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

47 Pages Posted: 24 Feb 2017

See all articles by Alexander D. Rothenberg

Alexander D. Rothenberg

Board of Governors of the Federal Reserve System

Samuel Bazzi

Boston University - Department of Economics

Shanthi Nataraj

RAND Corporation

A.V. Chari

University of Sussex - School of Business, Management and Economics

Date Written: January 2017

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.

JEL Classification: R12, R32, O14

Suggested Citation

Rothenberg, Alexander D. and Bazzi, Samuel and Nataraj, Shanthi and Chari, Amalavoyal, When Regional Policies Fail: An Evaluation of Indonesia's Integrated Economic Development Zones (January 2017). RAND Working Paper Series WR- 1183. Available at SSRN: https://ssrn.com/abstract=2922254 or http://dx.doi.org/10.2139/ssrn.2922254

Alexander D. Rothenberg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets NW
Washington, DC 20551
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Samuel Bazzi

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
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Shanthi Nataraj

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
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HOME PAGE: http://www.rand.org/

Amalavoyal Chari

University of Sussex - School of Business, Management and Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

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