Urbanization for Everyone: Benefits of Urbanization in Indonesia’s Rural Regions

Abstract

The motivation for this paper is to understand the value of urban agglomeration to rural economies in Indonesia. It has recently been argued that Indonesia has not leveraged urbanization for economic growth as effectively as peer countries such as China, India, Vietnam, and Thailand. This analysis is deepened by looking at within-country differences in the relationship between the growth of cities and the concomitant growth in rural economies located in proximity to these cities. Three sets of models are developed that examine growth over three relatively homogenous 4-year time periods. These are 1996–1999, the years roughly corresponding to the Asian financial crisis; 2001–2004, the years during which Indonesia recovered from the financial crisis, and also the first years of decentralized governance in the country; and 2004–2007, during which the country had regained precrisis gross domestic product (GDP) levels. Recognizing the strong possibility of feedback relationships between key variables, the final models treat economic growth as being jointly determined with population growth, human capital accumulation, and infrastructure legacy. The findings suggest that some of the most effective policy responses for increasing rural incomes could be seen in the increase of accessibility for rural areas to major metropolitan centers.