Development in Indonesia is characterised by the disparity among regions in which the eastern part of Indonesia lags far behind the western part. Since the implementation of the decentralisation system in the 2000s, Indonesia has achieved sustained growth and poverty reduction. However, such a development achievement has not had a significantly positive impact on equality in Indonesia. This study sets out to describe the source of disparity among regions in Indonesia as well as to identify several policy alternatives to reduce the disparity. A review of the literature shows the disparity in regional development in Indonesia to be a crucial problem. The development of economic and social infrastructure by provinces shows a huge gap between Java Island and the eastern part of Indonesia. Therefore the development of the eastern part of Indonesia should be focused on improving the main primary sectors, improving the quality of human resources and infrastructural development, which can be realised with funds from the budget allocation from the central government.
Using an Inter Regional Computable General Equilibrium model developed by Resosudarmo et al. (2009a), this study analyses the impact of several policy alternatives including fiscal transfer allocation on Eastern Indonesia. The analysis captures the impacts of the policies on key macroeconomic indicators such as economic growth, poverty and income distribution. The results show that all the policy scenarios have significant effects on economic growth and poverty but have a negligible effect on income distribution. The results suggest that compared to infrastructure development, investment in human quality improvement and the main primary sectors can be more effective in helping Eastern Indonesia to catch up with the other regions.