Thus, I(yi) = I(yi+yj) = I(yj) = I(2yi)
3. Transfer principles
– The measurement value decreased, when some incomes are transferred from the
CV(λy)= ⁄ ∑ λ −λ = λ − rich (e) to the poor (a).
λ λ
yi= {0.5, 4.0, 1.0, 1.5, 3.0}, sd(yi)= 1.304; yi’= {0.5+1, 4.0, 1.0, 1.5, 3.0−1},
λ "# sd(yi’) = 1.048, I(yi)>I(yi’)
= = . Thus, SD(y)=SD(λy).
λ 4. Decomposability
CV(y) satisfies the property of scale independence. – Inequality value can be disaggregated into several interpretative factors.
I(y)= I(x) + I(z): Inequalities in x and z influence inequality in y.

2.3.5 Inequality measures and their properties 2.4.1 Multiplicative decomposition in

Relative Inequality Measures Anonymity Population
Independence
Scale
Independence
Transfer
Principle
Per capita income is multiplicatively expressed as
(1) Range (D) 〇 〇 〇 X
* * "
(2) Relative mean deviation (M) 〇 〇 〇 X
=
* * "
(3) Kuznets ratios
= =
(a) Income share of Richest Q% 〇 〇 〇 X
= , = .
(b) Income share of Poorest P% 〇 〇 〇 X
(c) Ratio of income shares of (a) to (b) 〇 〇 〇 X where : Labor participation rate,
(4) Variance of log income (V) 〇 〇 〇 X
(5) Coefficient of variation (CV) 〇 〇 〇 〇 : Labor productivity,
(6) Williamson’s Coefficient of 〇 〇 〇 〇 *
variation (WCV) : Pure labor productivity,
(7) Gini coefficient (G) 〇 〇 〇 〇
(8) Theil indices (T and L) 〇 〇 〇 〇 : Overall tech. efficiency,
(9) Atkinson Class of inequality
*
measures 〇 〇 〇 〇 "
: Scale efficiency, and
The four inequality measures above (5) ‒ (9) satisfy four desirable *

properties of inequality measures. : Pure tech. efficiency.

"
 2.4.2 Inequality decomposition 2.5 Convergence / Divergence
Convergence (Divergence):
Cheng & Li’s (2006) inequality decomposition based a. The lower-income regions tend to grow faster (slower) than
on Theil second measure. the higher income regions.
⇒T T +T b. The income gap reduces (widens) across regions over time.
5 countries / regions, A-E
⇒T T +T A: Convergence B: Divergence C: Multiple convergence
(Club convergence)
⇒T T +T y
(Single convergence)
y A y A
A B
B
A C A B A
D
T: Theil second measure (Theil L index) B E B
C
B
C
I: Interaction term of two variables (adjusted covariance term) C D
C C
• If I(∙) take a positive value, two terms are positively correlated. D D
D
D
• If I(∙) take a negative value, two terms are negatively correlated. E E E
E E
• If I(∙) take a zero, two terms are not correlated at all.
0 t 0 t 0 t
The notations y and t show the per capita income and year, respectively.

3.1 Research gap from literature survey in

Indonesia’s regional inequalities
Topics Existing studies
1. Interprovincial inequalities in Esmara 1975; Islam and Khan 1986; Akita
Regional Per capita GRDP, poverty 1988；Hill 2000; Hill 2002; Milanovic 2005;
rate, school enrollment ratio Hill 2008
3. Kataoka’s (2018) application to 26 2. Relations between factor Garcia and Soelistianingsih 1988; Azis 1990;
endowment and regional income.
provinces in Indonesia 3. Income inequality decomposition in Akita and Lukman 1995; Tadjoeddin et al.
GRDP per capita by industrial / 2001; Akita and Alisjahbana 2002; Akita 2003;
reginal structure（Region-Province- Akita and Miyata 2008; Akita and Miyata
City/Regency) 2010; Kataoka 2010; Akita et al. 2011
4. Inequality decomposition in Akita et al. 1999; Akita and Miyata 2008;
household expenditure by population Hayashi et al. 2014
sub-groups: urban-rural, education
attainment, job sector, and gender
No studies explored the effects of “efficiency factors” on
interprovincial income inequality.⇒Research gap
 3.2.1 Two methods in Kataoka (2018)
1. Output-oriented CRS/VRS DE A derives 3 efficiency scores:
Overall tech. (oe), pure tech. efficiency (pe), and scale efficiency (se)
0< Score <1. (efficient: score = 1; inefficient: score < 1).
2. Cheng & Li’s (2006) inequality decomposition
=+ ×- ⇒T = T + + T - + / +, -
- = -0 × 10 ⇒ T - = T -0 + T 10 + / -0, 10
10 = 20 × 30 ⇒ T 10 = T 20 + T 30 + / 20, 30
T: Theil second measure (Theil L index)
I: Interaction term of two variables (adjusted covariance term)
If I(∙) take a positive value, two terms are positively correlated.
If I(∙) take a negative value, two terms are negatively correlated.
If I(∙) take a zero, two terms are not correlated at all.
See Appendix for the details of the mathematical proof.
3.2.2.a Data: 26 provinces for 1990-2010
Provincial values
Output: GRDP, 2000 constant price (BPS)
Input:
• Labour force (BPS)
• Physical capital (Kataoka and Wibowo 2014)
• Human capital: Average education year (BPS)
Others
• Population (BPS)
Provinces: Aggregated 34 into 26 provinces
– Under the decentralization process from 1998, 8 new provinces
were split from the existing ones and East Timor became
independence. (27 provinces →34)
– No retrospective adjustment was made by BPS. Thus, I created the
balanced panel data covering 26 provinces for 1990-2010.

