Economic zones and local income inequality: Evidence from Indonesia

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 eco-
nomic zones and within-province income inequality. We apply fixed-effects panel estima-
tion 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 syn-
thetic 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 dif-
ferences, 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.