The Role of Economic Globalization and Institutions on Regional Inequality in ASEAN Countries

1.       Introduction

ASEAN is one of the regions that has succeeded in achieving the fastest economic growth in the world, with an average economic growth of 4.94 percent from 2014-2019. ASEAN, which consists of ten member countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) is also one of the most successful regional organizations in the world (Hew, 2006). ASEAN which is dominated by developing countries has the potential to become a developed region(Tonby et al., 2014), there are at least five factors that influence ASEAN to become a developed region, the five factors are economic strength where ASEAN countries which are emerging markets country has a large GDP and an increasingly productive workforce. Second, ASEAN has a diverse society, so it is not a monolithic or homogeneous market. Third, ASEAN has a huge market potential with a population of 661 million people in 2019. Fourth, it is geographically in a strategic location which is one of the world's largest economic and trade routes. Fifth, the investment value is very large and tends to increase.

Although ASEAN has great potential to become a developed region, each country has different roles and advantages, both competitive and comparative advantages. Behind the potential of ASEAN which has considerable economic strength, this cannot be separated from the problems faced by ASEAN countries. The main problems that occur in ASEAN are regional inequality, income inequality, human resources, institutions, infrastructure, and the unequal regional distribution mechanism (Chia, 2014).

Regional inequality is an important issue for ASEAN because it is related to one of ASEAN's goals, namely reducing regional disparities (Bangkok Declaration, 1967). The issue of regional inequality is a problem that occurs globally. Economic inequality is a major problem that occurs in a country, both in developed and developing countries, including those that occur in ASEAN countries. Regional inequality has always been a hotly debated issue because it is related to various aspects such as its relation to Education and Health (Zhang & Kanbur, 2009), industrial location, and regional inequality (Lall & Chakravorty, 2005) and regional inequality related to human capital and economic growth (Fleisher et al., 2010).

Regional inequality in ASEAN cannot be avoided as one of the negative impacts of massive economic integration in ASEAN. Economic integration has caused economic activity to become very open by narrowing economic barriers between countries in an economic area such as ASEAN. Economic integration has boosted trade efficiency, increased purchasing power, expanded the labor market, and facilitated investment flows and technology exchange. On the other hand, economic integration or economic globalization has a negative impact, which results in reduced government control because economic activity is more determined by market forces, thus exacerbating regional inequality.

Economic globalization is the process of integrating a country's economy into a larger economic system, both regionally and globally(Fakih, 2002). The form of economic globalization can be seen in the increasing openness of a country's economy to international economic activities so that economic globalization will lead to economic relations between countries that influence each other. The process of globalization tends to be driven more by global market forces so individual government control is fading. International trade activities will affect the economic growth of a country, because all countries compete in the international market (Todaro & Smith, 2006)

Economic globalization has a role in influencing regional inequality because it is one of the exogenous factors (Sjafrizal, 2012). This study is focused on analyzing the impact of economic globalization on regional inequality, especially in ASEAN. Empirically economic globalization and regional inequality have been investigated by (Ezcurra & del Villar, 2021; Ezcurra & Rodríguez-Pose, 2013; Lee et al., 2019). This study also focused on analyzing the role of institutions in regional inequality that had previously been investigated (Jong-Sung & Khagram, 2005; Kuncoro & Murbarani, 2016; Muštra & Škrabić, 2014; Syadullah et al., 2019). This article does not forget to include control variables from other economic aspects, namely education, investment, and per capita income as investigated by (Lessmann, 2013; Xu et al., 2021).

2.       Literature

2.1 Economic Globalization and Regional Inequality

Since the late 1980s, globalization has become an important dimension of our daily lives. Regions have become more interconnected than ever before and global powers have become influential in national and regional development. Technology has played a more important role in economic development. Globalization, technological developments, and social change have inspired new thinking about regional development and inequality. The widely observed increase in inequality since the recent Global Financial Crisis has sparked renewed debate and widespread concern about inequality (Piketty & Saez, 2014; Stiglitz, 2012).

Research on regional inequality has been heavily influenced by economic development, development studies, and economic geography. The concept of development has been broadened to include income distribution, human development, quality of life, happiness, and increasingly sustainable development.

The globalization of economic activity has emerged as an important trend in the world economy. Several structural and technological forces have facilitated the globalization of production. The theory of industrial organization or market imperfection has attempted to explain the globalization of capital through technology, organizational structure, transaction costs, market power, and the rate of profit (Kojima, 1982). The company's relocation abroad is also facilitated by two technical conditions: the development of transportation and communications that reduce moving costs and increase travel efficiency, and changes in production technology and organization that make it possible to decipher complex production processes and perform with minimum labor skills.

