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THE EFFECT OF AIR TRANSPORTATION ON

REGIONAL ECONOMIC DEVELOPMENT

EVIDENCE FROM INDONESIAN REGENCIES

M.Sc. Thesis

June 2017

Author: Aunurrofik

University of Groningen

Faculty of Economic and Business

Student number: S3161293

Email:

a.aunurrofik@student.rug.nl

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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ABSTRACT

This study aims to examine the importance of air transportation on regional development in Indonesia as an archipelago and developing country. Using cross-section dataset in regencies level and multiple regression analysis, we found that the number of flight, air passenger, and air cargo give positive and significant impact to regional per capita income. The effect of air cargo is the strongest which imply that airport will give larger effect to regional economic growth if the airport is intended to use for trade and business activities. The motivations of a regency to have an airport are if a regency is an independent island, manufacturing industry with its high-skilled and mid-skilled workers, and tourism sector.

Keywords

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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Table of Contents

Cover ……… i

Abstract ……… ii

Table of Contents………. iii

Chapter 1 Introduction……….……….…. 1

1.1 Air transportation and economic development …...………. 2

1.2 Air transportation role in the regional term ……...……….. 4

Chapter 2 The Case in Indonesia………... 5

2.1 The importance of air transportation in Indonesia ………... 5

2.2 Air transportation and Indonesian economic growth ………... 7

2.3 Air transportation and Indonesian tourism sector ……… 8

Chapter 3 Literature Review ……….. 11

3.1 Infrastructure and economic development ……….. 11

3.2 Air transportation and economic development ……… 12

3.3 Air transportation and tourism sector ………... 14

3.4 Hypotheses ……….. 15

Chapter 4 Methodological Framework ………... 17

4.1 Methodology ……… 17

4.1.1 The effect of air transportation on regional GDP per capita ………. 17

4.1.2 The likelihood of a regency to have an airport ………...……. 18

4.2 Data description and sources ……… 18

4.2.1 Dependent variable ……… 18

4.2.2 Independent variables ……… 19

Chapter 5 Analysis and Results ……….. 21

5.1 The effect of air transportation on regional GDP per capita ………... 22

5.2 The likelihood of a regency to have an airport ……….. 26

Chapter 6 Conclusion ………. 28

5.1 Concluding remarks ………. 28

5.2 Limitation and further research ……….……….……….. 29

References ……… 30

Appendix A Correlation table ………. 34

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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Chapter 1

Introduction

Nowadays air transportation has become an important indicator of competitive advantage of a country/region as it enables faster traffic to integrated local, regional and global network (e.g. Button and Taylor, 2002). It is not only important to transport people worldwide but also for transporting goods which mean that air travel supports the economic activity by giving access to global markets. The importance of aviation has become even more for developing countries which largely depend on trade with other nations. Air transportation provides the larger opportunity for developing countries to export their abundant agricultural products and raw materials mainly natural resources to foreign markets (Button, 2006). Also, multinational companies are recently getting more involved in international fragmentation of production in the global value chains through both offshoring and outsourcing (Timmer et al., 2014; Los et al., 2015 ). Air freight will improve the delivery speed, lower damage risk, and has a regular schedule for a destination. Thus, air travel supports the economic activity by providing a better delivery service (Tseng, 2005). The need of on time transportation for standard intermediate goods for production become higher. In this case, air cargo plays a significant role. Earlier evidence suggests that one percent increase in cargo development is likely to increase total trade by 6.3 percent (Shepherd et al., 2016). Therefore, countries which can develop their load connection well combined with high quality in customs and borders services are one step ahead in the global value chains integration.

This study aims to understand the importance of air transportation on regional development in Indonesia. We first analyze the impact of air traffic on regional economic development in regencies level, and subsequently, we investigate the motivations behind the likelihood of a local regency to build an airport in their area. Indonesia is chosen as the research subject for several reasons. First, Indonesia as an archipelago country consists of about 17,000 islands. The most effective in term of direct travel and the most efficient in term of the trip time transportation mode to connect them is air travel. Second, the inequality among region in Indonesia is considered high. In 2010, the Gini coefficient which measures regional inequality in Indonesia reached 0.39 (Kuncoro and Murbarani, 2016). With the existence of air transportation be expected to increase the economic development of a region so that can catch up their left behind to the more advanced area.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

2 are provided in Chapter four. Analysis and results will be presented in chapter 5, whereas the sixth part will provide the conclusion of the research study.

1.1 Air transportation and economic development

Air transportation is a big industry. According to the data from Air Transport Action Group (ATAG), in 2016, the number of commercial aircraft worldwide in service is approximately 26,065 including passenger and cargo planes. There is another 2,500 more in storage. The active aircraft serve 51,554 routes globally, flight through more than 20 million kilometers network in a year through 17,678 commercial airports. Air transportation in 2016 carried about 3.78 billion passengers and over 53 million tons of cargo with a value of goods transported about $6.4 trillion which represent 35 percent of international trade (IATA, 2016). These numbers signify the economic importance of air transportation industry in modern world’s economic life.

