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Decentralization and Spatial Allocation Policy of Public Investment in Indonesia and Japan

  • Mitsuhiko Kataoka


    (Department of Economics, Chiba Keizai University, Chiba, Japan)

  • Kodrat Wibowo


    (Department of Economics, Padjadjaran University)

Public investment is a fundamental response of government to the existing imbalances between subnational regions. Especially, the question concerning the allocation policy of public investment more receives a great deal of public attentions along with the decentralization process, because economic growth is inevitably uneven in its subnational impacts and decentralization has effects on the change in the allocations across the subnational governments and regions. This study explores the public investment allocation policy that either emphasizes efficiency, equity, or redistribution or strives to strike a balance between these three policy directions under the trade-off restrictions. We employ a new benchmark index, “equity–growth allocation share,” defining regional public investment allocation, given equal public capital growth across regions. We apply this method to Indonesia’s and Japan’s pre- and post-decentralization eras, beset by efficiency–equity trade-offs between uneven regional development and balanced growth policy. We found two major observations that contrast between two countries. First, as excessive economic activity regions in two countries, the capital region in Japan mostly shows the highest returns on public capital where the Java-Bali region does not. Second, Indonesia shows a structural change investment concentration in the Java-Bali region before and after decartelization regime while the Japan’s government pursues the pro-efficiency allocation policy under the decentralization process.

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Paper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 201403.

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Length: 13 pages
Date of creation: Feb 2014
Date of revision: Feb 2014
Handle: RePEc:unp:wpaper:201403
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  1. Fumitoshi Mizutani & Tomoyasu Tanaka, 2010. "Productivity effects and determinants of public infrastructure investment," The Annals of Regional Science, Springer, vol. 44(3), pages 493-521, June.
  2. Djoni Hartono & Tony Irawan, 2008. "Decentralization Policy and Equality: A Theil Analysis of Indonesian Income Inequality," Working Papers in Economics and Development Studies (WoPEDS) 200810, Department of Economics, Padjadjaran University, revised Oct 2008.
  3. de la Fuente, Angel, 2004. "Second-best redistribution through public investment: a characterization, an empirical test and an application to the case of Spain," Regional Science and Urban Economics, Elsevier, vol. 34(5), pages 489-503, September.
  4. Kodrat Wibowo, 2005. "Basic Strategies For The Role Of Indonesian Central-local Government In Poverty Alleviation Programs," Working Papers in Economics and Development Studies (WoPEDS) 200503, Department of Economics, Padjadjaran University, revised Apr 2005.
  5. Sayuri Shirai, 2005. "The Impact of Intergovernmental Transfers in the Japanese Local Government Fiscal System," Asian Economic Papers, MIT Press, vol. 4(2), pages 26-58.
  6. Motohiro Sato, 2002. "Intergovernmental Transfers, Governance Structure and Fiscal Decentralization," The Japanese Economic Review, Japanese Economic Association, vol. 53(1), pages 55-76.
  7. Takahiro Akita, 2002. "Regional Income Inequality In Indonesia And The Initial Impact Of The Economic Crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 38(2), pages 201-222.
  8. Hill,Hal, 2000. "The Indonesian Economy," Cambridge Books, Cambridge University Press, number 9780521663670.
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