Seminar objectives and outline
CPDET Seminar: Book Session Objectives: Provide summaries for each chapter in
Regional Inequality and Development: Measurement and
Applications in Indonesia, 2022, Springer
November 27th, 2023
Mitsuhiko KATAOKA
Graduate School of Business, Rikkyo University
Akita T. and Kataoka M. (2022) Regional Inequality and
Development: Measurement and Applications in Indonesia,
Springer
The book addresses the three issues.
1. Meaning of regional income inequality
2. Measurement of regional income
inequality
3. Relationship between national
economic development and regional
income inequality
this book to promote thorough understanding.
Outline
1. Do regional income inequalities matter in Indonesia?
2. Measurement of regional inequality
3. Regional inequality decomposition
Topics 4-7: Empirical Applications to Indonesia
4. Bi-dimensional (BD) inequality decomposition
5. Inequality decomposition by sectoral income source
6. Two-stage nested Theil inequality decomposition
7. Factor decomposition analysis
Table of Contents in the book
Ch. 1. Introduction
Part I: Measurement and Analysis of Regional Inequality
Ch. 2. Measurement of Regional Inequality
Ch. 3. Analysis of Regional Inequality
Part II: Analysis of Regional Inequality: Applications
Ch. 4. Economic Tertialization, Output Deindustrialization and Income
Inequality in Indonesia: A Bi-dimensional Inequality
Decomposition Analysis
Ch. 5. Structural Changes and Regional Income Inequality in the
Indonesian Manufacturing Industry: An Inequality
Decomposition Analysis
Ch. 6. The Impact of the 1997 Economic Crisis on Income Inequality
in Indonesia: A Two-stage Nested Theil Decomposition
Analysis
Ch. 7. Inter-provincial Inequality in Labor Productivity and Efficiency
in Indonesia: A Factor Decomposition Analysis
 1.1 Regional administrative units by nation
Regional Inequality = Economic and social gaps
between the sub-national regional units.
1. Do regional income Regional
Administrative tiers
Japan Indonesia

inequalities matter in 1st tier 47 prefectures 34 provinces

Indonesia? 2nd tier 1718 municipalities

(City/Town/Village)
514 districts (416
Kabupaten / 98 Kota)
3rd tier 7,071 sub-districts

GDP and other social and economic indicators are

published at the province and district level in
Indonesia.

1.2 GDP per capita by district, 2020

Rich mining regions

2. Measurement of regional
inequality

• World's largest island country / fourth largest population

• Rich geographical and industrial diversities
• On-Java region drives 2/3 of national economic activities
• Resource-rich (poor) off-Java districts face higher (lower) income
• Serious inter-regional gaps.→ Key policy issue since independence
2.1 Absolute / relative inequality measures 2.2.a Four desirable properties of inequality
Two inequality measures measures
a. Absolute measure quantifies differences in monetary terms using the 1. The anonymity principle
same unit as the variable→Can’t apply cross-country comparison. – Measurement care about the ordering and distribution,
b. relative measure assesses average disproportionality, independent not which are rich and poor.
from the units of scale (Scale independence principle)
2. Scale (Income) independence principle
Example: – Measurement unaffected by economy size; value
a) Absolute: Standard deviation, SD remains constant with income scaling.
b) Relative: Coefficient of variation, CV 3. Population size independence principle
where – Measurement unaffected by the number of regions with
yi is a per capita income in region i, consistent income patterns.
n is a total number of regions, and 4. Transfer principles
is the arithmetic mean of yi – The measurement value decreases when income is
Pi is a population in region i, and transferred from richer to poorer regions.
Yi is an income in region i.

