The Regional Economics Applications Laboratory (REAL) is a cooperative venture between the University of Illinois and the Fede

This paper examines the nature of interregional competition and complementarity in Indonesia. The analysis is important for the island country given the heterogeneity of the regional economies and will provide insights into the structure of economic interactions that should prove useful for policy-makers considering alternative decentralization schemes. Covering the 1975-1999 period, the analysis provides a picture of the interregional interactions by focusing on derived linkages between the regional economies. The analysis is based on the application of the Dendrinos-Sonis model to six major regions in Indonesia. Characterized by a discrete socio-spatial dynamics, the model is empirically applied by making use of the log linear interaction function. The system of interregional interactions is modeled using the Seemingly Unrelated Regression (SUR) estimator. The quantitative analysis confirms the prevailing belief that regions within the western part of Indonesia complement each other, i.e., their relative share of income increasing simultaneously. In addition, there is also evidence that the western part is in competition with the eastern part Indonesia, i.e., the relative share of the former increases on the expense of the latter. The nature of the competition and complementarity that is revealed raises important issues for the development of appropriate policy initiatives designed to address problems of efficiency and equity in the distribution of national expenditures in the decades ahead.