Abstract
Economic zones can be powerful drivers of economic growth in developing countries. However, less is known about their distributional impact on the local society. This paper provides empirical evidence from Indonesian provinces on the relationship between economic zones and within-province income inequality. We apply fixed-effects panel estimation to province-level data for the whole of Indonesia, which we then complement with separate studies on the opening of three economic zones in three provinces using the synthetic control method. The results suggest that the above relationship is positive overall. The estimated rise in income inequality after a zone opens is, however, relatively small on average and may be short-lived. Moreover, the average estimate masks large regional differences, which suggests that the inequality implications of economic zone policies depend on local conditions. One possible explanation for the rise in inequality is that the unskilled population benefits disproportionately less from the policy.
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Acknowledgements
We thank Aradhna Aggarwal, Holger Görg, Krisztina Kis-Katos, Alina Mulyukova, two anonymous reviewers and participants of the project for useful comments and discussions. We are also indebted to the Republic of Indonesia National Council for Special Economic Zone and to Dr. Winardi from the Indonesian Ministry of Industry for their generous help in setting up the list of economic zones.
Funding
Open Access funding enabled and organized by Projekt DEAL. This work was funded by the Riksbankens Jubileumsfond of Sweden as part of the research project “Special Economic Zones: A Force for Good to Reduce Inequality”, https://special-economic-zones.org/. We gratefully acknowledge the financial support.
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Cecília Hornok wrote the main manuscript text, conducted the regression analysis and the synthetic control studies. Dewa Gede Sidan Raeskyesa was responsible for data collection, created descriptive tables and figures, and assessed the descriptive evidence specific to the Indonesian context. Both authors were responsible for reviewing the literature. Both authors reviewed the manuscript.
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Appendix
Appendix
1.1 Data availability
Information on economic zones in Indonesia has been collected by the authors and is available upon reasonable request. It contains the names, exact locations and years of opening of 118 industrial estates and 15 SEZs in Indonesia as of the end of 2020. Primary sources of data collection were the Ministry of Industry Indonesia (for industrial estates) and the Republic of Indonesia National Council for Special Economic Zone. In many cases, location and year of opening information was collected from web-based sources on individual zones. To produce Figs. 6 and 8, we geocoded the postal addresses of the zones using Google services. Then we located the zones on Indonesia’s map using the ArcGIS software and a shapefile from the GADM database (www.gadm.org; version 2.5, July 2015).
All other data used in the empirical analysis were obtained from publicly available sources. The Gini coefficient is directly obtained from Statistics Indonesia (https://www.bps.go.id/linkTableDinamis/view/id/1116, accessed on Jan 12, 2021). Further variables that are sourced from Statistics Indonesia are the Gross Domestic Regional Product (GDRP), Government expenditures, Population, GDRP per capita and the Minimum wage. Another important data source was the World Bank’s Indonesia Database for Policy and Economic Research (INDO-DAPOER; https://datacatalog.worldbank.org/search/dataset/0041056, last update May 7, 2019). Variables used from INDO-DAPOER are the Enrollment ratio in secondary education, Employment, Unemployment, Underemployment, Employment by economic sectors, Labor force, Poverty rate, Poverty gap, Literacy rate and Total area of a province (which was used to calculated Population density). Because GDRP and Government expenditures data under the 2008 System of National Accounts is available from 2010 only, we used historical annual growth rates from INDO-DAPOER to extend these two series back in time. Data on foreign direct investment (FDI) inflows is obtained from the website of the Ministry of Investment Indonesia (https://www3.bkpm.go.id/en/statistic/foreign-direct-investment-fdi, accessed on Dec 3, 2020). Conversion of inflows in US dollars to Indonesian rupiahs was done with the annual average exchange rate reported by the Asian Development Bank in its Key Indicators Database (https://kidb.adb.org/economies/indonesia, accessed on Dec 4, 2020). We generated inward FDI stocks by cumulating the inflows over the available years, starting from year 2000.
1.2 Further figures and tables
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Hornok, C., Raeskyesa, D.G.S. Economic zones and local income inequality: Evidence from Indonesia. J Econ Inequal 22, 69–100 (2024). https://doi.org/10.1007/s10888-023-09581-x
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DOI: https://doi.org/10.1007/s10888-023-09581-x