2.2.b Inequality measures and their properties 2.3 Four major conventional inequality
Relative Inequality Measures Anonymity Population
Independence
Scale
Independence
Transfer
Principle measures
(1) Range (D) 〇 〇 〇 X 1. Coefficient of variation, CV= .
(2) Relative mean deviation (M) 〇 〇 〇 X
(3) Kuznets ratios 2. Gini coefficient, G
(a) Income share of Richest Q% 〇 〇 〇 X
(b) Income share of Poorest P% 〇 〇 〇 X
3. Theil First (T) indexes, ∑
(c) Ratio of income shares of (a) to (b) 〇 〇 〇 X
(4) Variance of log income (V) 〇 〇 〇 X 4. Theil Second (L) indexes
(5) Coefficient of variation (CV) 〇 〇 〇 〇
(6) Williamson’s Coefficient of where
variation (WCV) 〇 〇 〇 〇
yi and yj is a per capita income in region i and j (i ≠ j),
(7) Gini coefficient (G) 〇 〇 〇 〇
(8) Theil indices (T and L) 〇 〇 〇 〇 n is a total number of regions,
(9) Atkinson Class of inequality
measures 〇 〇 〇 〇 is the arithmetic mean of yi.
The four inequality measures above (5) ‒ (9) satisfy four desirable is the ascending ranked value of , and
properties of inequality measures that are usually applied in the cov is covariance.
empirical analysis. Note: Gini has many alternative formulas.
 3. Regional inequality decomposition
Fundamental methods
1. Decomposition by regional sub-group
Theil T and L index
Squared Coefficient of Variation, CV2
2. Decomposition by sectoral income source→Chapter 5
3. Regional inequality Gini coefficient, G
decomposition Coefficient of Variation, CV

Advanced methods
1. Bi-dimensional inequality decomposition, based on CV2
2. Two-stage nested Theil inequality decomposition
3. Factor decomposition analysis, based on Theil L index

3.1 Fundamental inequality decomposition 3.1.a Decomposition by regional sub-group

a. Decomposition by regional sub-group • The nation consists of m regions and region i consists of ni
Hierarchical regional structure: Region-province- kota/kapubatan provinces: Two hierarchical regional structures.
Indonesia: 5 regions, 34 provinces, 514 kota/kapubatan. • Indonesia consists of 5 regions and 34 provinces.
Total regional inequality=Between region ineq.+ Within region ineq. • Sumatra region consists of 10 provinces.
Theil T = TB + TW, Theil L = LB + LW, CV2 =
Example:
b. Decomposition by sectoral income source Region 1 Province 1 Overall
Each region i’s economy, GDP, has K sectors in total (k=1,2, k…K). Province 2 inequality
=
Province j
The notation k indicates the primary, secondary, and tertiary sectors. ⁝
Between Within
– Gini= region + region
Province n1 inequality
Nation inequality
where is Sector k’s GDP per capita share, is relative rank ratio Region 2 Province 1
sector k’s GDP per capita, and is Gini in sector k. ⁝ Province 2
Region i Province j Within region inequality =
where is Correlation coefficient between total GDP per capita and ⁝ ⁝ Between province inequality
Province n2 within region.
sector k’s GDP per capita, and is CV in sector k. Region m
 3.1.b Decomposition by income source 3.2 Advanced inequality decomposition
• GDP in region i, , is the sum of the sector k’s a. Bidimensional inequality decomposition →
GRDP values (k is the primary, secondary, and
Chapter 4
tertiary sectors).
GDP in Region 1 GDP in Sector 1 in Region 1, b. Two-stage nested Theil decomposition
= Sum of all GDP in Sector 2 in Region 1, analysis → Chapter 6
provinces’ 1* ⁝
GDP in Sector k in Region 1, c. Factor decomposition analysis → Chapter 7
⁝
GDP in Sector K in Region 1,
GDP in Region i GDP in Sector 1 in Region i
⁝ GDP in Sector 2 in Region i
⁝
GDP in Sector k in Region i
⁝
Region n GDP in Sector K in Region i

3.2.a Bidimensional inequality decomposition 3.2.b Two-stage Nested Theil Decomposition