The impact of globalization and global (external) forces on regional inequality is an important topic in the development literature. However, regions within countries face most of the challenges in adjusting to the new, increasingly dynamic world order. Some economists have observed trends in income convergence across countries(Sala-i-Martin & Barro, 1995) and have speculated on the convergence and homogenization of the world and the emergence of "global villages". Economists have also discussed the localization of global capital and the importance of local institutions and attributes in regional development(Amin & Thrift, 1995). Borders still affect regional inequality dynamics.

Research on global powers and regional development has mostly focused on foreign direct investment (FDI) and multinational corporations (MNEs) or transnational corporations (TNCs), although other factors such as international trade, financial institutions, and technological change are also considered. Multinational corporations have progressed through three stages of development (Malecki, 1991) extracting natural resources and primary products from developing countries, secondly the expansion of markets among large countries, and thirdly, recently, production moving overseas to other countries. Developing countries, often called the globalization of production, are accompanied by the globalization of finance, trade, and services and the formation of transnational enterprises and global production networks. A large amount of FDI has been found in the newly industrialized countries of Asia, especially China.

The penetration of global power and the globalization of production tends to lead to an increase in urban primacy and regional inequality in developing countries(Kasarda & Crenshaw, 1991). FDI tends to be located in large cities and core regions in developing countries, as these places have advantages in infrastructure, labor, and access to markets and political power, as evidenced by the concentration of FDI in coastal China (Huang & Wei, 2016). Transnational companies often have links to local economies, form their local production networks, and are referred to by some as pseudo-embeddedness (Wei et al., 2009). The spatial concentration of foreign capital tends to lead to a polarized urbanization process and strengthens the advantages of urban areas and regional inequality (Li & Wei, 2010). World cities or global cities have also emerged as major centers for the distribution and accumulation of international capital (Friedman & Schwartz, 1986). However, some economists argue that foreign investment has a little causal effect on regional inequality (Fuchs et al., 1987; Knox et al., 2014), largely due to state intervention and the spread of manufacturing investment in peripheral regions.

The literature is limited on the impact of other dimensions of globalization such as foreign trade and the diffusion of innovation on regional inequality. Foreign trade tends to benefit cities and regions with location and comparative advantages, such as port cities and coastal areas. However, some argue that, over time, the gap tends to decrease with the relocation of capital and industry to the periphery (Kim, 2008).

2.2 Institutional and Regional Inequality

Next is the relationship between the quality of government, the ability of local governments to control corruption, and regional inequality. Regarding the relationship between regional inequality and institutions, (Kyriacou et al., 2015) argue that regional inequality is of which is caused by the quality of government policies which ultimately leads to a decline in public trust. (Kyriacou et al., 2015) provide empirical evidence showing that regional inequality can lead to conflicts in the redistribution of resources, so policy improvements are needed as an effort to improve the quality of public policies and control corruption. Improving the quality of government policies can reduce income inequality.

Other literature also shows that the quality of government can affect positive changes in regional inequality. (Ezcurra & Rodríguez-Pose, 2013)argue that effective local development strategies and sound public policies can naturally attract foreign direct investment (FDI).

In another study, (Kyriacou et al., 2015) considered the direct impact of the quality of government policies on regional inequality. They found that better governance tends to directly reduce regional inequality, while (Ezcurra & Rodríguez-Pose, 2013) defines the quality of government policies can be seen from the press freedom index as an exogenous factor that shows a negative correlation to regional inequality. In contrast Ezcurra and Kyriacou, (Muštra & Škrabić, 2014) emphasize the role of institutions in reducing regional inequality, their approach is to look at the correlation between corruption, and the quality of government policy as exogenous factors that influence regional inequality.

3.       Method

The object of research leads to the main focus of the research following the problems formulated. The object that is the focus of this research is formulated based on an empirical literature review so that the object of research consists of Regional Inequality as an affected variable, Economic Globalization, Corruption Perception Index, and Policy Quality as influencing variables, as well as Foreign Investment, Per capita Income, and Education as a control variable.

While the research subject leads to the locus which is the limitation of the study. This study tries to analyze economic globalization and regional inequality in ASEAN, officially ASEAN consists of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. However, about the object of research, especially regional inequality as measured by theil index, it cannot be done for countries that do not have subnational, namely Singapore and Brunei Darussalam, so the subject in this study, namely ASEAN, is limited to 8 countries, namely Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand, and Vietnam with the period used is 2012-2019.

