DO INVESTMENT, GOVERNMENT SPENDING, EMPLOYMENT, AND DONATION MATTER FOR INCOME INEQUALITY REDUCTION IN ACEH, INDONESIA?

This study aims to empirically measure and analyze the impacts of investment, government spending, employment, and donation on income inequality in Aceh Province, Indonesia during 2010–2020. Considering Aceh as the only province in the country that has been granted to implement Islamic law and only permitted Islamic financial institutions to operate in the province, assessing the role of donation as an Islamic fiscal instrument apart from other macroeconomic variables in reducing income inequality is the main contribution of this study. Using annual secondary data for 23 provincial regencies/cities collected from the reports of the Central Statistical Bureau of Aceh (BPS – Statistics Indonesia) and analyzed using a dynamic panel regression model of the general method of moments (GMM), the study found that the growth of investment, government spending, labor, and donations has contributed significantly to reducing income inequality. Our findings confirmed the importance of donation as the Islamic fiscal tool for reducing income inequality apart from investment, labor force, and government spending. This empirical evidence could be used as a policy reference to ensure income equality among citizens. The government should make continuous efforts to promote investment, optimize the allocation of government spending for the lower middle-income group, create more new job opportunities, and boost donation collection to be distributed to the poor for productive economic activities.