BD combined the below two decompositions in CV2 This uses three hierarchical regional structures: Region-
1. CV2 by regional sub-group and Province-District (Kota/Kapubatan)
2. CV2 by sectoral income source. Assume that the nation consists m regions and region i consists ni
• The nation consists m regions and region i consists ni provinces. provinces. Province j has K districts.
• Each regional and provincial economy consists of K industrial sectors. Region 1 Province 1 District 1 Example:
+
Province 2 District 2 Indonesia consists of 5 regions, 34
(1) Province j District k provinces, 514 districts.
⁝ ⁝ • Sumatra region consists of 10
where and are average per capita GDP in region and in total. provinces.
Nation Province n1 District K
(2) Region 2 • Aceh province has 23 districts.
Province 1
,-./0 ⁝
0· (3) Province 2
Region i Province j
where is cross-regional average per capita GDP in sector k. ⁝ ⁝
Substituting Eqs.(2) and (3) to Eq.(1), Region m Province n2
+ 1st stage
(4) 2nd stage
Within region inequality Between regioninequality Overall inequality Between region Between province Within province
23 = +
by sector by sector in per capita GDP = inequality + inequality + inequality
consists of components. between districts component component component
 3.2.c Factor Decomposition Analysis
A multiplicatively decomposed variable is additively decomposed into
the sum of the corresponding strict Theil L inequality terms and their
interaction term.
Let Yi, and YEi, Li be GDP, GDP without inefficiency, and labor in
region i. Part II: Analysis of
Multiplicatively decomposed variable, : =
:< :
;
Regional Inequality:
; :< = (1)
where =, =, and
are labor productivity, pure labor productivity,
= Applications
and efficiency.
↓
After linearizing Eq. (1), we have factor inequality decomposition
Chapters 4-7
I (2)
T : Non-weighted Theil L index
I : Interaction term between two variables:
If I , two variables have the positive (negative) correlation.

4. Chapter 4 Summary 4.1 Ch. 4 Interprovincial income inequality

Objectives: Explore the regional and sectoral factors
influencing the province-level inequalities. Fig.4.3 Conventional inequality measures,
Methods: Bi-dimensional Inequality Decomposition based on per capita GDP
Data: GDP per capita by 9 sectors, 3regions/33 provinces, CV=
Major findings
• Tertiarization 1983−2019: Fig. 4.2
– Decline in agricultural and mining GDP share.
– Decline in manufacturing GDP share in ht e2010s.
• Bi-dimensional Inequality Decomposition 2010−2019, Table 4.4
– Inequalities increased in Java-Bali.
– Tertiary sectors drive inequalities, mainly by THR, TIC Finance.
– Decline in manufacturing inequalities in Java-Bali.
– Large construction sector disparities in Java-Bali due to the
concentration of large projects in on-Java mega-cities.
Continuous decline income gaps across provinces
 4.2 Ch. 4 Tertiarization: Fig. 4.1 4.3 Ch. 4 Bi-dimensional Dec: Table 4.4
AGE M IN M AN EGW CON THR TIC FBS OTH Tertiary Total
2010
Service Total (B + W) 1.2 19.5 16.2 0.2 12 15.4 7.3 17.7 10.4 50.8 100
Between-region (B) 0.6 1.1 1.2 0 0.2 0.3 0.1 0.1 -0.2 0.3 3.5
Within-region (W) 0.5 18.4 15 0.2 11.8 15.1 7.3 17.6 10.6 50.6 96.5
Sumatra-Kalimantan, W1 2.1 17.4 9.1 0 2.3 1.3 0.5 0.3 0.5 2.6 33.6
Manufacturing Java-Bali, W2 -1.7 -0.2 5.4 0.2 9.3 13.7 6.7 17.2 10 47.6 60.6
Sulawesi and others ,W3 0.1 1.2 0.4 0 0.2 0.1 0.1 0.1 0.1 0.4 2.3
2019
Agriculture Total (B + W) -0.2 9 11.8 0.3 11.7 18.2 13.3 23.7 12.1 67.3 100
Between-region (B) -0.2 0 1.3 0 0.1 0.6 0.2 0.4 -0.1 1.1 2.3