Air travel generates significant economic and social benefit (ATAG, 2016). The economic impact of aviation can be categorized as employment and output effect. Britton et al. (2005) break down these impact into four different classifications which are:

a. Direct impact related to air transportation industry itself.

b. Indirect impact related to the supply chain of the air travel industry.

c. Indirect demand effects, by generating demand for other sectors, through generating income for directly and indirectly employed in the air transportation.

d. Catalytic impact or spillover impact, by which the growth of aviation industry spur the performance of other sectors, for instance, trade, tourism, and accelerate investment and productivity.

Table 1. Air transportation global employment and output impact, 2014

Jobs GDP

Air transportation direct impact 9.9 million $664.4 billion

Indirect impact 11.2 million $761.4 billion

Induced impact 5.2 million $355 billion

Tourism catalytic impact 36.3 million $892.4 billion

Total 62.7 million $2.7 trillion

Source: ATAG (2016)

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

3 9.9 million direct jobs which are about 0.3 percent of global employment, consists of 450,000 as airport operators, 2.7 million work in the airlines (for instance flight and cabin crews, ground services, check-in officers, executives, and maintenance staff), 1.1 million in civil aerospace (designers of components, engines, and aircraft itself and engineers), 220,000 work as air navigation and service providers (air traffic controller and executives), and 5.5 million work in others (retail inside the airport, car rental, freight handle, catering, and several government officer such as customs and immigration).

Air transportation plays a major role in the development of tourism sector, especially in developing countries. Almost 54 percent of international travelers use the airplane for their primary transportation (ATAG, 2016). Air transport contributes to 36.3 million jobs and $892.4 million GDP in tourism sector globally (Table 1). The development of air transport industry brings many benefits to the tourism industry in many countries. The advancement of general technology of aircraft industry and the onset of information and telecommunication technology have improved the quality of air transportation services. Also, the increases in income in several emerging market economies like China and India which also enhance their purchasing power, will generate a larger number of tourist and hence increase the demand for air transportation. Moreover, competition from low-cost carrier (LCC) airlines and their marketing strategy have made ticket price cheaper. As a result, the volume of passenger especially for the longer route has doubled for the last three decades (Button, 2008).

Whereas in the social benefit side, air transportation provides access to rural areas and small island which inaccessible by road or railways network. It became easier to transport essential services, for instance, health care. Moreover, when natural disaster or war happened in one area, air transportation speed and reliability are the fastest transport mode to access such area to deliver emergency assistance.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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1.2 Air transportation role in the regional term

Air traffic is often essential for the development of a country or region. One idea analyzes this relation introduced by Crockatt (2000) called Growth Pole concept. Each industry will prefer to locate their business place near cargo gateways and hubs. They will tend to choose their location near cargo terminals, harbors, railways stations, and recently close to airports. Moreover, the airport that primarily cargo based will attract a lot of business to be located together, forming a center of business activities. By agglomerating together, firms will gain the benefit of sharing facilities which will decrease their cost, matching with appropriate employee and qualified buyer and supplier, and also learning about the development of the market and new technology (Combes et al., 2010). Such agglomeration will increase the output of firms in the industry which will contribute to the regional growth and development.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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Chapter 2

The Case in Indonesia

2.1 The importance of air transportation in Indonesia

Indonesia which has almost 258 million population (World Bank, 2015) is the most populated country in the Southeast Asia region and fourth largest in the world after China, India and the United States. It is an archipelago with over 17,000 islands covered its 1,905,000 square kilometers surface area whereas seas and ocean take 81 percent of the total area. There are seven major islands in the country: Java & Bali, Sumatera, Nusa Tenggara, Kalimantan, Sulawesi, Maluku, and Papua. Each island consists of several provinces which in total 34 provinces.

The main transportation modes are railways, roadways, ships, and airplane. Land transports are available in all provinces while ships transport is only available for them who located in the coastal area. Railways are only accessible in the Java and Sumatera islands whereas it is not established in the other islands due to their geographical condition. Hence the primary transportation mode within an island is road transport although sometimes to travel from the east to west part of a province needs 12 to 24 hours or more due to the condition of roadways infrastructure. Moreover, to move from east to west part of an island will spend a longer time.

Figure 1. The map of airports in Indonesian regencies

Source: maps.google.com

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

6 travel is not only necessary to connect people but also to support economic activities across regions, which is useful for their development. The correlation between air transportation and economic development is required for a policy maker to arrange proper policy regarding the cause and effect that arise from their relation.

