Hypothesis
Setyo Tri Wahyudi
Department of Economics-Faculty of Economics and Business
Brawijaya University, Malang East Java
Corresponding: setyo.tw@ub.ac.id; setyo81@gmail.com
Abstract
East Java is one of the provinces in Indonesia with the highest economic growth
relative to the average national economic growth in recent years. The sectors having the
largest contribution to economic growth of East Java are: (i) trading, hotel, and restaurant, (ii)
manufacturing, and (iii) agriculture. However, such high economic growth does not spread
evenly in the entire regency as some regions are developed while there others not developing
yet. This indicates that the problem of imbalance development in East Java has not yet been
solved.
This study aims to identify income inequality, analyze factors that contribute to the
inequality as well as prove whether Kuznets hypothesis about inverted U curve are evident
for the case of East Java province. The data used are secondary data on city-level in East Java
in a period of 2008 2011. The analysis method conducted includes: (i) disparity analysis
using Williamson index, (ii) estimation of panel regression model, (iii) a test of Kuznets
hypothesis.
The study results show that most cities in East Java have value of Williamson index in
intermediate category (0.3<IW<0.7), showing a tendency to decline along the period of
study. In addition, variables of PDRB per capita and labor show significant influence on the
income inequality while these two variables have negative correlation. This means that the
increases in PDRB per capita or sum of labor will reduce the level of income inequality in
East Java, whereas IPM has no significant influence on income inequality. Furthermore, the
test of the Kuznets inverted U hypothesis shows that the relationship between income
inequality and economic growth in East Java is in a shape of inverted U curve. This is in
accordance with Kuznets hypothesis stating that in early stage of development, income
inequality will increase and will decline in a long term. Therefore, the Kuznets hypothesis
does apply to the province of East Java.
Keywords: Income inequality, Kuznets inverted U hypothesis, East Java.
1. BACKGROUND
The purpose of economic development is to create more prosperous, wealthy, and just
society. To reach such society requires potential and resources management possessed by
each region. To create prosperity, a collaboration between government, society, and private
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sector continues being done by every region in effort to manage potential and resources in
order to create job market as well as to stimulate the development of economic activities
(Arsyad, 1999). Although development policy has been directed to attain high economic
growth by taking advantage of potential and resources possessed, the success of development
is not even and there is an interregional inequality, especially income inequality. Alisjahbana
(2005) proposes that one of main problems of inequality in Indonesia is interregional
inequality as a consequence of the centralization of economic activities in the islands of Java
and Bali.
One of measurements frequently employed to evaluate the development performance
is GDP growth. An economy is said to be growing if the rate of economic activities is higher
than that of the previous period (Sadono, 1996). High and continuous economic growth is the
main condition for the sustainability of economic growth. Thus, every region always has to
set a target for high growth rate in the plan and goal of development. Although the GDP
measurement is frequently used to evaluate economic performance as well as represent
income rate per capita, its usage only views things on one perspective and thereby unable to
show how income is evenly distributed among people in reality. The rise in income per capita
does not mean that most people feel better about themselves. To get a clear picture, therefore,
the distribution of income needs to be measured.
East Java as one of provinces in Indonesia is frequently called the barometer of
national economy because the economic performance of East Java always represents the
highest growth performance relative to the average national economic growth. According to
the statistics of East Java (BPS, 2014), within the period of 2005 2013, East Java marked
higher economic growth compared to the national average. In 2013, the economic
performance of East Java reached 6.55%, weaker than that in 2012 at 7.22% but still higher
than that of national economy at only 5.78%. The major contributors to economic growth of
East Java are still dominated by 3 sectors, they are: trading, hotel and restaurant sector with a
contribution of 31.33%, followed by manufacturing sector and agriculture sector, each with a
contribution of 26.6% and 14.91%.
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8
7
6
5.84
5.69
6.35
6.11
5.8
5.5
6.16
6.01
7.27
7.22
6.49
6.68
6.22
6.55
5.78
6.23
5.01
4.63
4
3
2
1
0
2005
2006
2007
2008
2009
Jawa
EastTimur
Java
2010
2011
2012
2013
Nasional
Indonesia
Year
Percentage of Poor
Citizens
Poverty Line
(IDR/Capita/Month)
Urban
Rural
Urban
Rural
Urban
Rural
2008
2.438
4.581
13,15
23,64
183.408
155.432
2009
2.148
3.874
12,17
21
202.624
174.628
2010
1.873
3.655
10,58
19,74
213.383
185.879
2011
1.734
3.492
9,66
17,66
242.403
214.166
2012
1.605
3.354
8,9
16,88
253.947
234.556
2013
1.622
3.243
8,9
16,23
278.653
269.294
Based on these facts, the attainment of economic growth rate of East Java still leaves
some problems, especially the uneven distribution of income. This indicates that the usage of
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4|Page
Inequality rate
5|Page
This indicates that equitable development between regions in Western Indonesia is relatively
better than the average condition in the entire Indonesia.