Mining Within-region (W) 0 9.1 10.6 0.3 11.6 17.6 13.1 23.4 12.2 66.2 97.7
Sumatra-Kalimantan, W1 1.2 8.8 5 0 1.6 0.9 0.4 0.2 0.4 1.8 18.4
Java-Bali, W2 -1.4 -0.2 5.1 0.3 9.7 16.5 12.6 23.1 11.7 63.9 77.3
Sulawesi and others ,W3 0.2 0.4 0.5 0 0.3 0.2 0.1 0.1 0.2 0.6 2.1

• Java-Bali’s contribution to overall inequalities increased. 47.6→63.9

• Decline in agricultural and mining GDP share from 1983. • Tertiary sectors drive inequalities, mainly by THR(Trade, hotel, restaurant), TIC
(Transport, Information and communication, Financial Business)
• An inverted U-shaped curve in manufacturing • Java-Bali’s manufacturing sector’s contribution (MAN) declined. 5.4→5.1
• Increase in the tertiary sector GDP share. • Java-Bali’s construction sector’s contribution (CON) remains large. 9.1→9. 7

5. Chapter 5 Summary 5.1 Ch.5 Manufacturing interprovincial

Objectives: Explore the sectoral factors influencing the inequalities based on GDP per capita
province-level inequalities within manufacturing industries. Fig. 5.1
Methods: CV-based sectoral inequality decomposition
Data: GDP per capita by 9 manf. sub-sectors, 33 provinces,
2010−2019
Major findings
• The manufacturing share in GDP per capita declined
• The manufacturing interprovincial inequalities in GDP per
capita declined.
• Those vary by the manufacturing sub-sectors.
– The labor-intensive sector (Food, Textile, Wood): inequality-
reducing sector.
– The capital-intensive sector (Mining, Basic metals, Machinery • The mining and manufacturing interprovincial inequalities declined
– Transport) : inequality-increasing sector. in the 2010s.
– The sectoral share in GDP per capita of Food, Textile, Basic • Agriculture and services sectors manufacturing interprovincial
metals, increased while all other 6 sectors decreased.
inequalities increased.
 5.2 Ch.5 Inter-provincial income inequality 6 Chapter 6 Summary
decomposition in manufacturing by subsectors Objectives: To examine the impact of the 1997/98 financial
2010 2019 crisis on regional income inequality based on district level.
Table 5.4 Sector Share CV RCC % Share CV RCC %
RCC: Relative correlation M ining 11 3.2 1.80 41.7 7.3 3.2 1.51 24.5
Methods: Two-stage nested inequality decomposition
concentration ratio Food 31.5 1.2 0.31 8.4 36.7 1.2 0.42 13.9 Theil T = TBR + TBP+TWP, Theil L = LBT + LBP+LWP
23 = ∑ > ? 23 Textile 7.4 2.1 0.56 2.1 8.1 2 0.75 2.9
BR: Between regions, BP: Between provinces, BW: within province.
A0 ,.0
@22 =
,. Wood 8.9 1.3 0.80 7.1 7.4 1.2 0.86 6.4 Data: GDP per capita w/o oil&gas, 27 provinces, 1993−1998
@22 > 1: Inequality increasing sect. Chemical 14.4 1.1 0.62 7.4 13.4 1.1 0.68 7.7
@22 < 1: Inequality reducing sect. Basic metals 13.6 3 1.33 20.5 14.2 2.7 1.54 28.4 Major findings
? : Correlation coeffect between
sector k’s and total GDP per capita.
M achinery 2.6 3.5 1.45 2.2 2.4 3.4 1.78 2.3 • TBP and TPW are major contributions to overall income gaps.
Transport 9.7 3.8 1.25 8.4 9.7 3.8 1.67 11.5 • 1993-1997: Increase in TWP while others remain constant.
Other 1 3.6 1.65 2.1 0.8 3.5 2.08 2.3
• 1997-1998: Decline in TBP and TWP
Total 100 1.2 100 100 1 100
– TWP: 0.143→0.141, ∆-0.02
– TBP: 0.124→0.108, ∆-0.06
• The manufacturing interprovincial inequalities vary by sub-sectors. – TBR: 0.021→0.018, ∆-0.03
RCC>1: Mining, Basic metals, Machinery, Transport (capital-intensive) – TBP in Java-Bali: 0.167→0.146, ∆-0.21
RCC<1: All other sectors (Labor-intensive) ⇒ The sectors are likely to be The crisis affects the provincial inequalities in Java-Bali-regions
located evenly.