3.2.2.b Choropleth map in 26 provinces 3.2.2.c Economic indicators in province

1990
Variables Maximum Minimum
Name Value Province Value Province
GDP, Y (IDR trillion) 154.0 Jakarta 3.2 Bengkulu
Physical Capital , K ( IDR trillion) 450.3 Jakarta 3.0 SE. Sulawesi
Labor, L (Million) 15.8 E. Java 0.5 SE. Sulawesi
Average years of education, H 0.0 Jakarta 0.0 W. Nusa Tenggara
Population, P (Million) 35.6 W. Java 1.2 Bengkulu
GDP per capita, y 25.6 E. Kalimantan 1.4 E. Nusa Tenggara
Labor productivity, x 64.7 E. Kalimantan 2.8 E. Nusa Tenggara
Physical capital per capita, k 57.6 Jakarta 2.0 Papua
Labor participation rate, l 0.563 Bali 0.308 Riau

2010
Maximum Minimum
Variables
Value Province Value Province
GDP, Y (IDR trillion) 410.8 W. Java 7.3 Maluku
Physical Capital , K ( IDR trillion) 1,311.9 Jakarta 10.7 Bengkulu
Labor, L (Million) 24.2 W. Java 0.9 Bengkulu
Average years of education, H 10.4 Jakarta 5.3 Papua
Population, P (Million) 53.7 W. Java 1.7 Bengkulu
GDP per capita, y 41.2 Jakarta 2.7 E. Nusa Tenggara
Labor productivity, x 75.0 Jakarta 5.9 E. Nusa Tenggara
Physical capital per capita, k 136.5 Jakarta 4.7 Maluku
Labor participation rate, l 0.577 Bali 0.423 Maluku
 3.3.1 Findings: Kernel density distribution in 3.3.2 Findings: Change in average efficiency
efficiency score scores
Mean 1990 2010 # of provinces with mean
in 1990 < mean in 2020
oe 0.509 0.771 22
pe 0.647 0.843 22
se 0.794 0.918 18

Changes for 1990–2010.

pe: Efficiency in resource utilization (=managerial performance)
se :Efficiency in resource allocation (=scale optimality, operation size)
In 2010,
⇒pe＝0.843: Given the operation scale, the provinces can improve
managerial performance by 15.7% on average.
⇒se＝0.918: The provinces can improve efficiency by adjusting
operation scale by 8.2%.on average.
See the file “00_scores.pdf” for the efficiency scores in each province.

