Trade openness, poverty, and income inequality: Subnational evidence from Indonesia

Abstract

Purpose — This study examines the relationship between trade openness, poverty, and income inequality across 34 Indonesian provinces from 2015 to 2019, while accounting for differences in access to basic services, employment, port infrastructure, and regional income.

Method — The empirical analysis employs panel regression models using fixed effects, random effects, and Least Squares Dummy Variable specifications. Model selection is guided by the Hausman test. Poverty is measured using the poverty headcount, poverty gap, and poverty severity indices, while income inequality is measured using the Gini index.

Findings — Trade openness is positively associated with poverty incidence and income inequality. In the preferred random-effects specification, trade openness increases the poverty headcount with a coefficient of 0.897 (p < 0.10), while the preferred fixed-effects specification shows a positive effect on the Gini index with a coefficient of 0.0411 (p < 0.01). However, its effects on the poverty gap and poverty severity are not statistically significant. Higher regional income and greater access to several basic services are generally associated with lower poverty outcomes.

Implications — Trade expansion should be accompanied by inclusive policies that improve access to basic services, decent employment, and workforce skills. Strengthening these areas can help low-income households benefit more from economic openness while reducing the risks of higher poverty and income inequality.

Originality — This study contributes to the trade–poverty literature by examining multiple dimensions of poverty and income inequality within a provincial panel framework in Indonesia, providing evidence that the distributional effects of trade openness differ across welfare indicators.