6.1 Ch.6 Two-stage nested inequality 6.2 Ch.6 TBP: Between province inequality by region
Fig. 6.1 decomposition Fig. 6.2
Overall inequality
between districts, T
Between region Java-Bali: 0.167→0.146, ∆-0.21
= inequality
component, TBR TBP
Between province
+ inequality
component, TBP
Within province
+ inequality
component , TWP

T = TBR + TBP+TWP

1993-1997: Increase in TWP while others remain constant. • Java-Bali’s interprovincial inequality was substantial
1997-1998: mainly decline in TBP (Between province inequality) and hit TBP declines hardest
TWP: 0.143→0.141, ∆-0.02
TBP declines accounted for over 75% in total
TBP: 0.124→0.108, ∆-0.16
declines: (0.16)/(0.02+0.16+0.03)×100=76.2%
TBR: 0.021→0.018, ∆-0.03
 7. Chapter 7 Summary 7.1. Ch.7 Factor inequality decomposition
Objectives: Explore the effects of efficiency on regional in labor productivity
income inequalities.
Methods: This study applied two methods
• Data envelopment analysis (DEA) derives efficiency in each
province.
• Cheng& Li’s (2006) inequality decomposition analysis.
Data: 26 provinces for 1990−2010 of GRDP and production
factors, labor psychical and human capital
Findings:
• Efficiency convergence is observed, with less efficient
provinces showing more improvement. x = xe × oe → K L = K LM + K NM + I LM, NM
T · : Theil L index, I · : Interaction term between two variables:
• Interprovincial income inequality (T(y)) decreases are • The nation experienced efficiency convergence.
attributed to improved efficiency. • Interprovincial productivity gap reduction is attributed to efficiency convergence.
• Widening pure labor productivity gaps between provinces • Widening interprovincial pure labor productivity gaps may hinder Interprovincial
productivity gap reduction, posing a new policy concern.
may hinder the reduction of T(y), posing a concern.

7.2 Ch.7 Factor inequality decomposition in efficiency

Book Review in Asia-
Pacific Journal of Regional
Science (2023)

I
pe: pure technical efficiency (Resource utilization)
se: scale efficiency (Resource allocation)
• Efficiency convergence is observed, due to convergence in both
resource utilization and allocation efficiencies.
 Highlights of Prof. Mendez’s review Future extensions
• Today's seminar provided an overview of the book.
 This book is a very informative research compendium of
• Upon request, we offer a PC workshop covering these
some the main methods, results, and arguments that the
topics using Stata and World Bank's Indonesia Database for
authors have published over the last 30 years.
Policy and Economic Research (INDO-DAPOER).
 Quantitative methods in regional science are changing – Regional inequality decomposition analysis
rapidly and increasing in complexity. Nevertheless, – Regional convergence analysis
inequality decompositions presented in this book are likely – Explanatory spatial data analysis
to remain as an intuitive starting point for various analyses. – Drawing choropleth maps
 This book provides an excellent overview and application
of inequality decompositions in the context of regional
disparities and structural change.
 These features make the book a ‘must’ read for anyone
who intends to teach and/or conduct research on issues
related to regional inequality and development.

Thank you for your attentions.

Terima Kasih,
ありがとうございました。