Figure 2. The air transportation passengers in Southeast Asian Countries

Source: World Development Index, The World Bank

Figure 3. Cargo carried by flights in Southeast Asian countries

Source: World Development Index, The World Bank

Indonesian air transportation has experienced significant increases in both passenger and cargo carried for the last 26 years period. In 1990, the passenger of aviation was only 9,22 million, and by 2015 as described in Figure 2, the total number of passengers has increased to 88,69 million which is the highest among Southeast Asian nations. Within this period, the annual growth rate is about 9.48 percent which is greater than Thailand 7.82 percent, Malaysia 6.58%, and Singapore

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

7 6.41%. In term of cargo, it is increased almost twofold from approximately 876 million ton in 1990 to become 1428,37 million ton in 2015 which is the highest in the region (Figure 3). Although the number of cargo carried is the highest among countries in the area, but the annual growth rate of Indonesian cargo 1.97 percent is lower compared to Singapore 5.64 percent, Malaysia 5.13 percent, and Thailand 4.80 percent

2.2 Air transportation and Indonesian economic growth

Air travel in Indonesia has developed over time. Airlines industries from both local and international take place to serve both passenger and cargo traffic. According to the data from Indonesian Ministry of Transportation (MoT) in 2016, domestic air travel in Indonesia consists of three types which are scheduled flight, cargo flight, and unscheduled (charter) flight. There are numerous of international airlines also serve tourist from overseas departure to come to several popular destinations in Indonesia through the international airports.

Table 2. Airlines in Indonesia

Scheduled flight Cargo Flight Unscheduled (charter) flight

Aviastar Batik Air Citilink Garuda Indonesia Indonesian Air Asia Kalstar Aviation Lion Air NAM Air Sriwijaya Air Susi Air Trans Nusa Wings Air Xpress Air Cardig Air

Republic Express Airlines Star Cargo

Airfast Indonesia Air Born Indonesia Asco Nusa Air Asi Pudjiastuti Aviastar Mandiri Dabi Air Nusantara Deraya Air Taxi Derazone Air Service Dirgantara Air Service Eastindo

Ekspres Transportasi Antarbenua

Gatari Air Service Intan Angkasa Air Service

Kura-Kura Aviation Mimika Air Megantara Air

National Utility Helicopter Nusantara Buana Air Nyaman Air

Penerbangan Angkasa Semesta Pura Wisata Baruna

Sabang Merauke Raya Air Charter Sayap Garuda Indah

Transwisata Prima Aviation TransNusa Air Services

Source: BPS (2010)

Table 3. International airlines in Indonesia

International Airlines Air China Cathay Pacific China Airlines China Southern Etihad Airways Emirates Airways Japan Airlines Korean Air Kuwait Airways Lufthansa Philippine Air Qantas Qatar Airways Royal Brunei Singapore Airlines Thai Airways Jet Star & value Air

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

8 The existence of these airlines to serve passenger and cargo is be expected to increase the economic development in Indonesia. Air passenger is related to the movement of people including workers whereas air freight related to the movement of inbound raw materials and outbound of intermediate and finished product which will support industries in regencies to gain a larger output. Figure 4 describes the growth of air passenger, air cargo, and GDP in Indonesia from 1991 to 2015. It is look alike that three lines have a positive correlation. There are at least three events actively show air passenger, air cargo, and GDP growth have a similar trend. Firstly, the Asian financial crisis in 1997 affected the growth of air passenger dropped into -26.1 percent in 1997 and continued to -36.2 percent in 1999, air cargo decreased -39 percent in 1998, and GDP declined to -13.1 percent in 1998. Secondly, the global financial crisis in 2008 reduced air passenger by -7.8 percent, send air cargo to fall by -29.8 percent, it slowed the GDP growth from 6 percent in 2008 to 4.5 percent in 2009. Finally, there is a rapid improvement in air transport indicators in 2010 as people started to travel and do business again after global financial shock in 2008. Air passenger increased more than two-fold from 27 million to 59 million, air cargo experienced increase by 1.4 times, whereas GDP growth increase from 4.5 percent in 2009 to 6.2 percent in 2010. One problem that might arise from this correlation is endogeneity issue, a lot of literature argues that air transportation impacted economic growth and it could also be another way. Given that, in this study, we use cross section data so we cannot do Granger causality test to check such endogeneity problem. We are ignoring reverse causality relations in this thesis.

Figure 4. Air passenger, cargo, and GDP growth

Source: World Development Index, The World Bank

3.3 Air transportation and Indonesian tourism sector

Table 4 shows the evidence about the importance of air travel for the tourism industry. According to papatheodorou and Lei (2006), people move to another place is for leisure, business, visiting friend, healthcare treatment, and pilgrim’s journey. In five year span from 2011 to 2015, the

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

9 travel for leisure is dominated the other purpose in term of arrival and departure tourist passenger. As the number of international air passenger increases in the period, the number of foreign visitors also increase. In term of arrival, air passengers have increased from 10.83 million to 13.18 million from 2011 to 2015. The number of tourists also increase from 7.65 million to 10.41 million in this period. On average, the number of tourist passenger is about 71 percent of all air international tourist arrival. The foreign visitor dominates international passenger departure as well. As global international passenger departure increased from 10.75 million to 13.63 million within 2011 to 2015, the number of foreign tourists also rose from 6.75 million to 8.18 million. The percentage of international tourist departure is on average approximately 61 percent of international passenger departure.