3.3.3 Findings: Overall tech. efficiency (oe) 3.3.4.a Classifying provinces by RTS
Provinces with the lowest & highest OE Output-oriented VRS model
Annual Growth 1990/2010 D1： Projected inputs/outputs derived by VRS Frontier
scores D2： Projected inputs/outputs derived by CRS Frontier
Rank Province (%) 1990 2010
Lowest
1st Highest Bengkulu 8.4 Province Score Province Score Classifying a province by RTS (Returns to Scale)
2nd Highest Jambi 6.9 1st Prov. Bengkulu 0.184 C. Kalimantan 0.407 VRS frontier though ABCEF consists of Segments AB (IRS), BC(CRS) and CEF(DRS).
3rd Highest C. Sulawesi 6.9 2nd Prov. W. Nusa Tenggara 0.187 W. Nusa Tenggara 0.506
3rd Prov. C. Sulawesi 0.187 Yogyakarta 0.510
D locates below frontier：D can be improved to D1. Thus, D is classified as DRS.
24th Highest Riau -0.8 Provinces 6 provinces: Aceh, Riau, 5 provinces: Bengkulu, W. VRS Frontier
CRS Frontier se=oe/pe ＝(D0 D1 / D0D2) if D moves to
25th Highest Aceh -1.2 with score = W. Java, Jakarta, E. Java, Java, Jakarta, E.
1.0 E. Kalimantan Kalimantan, S. Kalimantan leftward, se increases.
26th Highest Papua -1.8 Output
1. Higher oe growth provinces (Bengkulu 8.4%, Jambi 6.9%, C. Sulawesi 6.9%) ・D2 E F IRS : Increasing returns to scale. Increase in
C ・ operation size improves se.
• are resource-poor off-Java provinces. D1 A0ABB0Blue
• Show the lower oe scores in 1990 (Bengkulu 0.184, Jambi 0.191, C. Sulawesi0.187).
⇒ Efficiency convergence: Negatively correlated between the 1990’s oe scores and B CRS: Constant returns to scale. No change in
the growth rates: -0.879. operation size improves se.
2. Negative oe growth provinces (Aceh -1.2%, Riau -0.8%, and Papua -1.8%) ・D B0BCC0 Orange
• Those are resource-rich provinces DRS: Decreasing returns to scale. Decrease
• Those show the higher oe scores in 1990 (Aceh 1.0, Riau 1.0, Papua 0.818). IRS CRS DRS in operation size improves se.
⇒ Resource curse thesis in efficiency: Rich natural resource provinces show poor A Input C0CEFF0 Purple
efficiency growth. 0 A0 B0 C0 D0 E0 F0
 3.3.4.b Classifying provinces by RTS in 2010 3.3.5 Reference sets
# of provinces by RTS（CRS：6, IRS：15, DRS：5） Efficient peer groups, referred by inefficient provinces
• Inefficient F refers to efficient sets of B and C. RS shows the # of the reference stets (Efficient
– Provinces exhibiting IRS: 15; Provinces exhibiting DRS: 5 • Inefficient D refers to efficient sets of C and E.
– The fact that majority of provinces improves se by increasing operation size infers province + inefficient followers).
B, C, and E are the role model while A, F, and D are
that those face the resource constraints. followers. 1990 2010
2. Provinces with lower se exhibit IRS. ⇒Necessary for improving the access to the Provinces RS Provinces RS
resources in economic activities. Aceh 15 S. Kalimantan 15
2010 2010 Papua 10 E. Kalimantan 12
Provinces Provinces E. Kalimantan 7 W. Java 7
RTS SE RTS SE
1 Aceh DRS 0.992 14 Bali DRS 0.988 W. Java 6 Papua 7
2 N. Sumatra IRS 0.995 15 W. Kalimantan IRS 0.802 E. Java 6 Bengkulu 6
3 Riau* IRS 0.987 16 C. Kalimantan IRS 0.468 SE. Sulawesi 6 E. Nusa Tenggara 4
4 W. Sumatra DRS 0.994 17 E. Kalimantan* CRS 1.000 Riau 1 Jakarta 1
5 Jambi CRS 1.000 18 S. Kalimantan CRS 1.000 E. Java 1
6 Bengkulu CRS 1.000 19 N. Sulawesi* IRS 0.991
7 S. Sumatra* IRS 0.942 20 C. Sulawesi IRS 0.899 • 1990: Resource rich provinces, Aceh, Papua, E.Kalimantan have many followers.
8 Lampung IRS 0.960 21 S. Sulawesi* IRS 0.967
• 2010: Off-Java lower income provinces, Bengkulu and E. Nusa Tenggara have
9 W. Java* CRS 1.000 22 SE. Sulawesi IRS 0.969
several followers.
10 Jakarta CRS 1.000 23 W. Nusa Tenggara IRS 0.763
11 C. Java IRS 0.969 24 E. Nusa Tenggara IRS 0.652
• Jakarta and E. Java has no followers as those are regarded as extraordinary provinces
12 Yogyakarta DRS 0.995 25 Maluku* DRS 0.998
in terms of input-output efficiency.
13 E. Java IRS 0.968 26 Papua* IRS 0.557

3.4 Findings: Inequality decomposition 3.4.1 Inequality decomposition in T(y)

in T(y), T(x), and T(oe)
Inequality decomposition in T(y) Inequality decomposition in T(x)

