Capital Fundamentalism and Structural Transformation

We conduct the first judicious evaluation of Capital Fundamentalism, in the context of the Government of Indonesia's Inpres Desa Tertinggal (IDT or Left Behind Village) Program. Originally scheduled between 1994 and 1997, the IDT program injected capital into the economies of poor households in beneficiary villages. Leveraging administrative- and satellite-based data, we evaluate the impact of IDT capital injections on: (1) household welfare, (2) structural transformation (as captured by movements out of agriculture) and (3) which sectors those in agriculture moved into. For all three analyses we adopt a (fuzzy) regression discontinuity design by exploiting the official village 'scores' of the IDT program along with their provincial thresholds. The IDT program significantly increased household welfare (as measured by night time luminosity, enrolment rates, infant mortality rates, numbers of livestock, numbers of poor households and numbers of small and micro enterprises) in Java, Sumatra and Bali and Nusa Tenggara, as households exited agriculture in favour of more productive activities in the secondary sector, namely: construction, industry and trade. We find no evidence however, of the program affecting structural transformation or welfare in Kalimantan, Sulawesi or Papua, which suggests that structural transformation is a necessary condition for capital injections to foster regional development.