Table 4. Air transportation passenger and tourism in Indonesia (millions)

2011 2012 2013 2014 2015

International passenger arrival 10.83 11.81 13.14 13.25 13.18

International tourist arrival 7.65 8.04 8.80 9.44 10.41

International passenger departure 10.75 11.75 13.22 13.70 13.63

International tourist departure 6.75 7.45 8.03 8.07 8.18

Source: International passenger arrival and departure collected from Indonesian Central Bureau of Statistic. International tourist arrival and departure gathered from World Development Index, The World Bank.

Table 5. Economic contribution from tourism sector

Description 2013 2014 2015

Investment in tourism as a percentage of national investment 1.63% 2.18% 2.4%

Number of employment directly and indirectly related to tourism (millions)

9.61 10.32 12.16

GDP from tourism sector (trillion IDR) 365.02 394.52 461.36

Contribution of tourism as a percentage of National GDP 4.02% 4.04% 4.23%

Number of foreign tourists (millions) 8.80 9.44 10.41

Foreign revenue from tourism sector (million USD) 10.05 11.17 11.90

Number of domestic tourists (millions) 250.04 251.20 255.05

Domestic tourist expenditure (trillion IDR) 177.84 213.94 224.65

Source: Accountability and performance Report, Indonesian Ministry of Tourism, 2015.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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Chapter 3

Literature Review

Economic development often related to the infrastructure development. The infrastructure such as roadways, railways, water system, electric supply, and indeed air transportation give an impact to economic development (Lanau, 2017). Several researchers who have investigated the impact of infrastructure on economic development include air travel. The first subsection explores the previous literature on the relationship between infrastructure development and economic growth. The second subsection will break down the specific impact of air transportation on economic development. The third subsection will focus on the correlation between air travel and tourism. Finally, we propose hypotheses about the effect of air traffic on economic development in Indonesian regencies.

3.1 Infrastructure and economic development

Several researchers argued that the development of infrastructure has a close relation to economic development. The kinds of infrastructure related to economic activities are electricity and power, water, transportation, and communication service (Ayodele and Falokun, 2003). The availability of primary infrastructure is observed to rise firms’ productivity so that the capacity of production of goods and services will increase as well (Enimola, 2010). The capacity of electricity production and development of broadband internet infrastructure are found to have positive effects per capita income growth (Canning and Pedroni, 2004; Czernich et al., 2011).

Demurger (2001) used OLS and TSLS technique to analyzes whether infrastructure development in China influences economic growth and regional disparities. Using panel data for 24 provinces in 14 years period from 1985 to 1998, she found that the geographical location and infrastructure endowment could explain the growth gap among provinces. The coastal areas tend to grow faster compared to inner regions. Besides that, transportation infrastructures also play an important role to emphasize the regional disparities in the growth gap. Railways are more favorable among others because it can carry more quantities of raw materials or natural resources with a lower cost from natural resources abundant province to an industrialized one. So that, the government prioritizes to expand the network and upgrade the quality of the existing railways. Also, telecommunication help to connect the provinces to the outer world that influence the growth gap as well.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

12 activities.

Umoren et al. (2010) arranged a study to figure out the importance of road infrastructure development to improve the socio-economic condition in three rural areas zones in Nigeria which are Ibiono Southern, Ibiono Central, and Ibiono Northern. To show the connectivity network between three local area, they used gamma index which results in low accessibility index between regions. To consider the relationship between road infrastructure and the level of economic growth, they using correlation coefficient which showed a positive and significant association with a factor of 0.87. The findings recommend improving the development of road network that links all three zones.

In term of telecommunication infrastructure, Osotimehin et al. (2010) investigated the impact of telecommunication infrastructure to economic development in Nigeria. They measure telecommunication infrastructure by telephone density and communications employment. They used time series in the country-level dataset for 15 years period from 1992-2007. Using pooled OLS regression analysis, they found that both variables have a positive and significant correlation with productivity and economic growth. The development of infrastructure should involve private parties, via transparent policies.

