An Analysis of Post-Reform Income Inequality in Indonesia: Does Institutional Quality Matter?

Abstract

Post-reform, Indonesia faces persistent income inequality despite efforts to achieve inclusive growth. This study examines the impact of Foreign Direct Investment (FDI), manufacturing industrialization (IM), and democracy index (DI) on income inequality in Indonesia from 2003 to 2022, considering institutional quality (IQ) as a moderating variable. Using time-series data and moderated regression analysis (MRA), the findings reveal that FDI does not significantly affect income inequality, while IM reduces it. Conversely, DI exacerbates inequality, reflecting elite capture and unequal policy benefits. Notably, IQ positively influences inequality directly but fails to moderate the effects of FDI, IM, and DI, suggesting limited institutional efficacy. These results challenge prior assumptions that institutional quality consistently mitigates inequality, emphasizing the need for regionally tailored and inclusive policies. This study contributes to understanding structural determinants of inequality and offers policy recommendations for improving governance and institutional performance to promote equitable development in Indonesia.