Prapti (2006) conducts a study on the correlation between economic growth and
income distribution in rural and urban areas of Central Java in a period of 2000 2005. The
study results show that although the rate of income inequality of population in 35 regions of
Central Java is relatively low, there is a linkage that the increasing economic growth will be
followed by the increasing rate of income inequality in major regions of Central Java.
Hartono (2008) analyzes the inequality in economic development in Central Java using
Williamson index with a conclusion that during the period of 1981 2005, development
inequality tends to increase. Variables of private investment per capita, labor rate, and
allocation of development funds per capita significantly contribute to the income inequality.
3. METHODS
This study employs secondary data covering 38 regions in East Java province in a period of
2010 2013. The data consist of regional GDP, inflation, investment, and employment data
obtained from BPS-Statistics Indonesia. The testing stages of this study are as follows:
1. Analysis of the level of inequality
Williamson index is a coefficient of weighted variation proposed by Williamson in 1965.
Williamson index is highly sensitive to measure the differences between regions and to
watch the trend of inequality that occurs. In this study, Williamson index is used to see
how high the rate if income inequality among regions in East Java, that is formulized as
follows (Sjafrizal, 2009):
1
=
( )2
=1
Where:
IW = Williamson Index
yi = Regional GDP of region 1
= Average regional GDP per capita of province
pi = Total of population of region 1
p = Total of population of province
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Williamson index has a value of between 0 and 1 (0 < IW <1). If the index value is
nearing 0, then the income inequality is smaller and if the index value is nearing 1, then
the inequality is bigger. Furthermore, based on the calculation results of Williamson
index as well as referring to the research by Bappenas (2013), this study will group
regions based on the level of income inequality, they are low level of inequality (IW <
0.3), intermediate level of inequality (0.3 IW 0.7), and high level of inequality (IW >
0.7). The purpose of grouping is to select several samples of region in each group for
further test to determine factors that influence the inequality in East Java. The
representation of regions on each level is expected to represent the real situation of
income inequality.
2. Analysis of panel regression model
The analysis of panel regression model is used to determine factors that influence the
level of income inequality in regions of East Java. The general model that will be
estimated is as follows:
IWit = 0 + 1PDRBit + 2IPMit + 3TKit + it
Where:
IW
: Williamson index
PDRB
: Regional GDP
IPM
TK
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5.8
6.11
6.68
7.22
7.27
6.35
6.3
5.94
5.01
8
6
4
5.19
5.67
6.14
5.74
4.77
2
0
2006
2007
2008
2009
Jawa Timur
2010
2011
2012
Indonesia
Java shows a fluctuating tendency with improving trend. Although the inflation is higher than
previous years, it is still better compared to 2008. In 2012, PDRB inflation declines into
6.25%. The declining inflation rate is a good indication because it shows that the production
cost expensed by economic actors in East Java decreases.
12.00
10.00
9.29
8.73
8.00 8.20 7.71
7.36
7.04
6.75 6.97
6.20
5.89
5.14
4.47
4.23
3.82 3.93
3.75 3.97 3.86
3.17
8.00
6.00
4.00
2.00
10.16 10.39
10.45
9.66
8.39 8.06
7.78 7.55 7.537.59
6.96
6.83
6.47
6.05 5.94 6.40
6.01
5.83 5.93
4.85 4.66 4.97 4.51 4.86 4.564.50
4.58
4.23 4.62
4.01
3.62
2.90 2.65 2.99 2.68 2.81
2010
2011
2012
Desember
November
Oktober
Agustus
Juli
Juni
Mei
April
2009
September
2008
Maret
Februari
Januari
0.00
2013
Java during the period of 2007-2011 is still high where most of the regency/city Williamson
index value greater than 0,5. Based onn that calculation, the city of Kediri and Surabaya were
excluded because the regional GDP value in both cities far exceeds the other regions.