Lanau (2017) examined the effects of infrastructure improvement to the sectoral growth and investment at the firm level in six Latin America countries. He regresses the sector that dependence on transportation, the quality of infrastructure in the country, and several firm-specific controls to an average rate of firm-level investment. He found that the improvement in both quantity and quality of infrastructure will lift growth and spur the firm-level investment in these countries as their growth was decreasing in the last decade. Specifically, the sectors that relatively depend on infrastructure tend to grow faster when there is an improvement to infrastructure. In term of countries, if the road quality in Colombia is improved to its median value, the sector which more dependence on infrastructure will growth faster 0.15 percentage points, while Argentina will growth faster 0.13 percentage points. These sectoral results in aggregate could be used to measure the impact of improvement in infrastructure to GDP growth of the country. Moreover, the sector which has more dependence on infrastructure will tend to invest more when both quality and quantity of infrastructure improves. The lodging industry in Colombia would invest 0.43 percentage points larger if the infrastructure grew close to its median value.

3.2 Air transportation and economic development

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

13 and Shahid, 2014). On the other hand, Yao and Yang (2008) give evidence that regional GDP provides a positive influence to increase the number of air passenger. Whereas Hu et al. (2015) found a one-way relationship that air transportation determine GDP in the short run and two ways connection over the long term. We cannot address this issue since we use cross section data, so we ignore this problem in this study.

Brueckner (2003) provides evidence about the link between air transport traffic and employment in the United States metropolitan area. The good airline service is a necessary factor to explain urban economic development. The larger airport destination will attract a higher passenger traffic tend to facilitate easier businesses contact with other cities, which will attract new firms to set up its business in this metropolitan area and increase the employment. Using two-stage least square estimation on cross-sectional data of 91 metros in 1996, the results indicate that a 10 percent growth in passenger traffic in urban areas will lead to a 1 percent increase in jobs in service related industry. But, the results only hold for service sector without any effect on employment in the manufacturing and goods related industry.

Green (2007) found an influence of airport activities such as passengers boarding and passenger originations per capita to the economic development in term of population and employment growth in 83 metropolitan area in the United States between 1990 and 2000. He used OLS and two-stage least square regression to analyze the data. The result implies that air passenger per capita in 1990 gives a substantial influence on population growth between 1990 to 2000. An increase of one standard deviation in air passenger per capita will result in 8 percent rise in both population and employment growth within ten years period.

Mehmood and Shahid (2014) examined the hypothesis that air transportation will lead growth in the Czech Republic. They used Dynamic OLS, Fully Modified OLS, and Conical Cointegration Regression estimations for time series in country-level data for 42 years from 1970 to 2012. The results are that three estimation methods showed similar conclusion that air transportation demand has a positive contribution to economic growth. The effect is via two channels which are a direct effect on the transport of labor and goods and indirect impact through backward and forward linkages of air travel industry.

Hu et al. (2015) tested short-run dynamics, long-run relationship, and Granger causality between domestic air transportation and economic growth. They used quarterly panel data from Q1-2006 to Q4-2012 of 29 counties in China. The results give evidence that aviation passenger traffic has a long run relationship with economic growth. Specifically, 1 percent rise in the airline passenger traffic will lead the incline of 0.943 percent in GDP. The relationship is one direction in the short run but two directions in the long-run.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

14 They analyzed how regional GDP affects the air passenger and air cargo demands controlled by trade openness, ground passengers, ground freight, population density, services and location dummy. Using OLS and TSLS estimation methods, they found that GDP and trade openness give a positive and significant influence on air passengers and air cargo volumes demands in both short term and long term. These mean that GDP growth and trade openness are the key drivers of aviation and airport expansion.

3.3 Air transportation and tourism sector

The relationship of transportation mode and tourism have been discussed broadly by many researchers. Seetanah and Khadaro (2009) found that transportation sector has a positive role to develop the tourism industry in Mauritius by increasing the number of tourist arrival to visiting the country. Wang (2010) made a conclusion that transportation industry together with tourism infrastructure construction has a substantial role to the increase of domestic tourism arrival in the Chinese economy. Khan et al. (2016) breakdown the role of three modes of transportation which are roadways, railways, and air travel to the inbound-outbound of tourist in the tourism sector. Air travel has the largest contributor to influences the inbound-outbound of tourist.

Prideaux (2000) analyzed the role of the transport system to the development of destination area in Cairns, the newest international tourist destination in Australia. He used transport cost model to identify the importance of transportation system to determine tourists’ destination which later contributes to the development of the area. He argued that the inefficiencies of the transport system in a tourist destination will make visitors looking for alternative destinations. Fare cost, distance, and travel time are the primary consideration for travelers to decide their holiday destination.

The development of aviation and tourism sector are interlinked each other (Bieger and Wittmer, 2006). The new destinations and new forms of tourism will increase the demand for air transport. On the other hand, air travel is the only mode to reach rural tourism areas which often provide an exotic natural scenery. The development of modern aircraft reduced cost so that the airlines can give lower price will gain more passenger to a lot of tourist destination. The emergence of LCC with point-to-point service and provides lower price has created a new market and attracted significant passenger volumes. The availability of cheap airlines is the primary determinant of the growth of international tourism.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

15 airport. Air policy reform has a positive and significant relationship with traffic growth (Warnock-Smith and Morrel, 2008). The more effective competitor, in particular through LCC carriers, is higher in the markets with lower barriers to entry. A unit increase in the liberalization of air policy increases the log traffic growth per annum between 2.55 percent to 3.02 percent. The upper estimate is because of the effect of multicollinearity of traffic model.