Data on research objects and subjects were collected from secondary sources, namely data obtained from various data-providing institutions. For regional inequality data, the processing is carried out to produce theil index concerning the formula below.

Where T is theil index where the larger the value indicates the wider the level of regional inequality, y is GDP per capita, p is the population and u is the accumulation of GDP. Data on Policy Quality, GDP Per capita, Foreign Investment, and Education are sourced from the World Bank. Meanwhile, Corruption (Corruption Perception Index) was sourced from Transparency International, while Economic Globalization data, namely, KOF Index sourced from ETH Zurich. To identify the influence of economic and institutional globalization on regional inequality, the study will use panel data analysis consisting of 8 ASEAN countries as a cross-section and the period 2012-2019 as a time series.

Table 1: Description Variable

The model in this study refers to the model developed by Ezcura & Pose (2013), Ezcurra & Villar (2021) which modified the control variable adjustments by referring to Lessmann (2013), Jong-Sung & Khagram (2005), Kuncoro & Murbarani (2016), Pose (2012), Lee et al. (2019), Mustra (2014) and Cheong & Wu (2013). So that the specifications of the model that are estimated and formulated in this study are as follows: 

4.       Result And Discussion

The purpose of this study is to analyze the role of economic and institutional globalization in overcoming the problem of inequality in ASEAN. The estimation results in this study are based on the previously formulated model. The estimation results are described in Table 2.

Table 2: Estimation Result

In analyzing panel data, we must choose the right method whether to use common effects, fixed effects, and random effects. The three models must be selected one model that fits certain criteria by performing several testing steps. The first is the Chow test which must be done to choose whether the suitable model to use is the fixed effect or common effect. After the Chow, the test has been carried out and the results have been selected for a fixed effect model, then it must be continued with the Hausman test to determine whether the best model that can be used in this study is fixed effect or random effect. Based on the results of the Chow test and Hausman test, the method chosen for model 1 in this study is a fixed effect model, while model 2 uses a random effect model.

Table 3: Chow Test

Table 4: Hausman Test

Countries that have a medium level of economic globalization such as ASEAN tend to have a wide level of regional inequality. Economic globalization in ASEAN has become increasingly open due to increased regional economic integration through the ASEAN economic community and increased trade and investment cooperation with ASEAN's main partners. Increased activity of economic globalization in ASEAN has proven to have positive benefits for each member country so that economic stability tends to be maintained, and the trend of foreign investment is increasing and increasing exports and imports. On the other hand, economic globalization in addition to providing aggregate benefits to the economies of each ASEAN country also gives rise to the emergence of losing and winning regions within each country. The winning regions can take advantage of the increasingly open economic globalization because they are supported by infrastructure, resources, and their competitive and comparative advantages. Meanwhile, the losing regions tend to have stagnant income because they are unable to take advantage of economic globalization activities due to certain limitations. This is what causes the increasingly open economic globalization that supports the occurrence of wider regional inequality so that in this case the increase in economic globalization in ASEAN has not been able to create an equitable distribution of economic development in each country. The findings in this study are in line with previous research conducted by (Ezcurra & del Villar, 2021; Ezcurra & Rodríguez-Pose, 2013; Lee et al., 2019; Xu et al., 2021) which confirmed that increasing economic globalization has contributed to the exacerbated regional disparities.

Corruption is a major problem for developing countries, including ASEAN countries, which is indicated by the value of the corruption perception index in almost all countries in the subject of this study, the value is less than 50 which indicates that ASEAN countries are classified as developing countries that tend to be corrupt. The practice of corruption in ASEAN countries has different characteristics following the pattern and system of government used. This study found interesting things about the ASEAN case, ideally an increase in the corruption perception index which indicates a lower level of corruption should be able to cause a decrease in inequality or have a negative correlation as research conducted by Mustra who conducts research in Europe as a developed country. However, this study found different results, the corruption perception index has a positive relationship with regional inequality, this finding is in line with (Keneck-Massil et al., 2021) which analyzes the role of corruption on inequality in developed and developing countries. Kenefick explained that a low level of corruption can significantly increase inequality in developing countries due to unequal political power, as we know that ASEAN countries have different characteristics from developed countries such as Cambodia and Myanmar which tend to be authoritarian. Laos and Vietnam tend to be socialist, Indonesia and the Philippines are more democratic, and Thailand and Malaysia with a monarchical system. Besides Kenneck, a similar pattern was also found in research conducted (Iskandar, 2018) which explains the positive relationship between the corruption perception index and inequality in Indonesia.

