Airport Establishment and Local Economic Development in Indonesia

Abstraksi

The number of airports in Indonesia has been dramatically increased since the country undergoes decentralization policy in 2001. Our data record that the number of airports in 2018 is almost twofold increased compared to a decade ago. The paper exploits this large and swift changes in the number of domestic and international airports as an exogenous shock to identify the link between an airport and local economic development. Using data for 497 districts level government (Kabupaten/Kota) in Indonesia over 2000-2014, we apply the panel Difference-in-Differences (DiD) approach with Fixed Effect to establish a counterfactual analysis on the effect of the airport establishment on economic growth, unemployment and poverty, by setting up the districts that were having a new airport in period after 2001 as the treatment group and the other districts that were not as the control group. We find that an airport establishment increases district economic growth by 11%-23%, and reduce district poverty rate by 2%-5% within one to ten years after the airport operate. However, we only find a very weak evidence that airport establishment reduces unemployment. Overall, our finding suggests that an airport establishment could potentially be used as an economic development tool at the local level.