Balanced regional economic development in Indonesia: A multiregional econometric approach
Indonesia achieved high economic growth between 1974 and 1996 because of high oil prices and transformation policies. The policies made disparity in regional economic development wider. This study explores a way to mitigate the interregional economic disparity and to maximize national economic growth by considering the growth capability of regions. The analysis uses an econometrically based simulation of the effects of altering the distribution of public funds among regions. The regional model is a hybrid model that uses national variables, as in a top-down approach, and sums the regions' variables to get national variables, as in a bottom-up approach. Each regional model is linked through an interregional interaction index with other regional models. The regional model is an integrated regional supply and demand model, which correlates a supply production function with an aggregate demand. Supply and demand is equated with net exports. Other variables also included in the model are population, employment and net migration. The equations are analyzed using the pooled least squares method with simultaneous-equation estimation. The models are evaluated using mean absolute percent errors (MAPE). As many as 58% of all variables have MAPE statistics below 10%. Redistributions of government funds are simulated by redistributing from provinces with above average levels to those with below average levels. Several stages of redistributions are analyzed, going from 5 percent to 45 percent redistributions. The effects of the simulated redistribution on gross regional product and employment growth rates, multipliers and the interregional gini ratios are presented. On a whole, the national GDP increases for the redistributions less than 25 percent and then decreases for the greater levels of redistribution. The employment growth rates are stable over all redistribution stages. The gini ratios for GRP and per capita GRP are lowered as the redistribution increase. The model successfully lowers regional economic disparity without sacrifying economic growth.
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