The Role of Infrastructure in Indonesia’s Economic Growth

Abstract

This study examines the relationship of public capital, especially infrastructure to economic growth in Indonesia. This study uses a growth model derived from aggregate production functions and the generalized method of moment (GMM) estimation techniques to estimate public infrastructure capital as explanatory power in the growth model. This research innovates from previous research on the relationship of infrastructure and economic growth at the regional level with disaggregation of types of infrastructure. Four types of infrastructure are estimated: roads, energy, water, and telecommunications. We use a panel of data from 34 provinces in Indonesia, during the 2011-2017 period. The results of this study provide general evidence water and telecommunication have a positive contribution to economic growth with different values. The negative and significant results are surprising for road infrastructure. This result is contrary to the expectations and many previous researchers but relevant to one study in China. A negative significant still means that infrastructure is good. This problem can be explained through the U-shaped infrastructure and growth investment relationship which gives a sign of crowding out the effect of private capital if the infrastructure investment is too dominant. The right strategy is needed to reduce inefficiency because too much infrastructure investment has the potential to reduce growth.