Inequality and Economic Growth in Indonesia in The 2000’s

Damayanti Simangunsong, Chen Kuang-Hui


The income inequality in Indonesia reached the highest level during the decentralization era and suspected to be the cause of the slowdown of the economic growth in the last five years to 2015. This paper investigates whether increasing inequality had a positive or negative impact on economic growth in Indonesia. Using dynamic panel and applying Generalized Method of Moments (GMM) estimator, the result concluded that there is a significant positive relationship between income inequality and economic growth. However, this study cannot draw a definite conclusion about the association for the different classes (bottom, middle, and top level) since only one-step system GMM is significant. Based on the result, it implies that the government should be more careful in regulating the inequality policy and understand more about the right mechanism of inequality and economy growth.

DOI: 10.15408/sjie.v7i2.6177


inequality; economy growth; generalized method of moments

Full Text:



Alesina, A., & Perotti, R. (1996). Income Distribution, Political Instability, and Investment. European Economic Review. Vol. 40(6): 1203- 1228. doi:

Alesina, A., & Rodrik, D. (1994). Distributive Politics and Economic Growth. The Quarterly Journal of Economics. Vol. 109(2): 465-90. doi:

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies. Vol. 58(2): 277-297. doi:

Arellano, M., & Bover, O. (1995). Another Look at the Istrumental Variable Estimation of Error-Components Models. Journal of Econometrics. Vol. 68(1): 29-51. doi: http://

Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of Economic Growth. Vol. 5(1): 5-32. doi:

Benjamin, D., Brandt, L., & Giles, J. (2006). Inequality and Growth in Rural China:Does Higher Inequality Impede Growth?. Discussion Paper Series IZA DP No. 2344. Bonn: Institute for the Study of Labor. Retrieved from

Blundell, R., & Bond, S. (1998). Initial Conditions and Moment Restrictions in Dynamic Panel data Models. Journal of Econometrics. Vol. 87(1): 115-143.

Bond, S. R., Hoeffier, A., & Temple, J. (2001). GMM Estimation of Empirical Growth Models. Centre for Economic Policy Research. Discussion Paper Series No. 3048. London: Centre fro Economic Policy Research. Retrieved from

Caselli, F., Esquivel, G., & Lefort, F. (1996). Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics. Journal of Economic Growth. Vol. 1: 363-389.

Clarke, G. R. (1995). More Evidence on Income Distribution and Growth. Journal of Development Economics. Vol. 47: 403-27.

Castello-Climent, Amparo. (2010). Inequality and Growth in Advanced Economies: an Empirical Investigation, The Journal of Economic Inequality. Vol. 8(3): 293-321.

Dominics, L. D., Florax, R. J., & Groot, H. L. (2008). A Meta-Analysis on the Relationship between Income Inequality and Economic Growth. Scotish Journal of Political Economy. Vol. 55(5): 654-682.

Forbes, K. J. (2000). A Reassesment of the Relationship Between Inequality and Growth. American Economic Review. Vol. 90(4): 869-887. doi:

Li, H., & Zou, H. (1998). Income Inequality is not Harmful for Growth:Theory and Evidence. Review of Development Economics. Vol. 2(3): 318-334. doi:

Nahum, R. (2005). Income Inequality and Growth: A Panel Study of Swedish Countries 1960-2000. Working Paper Series 2005: 8. Uppsala University, Department of Economics.

Neves, P. C., Afonso, O., & Silva, S. T. (2016). A Meta-Analytic Reassessment of The Effects of Inequality on Growth. World Development. Vol. 78: 386-400.

Panizza, U. (2002). Income Inequality and Economic Growth: Evidence from American Data. Journal of Economic Growth. Vol. 7(1): 25-41.

Partridge, M. D. (1997). Is Inequality Harmful for Growth? The American Economic Review. Vol. 87: 1019-1032.

Perotti, R. (1996). Growth, Income Distribution, and Democracy: What data Say. Journal of Economic Growth. Vol. 1(2): 149-187. doi:

Persson, T., & Tabellini, G. (1994). Is Inequality Harmful for Growth? The American Economic Review. Vol. 84: 600-621.

Roodman, D. (2009). How to Do xtabond2: An Introduction to Difference and System GMM in Stata. The Stata Journal. Vol. 9: 86-136.

Setiyowati, T. W. (2013). Inequality, the Middle Class and Economic Growth in Indonesia: Evidence from cross Province Analysis. (Unpublished Thesis). Netherlands: Erasmus University.

Voitchovsky, S. (2005). Does the Profile of Income Inequality Matter for Economic Growth? Distingushing Betwwen the Effects of Inequality in Different Parts of the Income Distribution. Journal of Economic Growth. Vol. 10(3): 273-296. doi:



  • There are currently no refbacks.

View My Stats