It seems to me that infrastructure development, including airport development, will positively impact the economic development in a country or region. Air transportation will contribute to economic development of a region by generating employment and per capita income growth. The aviation sector is also significant for the development of tourism industry in a region. Hence, the role of air transportation is critical for economic development nationally or regionally.

In Indonesia, there are not many studies about the impact of air traffic on regional economic development. Also, the characteristic of Indonesia as an archipelago country with a lot of islands is different with previous studies worldwide. One of the studies in Indonesian case is conducted by Dharmawan (2012) using time series annual data on a country level, measured the effect of air transportation on economic growth. He proxies air transport only with air passengers, whereas the number of flight and air cargo are absent. Air passengers only measure the people traffic, in term of workers and tourists, and how it contributes to economic development. The results imply that tourism sector significantly contributed to economic growth, but the impact of manufacturing industry is insignificant. He suggested that to precisely measures the effect of manufacturing industry – the largest industry in Indonesia as developing country – on economic growth, air cargo should be included in the measurement. Also, the number of flight also important for economic growth because it generates average wage, employment, and the number of firms established in a region (Bilotkatch, 2015). So, be given this we are going to looking to the impact of the air transportation in term of the number of flight per capita, passenger per capita, and cargo per capita on regional economic development in Indonesia as an archipelago and developing country.

3.4 Hypotheses

According to the previous researches, the air transportation will give impact to the economic development through this important factor:

a. GDP growth. Air traffic demand has a positive contribution to economic growth through three

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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b. Likelihood to have an airport. After knowing the impact of the airport, we are going to

analyze the probability of a regency to have an airport. Florida et al. (2015) found that in the United States and Canada, airport tends to be located in the metro that has higher market share, warmer climate, and has a lot of art, culture, entertainment, and tourist attractions.

Building on these observations and previous literature, we propose the following two hypotheses in this research paper:

H1: The presence of an airport, which is active in carrying people and cargo, will have a

positive effect on the growth of regional per capita income.

This hypothesis will be tested using three measures of airport, which are flight per capita, passenger per capita, and cargo per capita

H2: The regencies which are separated by the ocean from the mainland have a higher

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

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Chapter 4

Methodological Framework

In this chapter, firstly we will discuss the methods and models that will be used to analyze the effect of air transportation to regional economic development and the likelihood of a regency to have an airport. Secondly, we will describe the data used in Indonesian case at the level of regencies.

4.1 Methodology

4.1.1 The effect of air transportation on regional GDP per capita

When analyzed the effect of the airport, in term of air passenger and air cargo, on local economic development, Florida et al. (2015) proposed a model as follows:

Regional Economic Development = Airport factors + Size of the city + High-tech industry + Human resources + Climate + Unemployment

This paper will replicate the model above by several adjustments with Indonesian condition. We proxy regional economic development with regional GDP per capita, whereas airport factors represented by three independent variables which are the number of flight per capita, passenger per capita, and cargo per capita. Since Indonesia is a developing country and less familiar with the high-tech industry, we use manufacturing sector which is associated with the more advanced region in Indonesia. Human resources represent by high-skilled, mid-skilled, and low-skilled workers. We are not using climate variable since the temperature among Indonesian regencies are not too much different, only have two seasons which are dry and rainy seasons, and happen in the same months. We add variable tourism as Indonesia is famous for a tourist destination.

Hence, the model becomes as follow:

𝑅𝑒𝑔𝑖𝑜𝑛𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = 𝛽0 + 𝛽1 𝐴𝑖𝑟 𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 + 𝛽2 𝑖𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑑𝑢𝑚𝑚𝑦 +

𝛽3 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 𝛽4 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 +

𝛽5 𝐻𝑖𝑔ℎ 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛽6 𝑀𝑖𝑑 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛽7 𝐿𝑜𝑤 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛽8 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 +

𝛽9 𝑇𝑜𝑢𝑟𝑖𝑠𝑚 ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ (1)

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

18 To ensure that we will get the Best Linear and Unbiased Estimators (BLUE), the linear regression has to satisfy several assumptions called Gauss-Markov assumption or classic test assumption (Ariefianto, 2012). To check the Gauss-Markov assumptions, this research will conduct heteroscedasticity and multicollinearity tests. We would not test for autocorrelation because the dataset is a cross section data, while autocorrelation will happen in the time series and panel dataset when the residuals are serially correlated.