• Decline in T(y) is largely affected

Inequality decomposition in T(oe) by T(x).
• Decline in T(x) is largely affected
by T(oe).
• Decline in T(oe) is affected by
T(pe) and T(se).
⇒ Decline in T(y) is largely
affected by T(pe) and T(se).
• T(y) declines from 0.331 in 1990 to 0.222 in 2010.
• The decline in T(y) is significantly affected by T(x).
– T(y): Interprovincial inequality in GRDP per capita
– T(l): Interprovincial inequality in labor participation rate
– T(x): Interprovincial inequality in labor productivity
 3.4.2 Inequality decomposition in T(x)
• T(x) largely declines from 0.403 in 1990 to 0.212 in 2010.
• T(oe) largely declines from 0.193 in 1190 to 0.028 in 2010.
• The decline in T(x) is significantly affected by the decline in T(oe).
• T(xe) slightly increases from 0.143 to 0.166.⇒ The interprovincial
gaps in pure labor productivity becomes wider.
3.5.1 Conclusions: Summary of Findings
• Resource curse thesis in efficiency could be observed.
• Indonesia experienced province-level efficiency
convergence.
• The reference set structure has changed for 1990-2010.
• The decrease in interprovincial income inequalities were
mainly attributed to both decline in efficiencies in
managerial performance and operation sizes.
• The widening interprovincial potential productivity gaps
may resist the decrease in T(y) and can be a further issue.
3.4.2 Inequality decomposition in T(oe)
• T(oe) declines from 0.193 in 1990 to 0.028 in 2010.
• T(pe) declines from 0.127 in 1990 to 0.014 in 2010 (68.3% contributing to T(oe)
decline).
• T(se) declines from 0.066 in 1990 to 0.018 in 2010 (35.9% contributing to T(oe)
decline).
⇒ Both declines in T(pe) and T(se) (= efficiencies in managerial performance and in
operation size) affect the decline in T(y).
3.5.1 Conclusions: Summary of Findings
• Majority of provinces improved efficiency in resource
utilization and allocation for 1990-2010.
• Resource curse thesis in efficiency could be observed.
• Indonesia experienced province-level efficiency
convergence.
• Majority of provinces faces the resource constraints to
improve efficiency.
• The reference set structure has changed for 1990-2010.
• The decrease in interprovincial income inequalities were
mainly attributed to both decline in efficiencies in
managerial performance and operation sizes.
• The widening interprovincial pure labor productivity gaps
may resist the decrease in T(y) and can be a further issue.
 3.5.2 Conclusions: Further extension
The list of the studies extended from Kataoka (2018).
– Interprovincial gaps in human capital endowment
(Kataoka 2019).
– Province-level productivity growth (Kataoka 2020).
– Multiple convergence hypothesis (Club convergence) in
not only input-output efficiency but also production
factors (Mendez & Kataoka 2021).
– Perspiration versus inspiration: Sources of national and
provincial output growth in Indonesia (Kataoka
Forthcoming).
Appendix 1: Output-oriented DEA model
The DEA model derive three scores as overall tech. efficiency
(oe), pure tech. efficiency (pe) and scale efficiency (se).
--------------------------------------------------------------
Each province i (i = 1, ... n) uses j inputs Xij (j = 1, ... m) to produce GDP Yi.
To derive pe (Yi / Ysi) under VRS model, we have the following.
45-6,7 8
3. 9. 8 ⋅ ; ≤ ∑ =
∑ = > ? ≤ > ;? @ = 1, . . . . A
= ≥0
∑ = = 1 C = 1, . . . , D
(1 / θ) is the pe score and z is each province’s weight.
We get oe (Yi / Yei) under CRS model, removing the last constraint.
We get se scores (Ysi / Yei) from se= oe / pe.

Appendix 2.1 Cheng & Li’s (2006) inequality Appendix 2.2 Cheng & Li’s (2006) inequality
decomposition decomposition
The covariance of li and xi (cov(l, x)) can be expressed as follows:
Recall Slide 2.3.2 that Theil L is expressed as:
E = ⁄ ∑ ln µ y⁄ E ≥0 (1) cov +, - = 1⁄D ∑ + − J - − L = − J⋅ L (4)
Per capita income is expressed as Dividing both sides in Eq. (4) by (µ i・ µ x）, we get
=+ ·- (2) =
QRS J,L
+1 (5)
where + and - are labor participation rate and labor productivity. Let I⋅ K I⋅ K

µ y, µ l, and µ x, are provincial mean values of yi (µ y [= (1/n)Σyi]) and its Substituting Eq. (5) into Eq. (3), we obtain.
corresponding two multiplicative terms. QRS J,L
E = E + + E - + ln + 1 = E + + E - + / +, - (6)
Then, substituting Eq. (1) into Eq. (2) and multiplying the quotient I⋅ K
inside the natural logarithm by (μl · μx / μl · μx) yields QRS J,L
where I(l, x)=ln + 1 is the interaction term that can be
E = ⁄ ∑ ln I ⋅ K ⋅
M I⋅ K
J L I⋅ K positive, negative, or zero if + and - are correlated positively,
I K
= ⁄ ∑ ln + ⁄ ∑ ln + ln negatively, or not correlated.
J L I⋅ K

= E + + E - + ln (3) We also derive the following in - = -0 · 10 and 10 = 20 · 30 as

I⋅ K E - = E -* + E 10 + / -* , 1e (7)
where T(l) and T(x) are strict Theil L index
E 10 = E 20 + E 30 + / 20, 3e (8)