The Impact of Investment-Driven Sectoral Productivity Change on Regional Economic Disparity in Indonesia

Abstract

The objectives of this study are to examine the impact of sectoral investment on microeconomic and macroeconomic performances and on regional disparity in Indonesia. Spatial inequality is an important issue in economic development and Indonesia still has very large regional income disparity. The sectoral investment has an important role in increasing productivity in order to encourage economic growth and equity. Investment allocation in Indonesia is still focused on the industrial sector and the Island of Java. Even though structural change in the Indonesian economy is happening, which is the shift from predominantly agricultural economy to one dominated by the industrial and services sectors, but most of the regions’ economies are still dominated by the agricultural sector and in general their incomes per capita are relatively low. The multiregional Computable General Equilibrium (CGE) top-down model is a comfortable method to analyze the objectives of this study. The main finding was that the priority of investment allocation into the agricultural, agro-industrial and infrastructural sectors (the implementation of the Agricultural Development Led-Industrialisation (ADLI) strategy supported by infrastructure construction) shows the best impact on increasing the sectoral output and growth and on decreasing regional disparity. This happens because infrastructural investment can generate productivity growth in all economic sectors and investment in agricultural sector shows the highest productivity growth compared to productivity growth in the other sectors. Therefore, increases in agricultural investment has a relatively strong impact upon regional disparity reduction and increases in infrastructural investment strongly encourages improvements in the sectoral and national output. But, the ADLI strategy supported by infrastructure construction has a weak impact on increasing the sectoral employment and on distributing equitable households income due to poor development in the agro-industrial sector.