4.1.2 The likelihood of a regency to have an airport

For the second analyses, after we know how air transportation give an impact to regional economic development, we would like to examine the likelihood of regencies to have an airport in their area. The dependent variable is a binary response, one if a regency has an airport and zero otherwise. The model is as proposed by Florida et al. (2015):

Airport = Size of the city + high-tech industry + Human resources + Climate + Unemployment + Bohemians (openness of a city to tourism in term of art, culture, and leisure)

Replicating that model with several adjustments due to Indonesian condition as in first analysis, we add one more variable which reflects Indonesia as an archipelago country, which is independent island dummy to shows whether a regency is separated by an ocean from the main island. Our second analysis will use this following equation:

𝐴𝑖𝑟𝑝𝑜𝑟𝑡 = 𝛿0 + 𝛿1 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 + 𝛿2 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 + 𝛿3 𝐻𝑖𝑔ℎ 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛿4 𝑀𝑖𝑑 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛿5 𝐿𝑜𝑤 𝑠𝑘𝑖𝑙𝑙𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 + 𝛿6 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝛿7 𝑇𝑜𝑢𝑟𝑖𝑠𝑚 + 𝛿8 𝐼𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑖𝑠𝑙𝑎𝑛𝑑 ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ ⋯ (2)

Since the dependent variable is a binary response variable, we will use logit regression to figure out the likelihood of regencies to have an airport.

4.2 Data description and sources

The data utilized in this research paper is the data from 497 regencies in Indonesia in 2010. For the first analysis about the effect of air transportation on regional GDP per capita, we use 105 regencies which have an airport in their area. Whereas for the second analysis about the likelihood of a regency to has an airport, we will use the data from all regencies. The year 2010 is chosen because the latest population census in Indonesia held in that year so that we can gather complete data for all variables.

4.2.1 Dependent variables Regional GDP per capita

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

19 et al., 2015; Mehmood and Shahid, 2014; Lanau, 2017). The data based on the annual publication of regional GDP of regencies/municipalities in Indonesia by Indonesian Central Bureau of Statistics (BPS) in 2010.

4.2.2 Independent variables

The independent variables included in this research paper are as follows.

Air transport factors

Air transport factors in this research paper are represented by the number of flight per capita, passengers per capita, cargo per capita, and international dummy.

Flight per capita

Flight per capita quantify the total number of departure and arrival flight in an airport in a regency. It divided by total population in the regency then result in flight per capita. The data is taken from Indonesian Transportation Statistics in 2010 by Indonesian Central Bureau of Statistics (BPS).

Passenger per capita

Airport passengers are counted by the total of departure, arrival, and transit passengers in the airport for both local and international travelers. The total then divides by the entire population in the region to get airport passenger per capita. The data is gathered from Indonesian Transportation Statistics in 2010 by Indonesian Central Bureau of Statistics (BPS).

Airport cargo

Airport cargo is measured by the total of departure and arrival of both freight and mails in kilograms divided by the number of population in the region which result in airport cargo per capita. The data are carried from Indonesian Transportation Statistics in 2010 by Indonesian Central Bureau of Statistics (BPS).

International airport dummy

International airport dummy will determine whether the airport also serves as an international route or only local. The value of international airport is 1, and local airport is 0. The data is taken from Indonesian Transportation Statistics in 2010 by Indonesian Central Bureau of Statistics (BPS).

Population

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

20

Manufacturing industry

This variable will measure the local concentration in the manufacturing sector. It measures the share of employment in the manufacturing compared to other industries in a regency. The data is taken from the result of population census in 2010 by BPS, the share of employment in nine leading industries sectors.

Human capital

Human capital is measured by the proportion of adults based on their degree of education. We divide this into three different variables. High-skilled workers represent those who have a bachelor degree or higher, mid-skilled workers are those with a diploma one until diploma three, and low-skilled workers are those with a high school degree. Unskilled which whom we consider as those who are below secondary high school are excluded from the regression to avoid singular variance matrix problem. The data comes from the result of population census in 2010 by BPS, education page.

Unemployment rate

This variable measures the share of unemployment to the labor force in a region annually. The data are taken from Indonesian Central Bureau of Statistics (BPS), local regency site.

Tourism

Variable tourism counted by the share of labor force work in the hotel and restaurant compared to other industries. The data is taken from the result of population census in 2010 by Indonesian Central Bureau of Statistics (BPS), employment share in nine primary industries page.

Independent island dummy

Independent island dummy determines whether the ocean separates a regency location with the mainland of the province. The mainland of the province usually the land which the province capital located. If a regency based in the different island with its mainland, its value is 1 and 0 for otherwise.

Industry structures

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

21

Chapter 5

Analysis and Results

In this section, we present the results of our study. First, we examine the effect of air transportation in term of airport intensity impact on regional GDP. Second, after knowing the impact, we analyze the likelihood of a regency to have airports. To do so, we examine which factors are important considerations for regencies to build airports in their area.

