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Decentralization and Spatial Allocation Policy of Public Investment in Indonesia and Japan

Mitsuhiko Kataoka and Kodrat Wibowo ()

No 201403, Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University

Abstract: Public investment is a fundamental response of government to the existing imbalances between subnational regions. Especially, the question concerning the allocation policy of public investment more receives a great deal of public attentions along with the decentralization process, because economic growth is inevitably uneven in its subnational impacts and decentralization has effects on the change in the allocations across the subnational governments and regions. This study explores the public investment allocation policy that either emphasizes efficiency, equity, or redistribution or strives to strike a balance between these three policy directions under the trade-off restrictions. We employ a new benchmark index, “equity–growth allocation share,” defining regional public investment allocation, given equal public capital growth across regions. We apply this method to Indonesia’s and Japan’s pre- and post-decentralization eras, beset by efficiency–equity trade-offs between uneven regional development and balanced growth policy. We found two major observations that contrast between two countries. First, as excessive economic activity regions in two countries, the capital region in Japan mostly shows the highest returns on public capital where the Java-Bali region does not. Second, Indonesia shows a structural change investment concentration in the Java-Bali region before and after decartelization regime while the Japan’s government pursues the pro-efficiency allocation policy under the decentralization process.

Keywords: Public investment; Decentralization; Efficiency–equity trade-off; Indonesia; Japan (search for similar items in EconPapers)
JEL-codes: N95 O23 R11 R53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe, nep-sea and nep-ure
Date: 2014-02, Revised 2014-02
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http://ceds.feb.unpad.ac.id/wopeds/201403.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:unp:wpaper:201403

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