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This paper addresses an issue that vexes current public debate in Indonesia: To what extent is economic growth held back by underinvestment in the country’s infrastructure facilities? Is infrastructure investment actually productive, given that Indonesia’s current President has made it a priority, although economic growth appears stuck at 5 to 6 percent per year? The paper identifies the output effects of increasing infrastructure investment and infrastructure use in Indonesia. It analyses annual data for 1968-2018 on (a) investment and capital stock in the public sector, (b) infrastructure-related investment in machinery and equipment, transport equipment, public works, and structures for public utilities and communications, and (c) indices of the use of infrastructure for transport, public utilities and communications in Indonesia. Using a Bayesian Vector AutoRegression (BVAR) framework, the paper finds positive long-run elasticities of GDP with respect to public capital, infrastructure-related investment, and infrastructure use.
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