Capital Fundamentalism, Structural Transformation and Welfare: Evidence from the 1990s Inpres Desa Tertinggal (Left-Behind Village) Program in Indonesia

Abstraksi

Structural transformation—the transfer of workers from low-productivity to high-productivity sectors or activities—is both a necessary and sufficient condition for economic development. The existing literature highlights factors which both expedite and impede the process of structural transformation, which include: labor regulation (Besley and Burgess 2004), not least in the case of Indonesia (Manning, 2014), migration policy (World Bank, 2012); and industrial Policy (Stiglitz, 1996), to name but a few. At the centre of many conceptualisations of transformational change is capital fundamentalism (Arthur Lewis, 1954; Harrod, 1939; 1948; Domar, 1946, 1947). To date however, no study examines the causal effect of a capital increase on structural transformation. To fill this gap, this paper uses a setting of the implementation of the 1990s ‘targeted’ poverty program in Indonesia, namely Inpres Desa Tertinggal (or Left Behind Village Program), which was previously aimed to increase the capital of poor households in selected villages. This paper applies a regression discontinuity design to mitigate fears of endogeneity bias. In particular, the paper exploits discontinuities in the program rules used by the GoI for determining targeted ‘poor’ villages, which are supposed to receive the program. We find a robust positive impact of the program. Receiving the IDT program expedited the structural transformation by around 10 percentage points in terms of decreasing the share of households working in agriculture. Furthermore, using night-light satelite data from NOAA as a proxy for income, we also show that the program increased the average luminosity by 0.5 points on average.