Local Public Goods, Regional Income Inequality, and Social Diversity in Indonesia

Abstraksi

Indonesia is particularly interesting for examining the effect of regional income inequality and social diversity on local public goods delivery because of the significant contribution of within province income inequality to total regional inequality and its vast heterogeneity in social diversity. In this study, five most essential sectors of local public goods are covered, i.e., health, infrastructure, housing, and social sectors. District level data is used to measure regional income disparity to capture income distribution dynamics within a province. This paper also estimates social diversity in Indonesia based on cultural (ethnic) and religious diversity by employing both fractionalization and polarization indexes to get a comprehensive knowledge of social diversity effect on local public goods delivery. This paper employs annual data which cover the period from 2001 to 2014. Dynamic panel estimation techniques are used to address the issues of persistence and endogeneity in the model. The paper presents interesting results. Firstly, larger regional income disparity is associated with less spending in social sector. Secondly, contrary to the popular hypothesis that proposes the opposite effect of social diversity on the provision of public goods, this paper shows that ethnic diversity in Indonesia encourages the provision of local public goods in all analysed sectors. Statistical tests indicate that the dynamic estimators are consistent and the instruments are valid. Several policy implications are proposed in this paper for both the central and the local governments in Indonesia to embrace ethnic diversity as an asset instead of a liability to advance overall economic welfare.