The Initial Impacts of the COVID-19 Pandemic on Regional Economies and Income Inequality in Indonesia: A Bi-dimensional Inequality Decomposition Analysis

The COVID-19 pandemic has exerted an enormous impact on the Indonesian economy. In 2020, the country contracted by 2.7%. But, the impact has been spatially heterogeneous. Based on provincial GDP by industrial sectors, this study examines how structural changes caused by the pandemic have affected the determinants of inter-provincial inequality in Indonesia by conducting a bi-dimensional inequality decomposition analysis. It also investigates how the pandemic has affected provincial economies by performing a panel data regression analysis. According to the regression analysis, the pandemic appears to have affected the convergence speed of provincial economies. Provinces with larger GDP shares of the tourism sector were affected more severely by the pandemic. Meanwhile, the impact of the financial sector on provincial growth was not affected. According to the decomposition analysis, after the outbreak of the COVID-19, the tourism sector reduced its contribution to inter-provincial inequality. On the other hand, the IC and financial services sectors were not affected by the pandemic and raised their contributions. When Indonesia will recover from the pandemic, it is likely that the tourism sector will regain its position as an important determinant of inter-provincial inequality. However, the most important sectors in determining inter-provincial inequality will be IC, financial and business services sectors, particularly in the Java-Bali region. With the rapid advancement of IC, financial and e-business technologies, the roles of these high-inequality sectors are likely to increase unless policies that could facilitate spatial dispersion of these services activities are implemented.