Economic Openness and the Regional Output- Employment-Poverty Nexus in Indonesia: A Fixed-Effects IV Approach
Year: 2026
Type: preprint
Abstract: This study examines the relationship between economic openness and the regional output-employment-poverty nexus in Indonesia. Economic openness is theoretically expected to stimulate regional economic performance through market expansion, productivity growth, and technology diffusion. However, in geographically fragmented developing economies such as Indonesia, the benefits of openness may not be evenly distributed across regions due to disparities in infrastructure, labor-market conditions, and human development. Despite sustained national economic growth, regional disparities, unemployment, and poverty remain persistent, particularly outside Java and Bali. This study therefore aims to analyze the causal effects of economic openness on regional output, unemployment, and poverty within an integrated analytical framework. This study employs balanced provincial panel data covering 34 provinces in Indonesia from 2017 to 2024. The analysis applies a Fixed-Effects Instrumental Variable (FE-IV). The results indicate that trade openness significantly increases regional output and modestly reduces unemployment, but does not directly reduce poverty. Unemployment negatively affects regional output and significantly increases poverty, indicating that labor-market absorption constitutes the primary transmission channel linking economic growth and welfare. Human development significantly reduces both unemployment and poverty, while ICT development and government expenditure positively contribute to regional output. In contrast, FDI only exhibits a limited poverty-reducing effect. Furthermore, the COVID-19 shock significantly worsened unemployment and poverty. The findings suggest that openness policies should be complemented by employment-oriented industrial strategies, human capital development, productive public expenditure, and stronger local economic linkages to promote more inclusive regional development outcomes.
Source: Research Square
Institution: IPB University
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7204903791