Water supply, Road Infrastructure and Economic Growth in Indonesia

This paper examines the impact of water supply infrastructure which is considered as public utilities and road infrastructure which considered as public works on economic growth in Indonesia. In this paper, I use balance panel data including 26 provinces from year 2000 to 2009. Using physical infrastructure as independent variable, the result provide clear evidence that water supply and road infrastructure are significant and positively impact on growth. The implementation of decentralization system in 2001 also shows positive result, which means that growth is higher after decentralization implemented. In this paper, I also look at the impact of these two infrastructure based on government quality, fiscal capacity and geographic condition. Considering for government quality, the result shows that high quality of government shows higher impact of these two infrastructures on growth. When considering for the fiscal capacity, this research found that higher fiscal capacity associated with higher impact of water supply infrastructure on growth. While, for road infrastructure, even though shows positive and significant impact in all level of fiscal capacity, the elasticity of road infrastructure are higher in medium and low fiscal capacity province than in high fiscal capacity provinces. Dividing province into 5 big regions based on geographic condition, it shows that the impacts of infrastructure are different across regions. Water supply sector shows significant impact only in region Java-Bali, Kalimantan and NTB, NTT, Maluku, Papua while it is not significant in region Sumatera and Sulawesi. Road infrastructure is positively and significantly impact on growth in all provinces. The highest road infrastructure impact is in Kalimantan and NTB, NTT, Maluku and Papua. Relevance to Development Studies Infrastructure is considered as an engine of growth. Studies on the impact of infrastructure on economic growth are important to see the relationship between infrastructures and economic growth. Unlike the previous studies in Indonesia, this paper adds another additional factor that affects growth, which is government quality, fiscal capacity and geographic condition. Informative studies on the impact of infrastructure on economic growth are important for infrastructure development in order to achieve higher economic growth.