The Trans-Sumatra Toll Road and Economic Geography in Indonesia

Abstract

We develop and calibrate a quantitative spatial equilibrium model of Indonesia to analyze the potential impact of the Trans-Sumatra Toll Road project on the country's economy. The estimated aggregate welfare gains vary from 1.33 percent of the country's output if there is only trade in final goods to 3.59 percent if sectoral linkages and trade in intermediates are allowed, and they further increase to 4.15 percent if labor mobility is considered. About 86.5% of gains result from improved product market integration and 13.5% from easier worker migration. Finally, the welfare effect concentrates on Sumatra, whereas the overall national inequality declines.

Keywords: Transport infrastructure, Economic geography, Trade in intermediates, Migration, Indonesia

JEL Classification: R11, R13, F10