Abstract
Under market-oriented factor mobility, capital and labor relocate to regions offering higher returns. In consequence, the more factor inputs go to subnational regions with higher productivities, the greater the increase in national output. Interregional factor mobility reflects the output growth of a region and, in turn, a nation. However, in Indonesia, the extent to which interregional factor mobility has been efficiently distributed has been only infrequently examined because of constraints on provincial capital data.
Using the provincial capital estimates from Kataoka [10], the present study examined efficiency in interregional resource allocation by observing actual and optimal levels of factor inputs and outputs for 1986-2007 in Indonesia. To achieve this objective, we employed two empirical results: panel data analysis in the province-level production functions and computation of welfare-maximizing interprovincial input allocation. Given these empirical results, several instances of uneven factor-input distribution such as capital overconcentration in the Java−Bali region, different dispositions in capital distribution among resource-rich provinces, labor surplus in the remote agriculture-dominated off-Java provinces, and labor surplus in Jakarta's commuting province of West Java were found. More interestingly, a structural shift from a pro-efficiency interprovincial allocation before the year 2002 to a pro-equity allocation afterwards was observed.
JEL Classification: O18, O47, R11, R12
