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When Regional Policies Fail An Evaluation of Indonesia's Integrated Economic Development Zones

Author

Listed:
  • Alexander D. Rothenberg
  • Samuel Bazzi
  • Shanthi Nataraj
  • Amalavoyal V. Chari

Abstract

Throughout the developing world, many countries have created special economic zones to attract investment and spur industrial growth. In some cases, these zones are designed to promote development in poorer regions with limited market access and lower quality infrastructure, an example of a "big push" development strategy. In this paper, we study the effects of Indonesia's Integrated Economic Development Zone (KAPET) program. This program provided substantial tax-breaks for firms that locate in certain districts in the Outer Islands of Indonesia, a country with large regional differences in per-capita income and a history of policies to promote inclusive growth. We find that along many dimensions, KAPET districts experienced no better development outcomes, and in some cases fared even worse, than their non-treated counterparts. If anything, the strongest finding is that firms in KAPET districts paid lower taxes, but these tax reductions neither encouraged greater firm entry, increased migration, nor raised local measures of output or welfare. Overall, the KAPET program does not appear to have achieved the intended outcome of promoting growth in lagging regions. While there are many possible reasons that the KAPET program failed, our findings suggest caution in spending scarce resources to subsidize development in lagging regions.

Suggested Citation

  • Alexander D. Rothenberg & Samuel Bazzi & Shanthi Nataraj & Amalavoyal V. Chari, 2017. "When Regional Policies Fail An Evaluation of Indonesia's Integrated Economic Development Zones," Working Papers WR-1183, RAND Corporation.
    • Handle: RePEc:ran:wpaper:wr-1183
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    References listed on IDEAS

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    1. Cecília Hornok & Dewa Gede Sidan Raeskyesa, 2024. "Economic zones and local income inequality: Evidence from Indonesia," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 22(1), pages 69-100, March.
    2. Abagna, Matthew Amalitinga, 2023. "Special Economic Zones and Local Economic Activities in Ethiopia," MPRA Paper 117427, University Library of Munich, Germany.
    3. World Bank, 2018. "Indonesia Economic Quarterly, December 2018," World Bank Publications - Reports 30969, The World Bank Group.

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    More about this item

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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