JAWA TIMUR
Kota Batu
Kota Madiun
Kota Mojokerto
Kota Pasuruan
Kota Probolinggo
Kota Malang
Kota Blitar
Sumenep
Pamekasan
Sampang
Bangkalan
Gresik
Lamongan
Tuban
Bojonegoro
Ngawi
Magetan
Madiun
Nganjuk
Jombang
Mojokerjo
Sidoarjo
Pasuruan
Probolinggo
Situbondo
Bondowoso
Banyuwangi
Jember
Lumajang
Malang
Kediri
Blitar
Tulungagung
Trenggalek
Ponorogo
Pacitan
(a)
2009
2008
2007
(b)
The high difference between regional GDP per capita in regency/city, shown by
Williamson index in regency/city that is high, also caused Williamson index in East Java to
show a high number (IW is greater than 1). Meanwhile, if two cities in East Java (city of
Kediri and Surabaya) excluded from the calculation, Williamson index number in East Java
decreased significantly, IW number in East Java in intermediate category (0.3<IW<0.7).
When examined, Williamson index number in East Java during the periods of 2007-2011
showed a tendency to be fluctuate with a declining trend. This means that there was a slight
decline in economic disparities between regency/city in East Java, in the other words
indicating an increase in equity between regions in East Java province (table 2).
Table 2. Williamson Index in East Java
IW in East Java
Year
IW (at
IW (at
IW (at
IW (at
Constant)
Constant)*
Current)
Current)*
2007
1.040
0.711
1.537
0.563
2008
1.027
0.693
1.503
0.549
2009
1.027
0.694
1.481
0.546
2010
1.014
0.687
1.472
0.542
2011
1.027
0.696
1.498
0.550
Based on the calculation of Williamson index for all of the regency/city in East Java,
then a grouping between regency/city based on categories, those are low (WI < 0.3),
intermediate (0.3 < WI < 0.7), and high category (WI > 0.7) was done. Based on the
categorization, if the city of Kediri and Surabaya was included in calculation analysis, then
the Williamson index number was in the high category (WI > 0.7), meanwhile, if those two
cities was excluded in calculation analysis, then the Williamson index number was in the
intermediate category (0.3 < WI <0.7) (see table 2). Further, referring to the categorization
results, if using regional GDP at constant prices, there were 7 regencies with low level of
disparity, 8 regencies with intermediate level of disparity, and 21 regencies with high level of
disparity. Meanwhile, when using regional GDP at current prices, there were 8 regencies with
low level of disparity, 21 regencies with intermediate level of disparity, and 7 regencies with
high level of disparity (see Table 3).
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Intermediate
(0.3 <WI<0.7)
Low
(WI<0.3)
Regency/City
At Constant Prices
At Current Prices
Pacitan, Ponorogo, Trenggalek, Blitar, Kediri, Malang, Jember,
Kediri, Malang, Jember, Bondowoso,
Pasuruan, Sidoarjo, Gresik,
Pasuruan, Sidoarjo, Jombang,
City of Malang
Nganjuk, Ngawi, Bojonegoro,
Lamongan, Gresik, Bangkalan,
Sampang, Pamekasan, Sumenep, City
of Malang
Lumajang, Situbondo, Probolinggo,
Madiun, Magetan, Tuban,
Banyuwangi, Mojokerto
Ponorogo, Trenggalek,
Blitar, Pacitan, Lamongan,
Banyuwangi, Probolinggo
Lumajang,Tulungagung,
Jombang, Nganjuk, Ngawi,
Bondowoso, Situbondo,
Madiun, Magetan,
Bangkalan, Sampang,
Pamekasan, Sumenep,
Bojonegoro
An increase in disparity between regencies should be watched out because it could threat the
sustainability of the development. According to Sjafrizal (2008) the emergence of disparity
between regencies was caused by first, differences in natural resource, that is regency with
low disparity index tend to have limited resources with barren lands and agriculture became
the mainstay. This situation makes the growth rate low and lags behind the other regencies.
Second, differences in demographic codition, that is demographic area with mountains,
separated by the forest, sea, and hill become a barrier in investment activities. Transportation
expense for the production result become expensive so that become isolated. Third, the less
fluent the mobility of goods and services caused by the minimum fund to repair/construct will
make the production result of one region difficult to be marketed and does not develop.
Fourth, the concentration of economic activities on a region that is close to the source of the
raw materials, cheap human resources, and affordable transportation that makes the other
regions neglected. Finally, the allocation of development funds between regions that are less
12 | P a g e
fair makes producing region less developed. Provision of infrastructure and public services
become limited and trigger a sense of dissatisfaction.
