Impact of Infrastructure and Industrial Agglomeration on Regional Economic Growth in Indonesia

Abstract

In general, the Indonesia’s economic growth is significantly improved recently but the increase rate is different in each region which entitles to high regional disparity. One of the reasons why it occurs is because of the difference of infrastructure development in every region. Beside, the centralization of the economic activities tends to cause this issue. This study intends to analyze the effect of infrastructure development and industrial agglomeration to the regional economic growth in Indonesia. Based on productivity function of Cobb-Douglas model, the fixed effect model is used as data panel method which includes a range of data from 26 provinces in 1991-2007. The estimation in this study ensues to the influence of labor, investment, human capital, physical infrastructures (electricity and roads), industrial agglomeration, and economic crisis in 1997, while water infrastructure is not significant. Due to the estimation data result, the characteristic of production activity in Indonesia is labor-based with the labor elasticity rate of 0,27 higher than investment elasticity which is 0,10. Human capital variable holds the biggest effect with 0,34 score. Physical infrastructure (electricity and roads) is significantly influential with electricity elasticity indicates 0,33 score, higher than roads elasticity score of 0,13. In addition to this, industrial agglomeration contributes positive effect on economic growth which is indicated by 0,04 elasticity score. On the other hand, the negative coefficient score as a result of economic crisis in 1997 obstructs the economic growth. To sum up, variables which deliver positive influence for regional economic growth in Indonesia are human capital, electricity, roads, and industrial agglomeration. Furthermore, distribution of infrastructure development, education, and centralization of the economy activity should be applied in order to reduce regional disparity.