When regional policies fail: An evaluation of Indonesia’s Integrated Economic Development Zones

Abstract

We study Indonesia’s Integrated Economic Development Zone (KAPET) program. Although firms in KAPET districts paid lower capital taxes, the program’s incentives neither stimulated entry nor increased output, and KAPET districts experienced similar development outcomes relative to non-treated districts. To investigate whether regional policies could be more optimally redesigned, we develop a quantitative spatial model where place-based capital tax cuts affect multiple sectors and impact a transfer system to finance local public goods. We find that capital incentives in KAPET areas would have been more welfare and growth enhancing if they had been accompanied by additional place-based improvements.