Indonesian capital city relocation and regional economy's transition toward less carbon-intensive economy: An inter-regional CGE analysis

Abstract

Transitioning to a low-carbon economy can take various forms, one of which is structural change, particularly tertiarization. When the economic structure shifts from being dominated by sectors that rely heavily on fossil fuels to one that does not, the economy can become less carbon-intensive. The relocation of Indonesia's capital city from Jakarta to East Kalimantan is an example of how a traditionally resource-intensive regional economy may respond to the sudden emergence of a large-scale service sector, in this case, the government sector. This paper investigates how the capital city relocation may affect the destination region's economic structure using an inter-regional computable general equilibrium modeling. The model considers not only how different economic sectors are interconnected but also how sectors within one province are interconnected with sectors in other provinces. According to the findings, the relocation of the capital city increases the Gross Regional Domestic Product (GRDP) of the destination region (KalTim) by a massive amount (22%) while decreasing the GRDP of Jakarta (the old capital) by a moderate amount (7%). However, because the expanding sector is relatively high-skill intensive, it tends to produce skill-biased increases in real wages. As a result, the destination region (Kaltim) undergoes massive structural change as its service sector share increases by 12%, a change historically comparable in two decades. In addition, Kaltim's carbon emission intensity decreases by 18% due to this large-scale tertiarization. The analysis has demonstrated how and to what extent the relocation of Indonesia's capital city may help the province diversify from a natural resource-intensive economy to a more service-oriented and low-carbon economy.