Regional inequality is caused by the interaction between regions and market mechanisms. But from an institutional perspective, the government also has an intervention role by strengthening the quality of policies to reduce regional inequality so that it does not widen. Strengthening the quality of policies is very important to do in ASEAN to realize ASEAN's goals, especially to create equality or reduce inequality. The findings in this study are in line with (Kyriacou et al., 2015) who consider the direct impact of the quality of government policies on regional inequality and explain that better governance tends to reduce regional inequality directly, while Ezcurra and (Ezcurra & Rodríguez-Pose, 2013) defines that the quality of government policy can be seen from the index of press freedom as an exogenous factor that shows a negative correlation for regional inequality. In contrast Ezcurra and Kyriacou, (Muštra & krabić, 2014) emphasize the role of institutions in reducing regional inequality.

Per capita income in ASEAN countries has an increasing trend during the 2012-2019 research year. The increase in per capita income is one indication of an increase in community welfare and the achievement of development goals, as we know that the goal of development is ultimately to create an increase in people's welfare (people prosperity) and an increase in regional welfare (spatial prosperity). The negative relationship between per capita income and regional inequality in this study is in line with the findings (Lee et al., 2019), but has differences with (Ezcurra & Rodríguez-Pose, 2013; Kuncoro & Murbarani, 2016; Lessmann, 2013; Rodríguez-Pose, 2012), but if it is related to the conditions of ASEAN, these findings are more relevant and in line with ASEAN's goal number 1, namely accelerating economic growth, social progress, and cultural development in the region through joint efforts in the spirit of equality and partnership to strengthen the foundation for the community of nations. a prosperous and peaceful Southeast Asian nation.

Foreign investors in this study, especially in model 1, have not shown a significant effect on regional inequality. The assumption used is that such as economic globalization, foreign investment is also very closely related to the direction and system of government of each country which is different, such as Cambodia, Myanmar, Laos, and Vietnam which tend to have a socialist style, even though until now there has been the implementation of foreign policies that better, also has a different character from Indonesia, Thailand, and Malaysia which tend to be more aggressive in capturing foreign investment opportunities.

Inequality is indeed an important issue for ASEAN as an unavoidable impact of the development process. The problem is how to reduce regional inequality so that it is not too wide so that economic development can be more evenly distributed in each region in each ASEAN country. The solution to be able to reduce regional inequality can be through strengthening the quality of policies, equitable distribution of infrastructure, and others, but no less important is through education. An increase in education spending will encourage an increase in the quality of human resources and improve technology, so that in the long term if in terms of education there has been equity, it will encourage equitable distribution of income and reduce inequality, both individual inequality, and regional inequality.

5.       Conclusion

Economic globalization has a positive influence on regional inequality in ASEAN, this finding is in line with the hypothesis and previous research where economic globalization on the one hand has considerable benefits for increasing the integration of member countries, resulting in accelerated economic growth, and increased import-export activities and increased foreign investment. This study found that the corruption perception index has a positive relationship with regional inequality. This is happening in ASEAN because it is motivated by differences in political power and the system of government applied in each ASEAN country. Foreign investment in this study does not have a significant effect on regional inequality in ASEAN. This indicates that foreign investment has not played a major role in overcoming the problem of regional inequality. The income per capita in this study has a negative relationship with regional inequality in ASEAN. Policy quality has a positive effect on regional inequality in ASEAN countries. Improved policy quality can encourage income distribution in the ASEAN region. Government spending on education has a negative relationship with regional inequality in ASEAN countries. An increase in education spending will encourage an increase in the quality of human resources and improve technology, it is expected to encourage equitable distribution of income and reduce regional inequality. From the findings in this study, it is hoped that the governments of ASEAN countries can improve the quality of policies, which encourage an increase in per capita income and equal distribution of education to reduce regional inequality. For further research, it is possible to develop a more comprehensive research model so that it can complete the discussion on this topic which is still rarely done. For example, by entering variables from regional characteristics, re-examining the relationship between corruption and its influence on inequality, or grouping research subjects based on categories of low, middle, and high-income countries.

Author Contributions: All authors contributed to this research.

Funding: Not applicable.

Conflict of Interest: The authors declare no conflict of interest.

Informed Consent Statement/Ethics Approval: Not applicable.

Declaration of Generative AI and AI-assisted Technologies: This study has not used any generative AI tools or technologies in the preparation of this manuscript.