Reducing disparity through a regions-focused development: A modeling approach of assessing the Indonesian MP3EI

For the last 10 years, Indonesian economy suffers from a triple setback. First, it experiences a slowing-down in economic growth. Second, the rate of poverty reduction is also slowed down, and third, there has been no improvement in the inter-regional economic disparity. In 2011, Indonesian government set a new strategy by launching a master plan for the acceleration and expansion of economic development (MP3EI) in response to these challenges. The strategy divides Indonesia into 6 economic corridors with two aims: (1) to accelerate investment in each corridor focusing on sectors with high comparative advantage; (2) to accelerate infrastructure investment in each corridor. Using a multi-sectors and multi-regions computable general equilibrium model of the Indonesian economy, this paper evaluates the extent to which these strategies can reduce Indonesia's inter-regional disparity. The result of the analysis suggests that the direction of the MP3EI strategy is in line with its mission to reduce regional disparity as it can accelerate the growth of regions outside Java and Sumatera, particularly eastern regions (Maluku and Papua). However, it can be made more progressive by broadening the sectoral base of the investment target. The current strategy relies on sectors with high comparative advantage particularly capital-intensive resource-based sectors. A broad-based sectoral approach can generate more employment particularly in the least-developed regions and ensuring more progressive acceleration in the poverty reduction.