H1
If P-Value Cross-section random < significance, H0 rejected and H1 accepted or fixed effect
method used. Based on the estimation result, data obtained as follows:
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Test Summary
Cross-section random
46.417472
Prob.
0.0000
Table 4 showed Hausman test result to choose fixed and random model. Based on
probability value, known that hausman test probability < real level of 5 percent means model
chosen was fixed effect model. Fixed model test result displayed in table 5. Based on table 5,
known that PDRB and labor force variable showed significant influence on income disparity
level (Williamson index), while IPM variable did not significantly influence on disparity
level.
Table 5. Fixed Effect Model Test Results
Dependent Variable: IW?
Method: Pooled Least Squares
Sample: 2008 2011
Included observations: 4
Cross-sections included: 15
Total pool (balanced) observations: 60
White cross-section standard errors & covariance (d.f. corrected)
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
PDRB?
IPM?
TK?
0.455946
-0.008250
0.011910
-1.17E-06
0.474336
0.002598
0.007610
1.82E-07
0.961230
-3.175749
1.565057
-6.438010
0.3419
0.0028
0.1251
0.0000
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-0.383693
-0.054257
-0.288124
0.033645
0.177367
0.356204
1.045279
1.129032
0.445173
1.025996
-0.322197
TUBAN--C
City of BLITAR--C
City of PROBOLINGGO--C
City of PASURUAN--C
-0.150178
-1.031902
-1.051883
-0.930461
Effects Specification
0.981722
0.974323
0.048921
0.100518
106.6166
132.6938
0.000000
0.539583
0.305300
-2.953887
-2.325583
-2.708123
1.647351
Based on the table 5 above, the regresion model can be written in the form:
WI
In accordance with the study findings, the three variables (PDRB, IPM, TK) could
explain the income disparity with a high value (R-square = 0.98), that is 98 percent. Variable
PDRB per capita and sum of the labor had probabilities that is smaller than 0.05 means
significantly influencing income disparity level, while variable IPM did not significantly
influence.
Based on estimation results, PDRB per capita significantly influence income disparity
and the relationship was negative. The relationship between PDRB per capita with the region
income disparity that was negative was in line with the theory that an increase in PDRB per
capita will decrease the income disparity, vice versa. PDRB per capita is an indicator to see
economic growth in a region, the higher PDRB per capita in a region, so the economic
growth in a region could be considered high. The high economic growth is one form of
success in economic development, which in turns could decrease the region development
inequity.
Further, the labor force variable showed a sognificant influence with negative and
small coefficient (0.0000016). This means that the increase of the labor force would
contribute on the decrease of income disparity level. The more the number of people that
work and have access to get a job the lower the rates of unemployment, and the higher
production activity that would reduce the income disparity between the people.
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WILLIAMSON_INDEX
.544
.542
.540
.538
.536
.534
.532
.530
4.8
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
ECONOMIC_GROW TH
Figure 6. Curve of Relationship between Williamson Index and Economic Growth Rate
in East Java
Figure 6 showed the relationship between income inequality and economic growth
that shaped inverted U-curve. This finding was consistent with Kuznet hypothesis stating that
in the early stages of development, income disparity would increase and in the long run
would decrease so that Kuznet hypothesis is applied in East Java Province. Income disparity
16 | P a g e
in one region increased in certain period then decreased when the growth continued to
increase and it becomes a repeating process.
5. CONCLUSION
Income inequality in regency/city in East Java Province measured by Williamson index from
2008-2011 showed that income disparity level in East Java measured using PDRB at current
prices showed that most of the regency/city in East Java were classified as disparity in
intermediate level - 8 regions with low level of disparity, 21 regions with intermediate level
of disparity, and 7 region with high level of disparity. Eventhough they were included in
intermediate level of disparity, most of the regions had Williamson index more than 0.5 even
close to the limit of high disparity that is 0.7. This showed that inequality reduction program
in East Java had not been optimal to reduce the Williamson index number so that inclusive
growth has not been reached.
The estimation result to know factors influencing the disparity level using variables of
PDRB per capita, human development index, and labor force by using five regencies in each
category as the samples
influence on the occurence of disparity in East Java while IPM variable did not. Then, the
result of Kuznet hypothesis on inverted U-curve was proved in East Java province. In the
early development stages disparity tends to increase but in the later stages disparity would
decrease along with the growth. This process occured repeatedly so that in the long run the
relationship between economic growth and income inequality is negative. The government
should continue to encourage the economic growth so the equality would be realized soon.
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