Table 6. Summary statistics

Mean SD Min Max

Regional GDP per capita 38,092.32 53,285.16 6,377 375,407

Ln regional GDP per capita 10.1303 0.8279 8.7605 12.8358

Flight per capita 0.0298 0.0436 0.0002472 0.2312

Ln flight per capita -4.4468 1.4942 -8.3052 -1.4647

Passenger per capita 2.1338 4.7838 0.0005151 31.3052

Ln passenger per capita -0.9948 2.2067 -7.5712 3.4438

Cargo per capita 8.5015 43.6303 5.70E-09 339.6371

Ln cargo per capita -2.6861 4.0496 -18.9833 5.8279

International dummy 0.2381 0.4280 0 1 Population 6.6398 6.0382 0.2194 56.2355 High-skilled workers 1.8753 .9679 .02 5.61 Mid-skilled workers 0.6998 1.5796 0 12.9 Low-skilled workers 17.63928 8.373935 0.39 46.46 Unemployment 6.1705 3.5180 .13 19.84

Independent island dummy 0.1328 0.3397 0 1

Industry employment shares

Agriculture, forestry, and fisheries 49.4811 24.7495 0.34 99.69

Mining and excavation 1.7494 3.5738 0 28.79

Manufacturing 10.2992 12.4587 0 48.6467

Electricity, gas, and water supply 0.2944 0.2715 0 2.04

Construction 4.5862 2.7163 0.04 13.54

Tourism 1.6780 2.4599 0 16.5277

Transport, warehousing, and communication 4.6325 2.8937 0 16.32

Finance, insurance, buildings, and land rental business 16.7912 8.7033 0.08 48.09

Other services 1.2456 1.0531 0 8.05

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

22 In Table 6 we provide the summary statistics. As Kuncoro and Murbarani (2016) said that Indonesia has a high degree of inequality, it also appears in the difference of regional GDP per capita between regencies. The highest regional GDP per capita regency is about fifty-eight times of the lowest. A similar pattern also happens in flight per capita, passenger per capita, and cargo per capita which their gaps between the highest and the lowest also significant. The distribution of population among regency in a province also unequally distributed. The highest is 56.24 percent, and the lowest is 0.22 percent, whereas the average is about 6.64 percent. In term of the labor force, low-skilled workers dominate both high-skilled and mid-skilled workers with the highest share of 46.46 percent and its average approximately 17.64 percent. Even, the lowest proportion of low-skilled which is 0.39 also the largest compared to two other types of workers lowest share. Unemployment share in all region is below 20 percent. In term of employment share in industrial sectors, agriculture, forestry, and fisheries have the highest percentage with an average of 49 percent. Manufacturing which has 10.29 share in average is in the second rank. The lowest average percentage is other services by only 1.24 percent.

5.1 The effect of air transportation on regional GDP per capita

To analyze the effect of air traffic on local economic development, we run an OLS regression with regional GDP per capita as the dependent variable. The independent variables associated with air travel are flight per capita, passenger per capita, cargo per capita, and international dummy along with control variables population, manufacturing industry, high-skilled workers, mid-skilled workers, low-skilled workers, unemployment, and tourism sector. We take a natural logarithm of regional GDP per capita, flight per capita, passenger per capita, and cargo per capita. While for the rest variable, we do not use natural logarithm because their value is in percent. The OLS regression analysis is based on equation 1. The results are described in Table 7. We control heteroscedasticity by using heteroskedastic-consistent standard errors and test for multicollinearity using VIF.

The VIF values in all regression show the degree of multicollinearity for each independent variables. Its value in regression results in column (1) until (4) where we regress air transportation factors separately to regional GDP per capita all below five, which indicates that the variables are moderately correlated, but do not have to be overly concerned about it. While in the column (5) which we regress air transportation factors together to regional GDP per capita without passenger per capita because it has multicollinearity with VIF value above 10. After we drop air passenger, the highest VIF is high-skilled workers with a value of 6.55 whereas other variables all below six. Even though the VIF value is considered high but it is still below the tolerance limit which is 10, so the VIF values in this regression are still tolerable.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regencies

23

Table 7. OLS regression analysis

Dependent variable: Ln Regional GDP per capita

(1) VIF (2) VIF (3) VIF (4) VIF (5) VIF

Ln flight per capita 0.156** 1.75 0.00225 3.13

(2.95) (0.03)

Ln passenger per capita 0.102* 2.41 multicollinearity problem

(2.18)

Ln cargo per capita 0.0991*** 2.35 0.0973*** 4.08

(5.27) (3.63) International dummy 0.241 3.10 0.148 3.23 (0.90) (0.62) Population 0.00277 1.86 -0.000770 1.89 -0.00179 1.87 -0.000394 2.00 -0.000327 2.07 (0.30) (-0.08) (-0.19) (-0.04) (-0.32) Manufacturing industry 0.0234** 1.54 0.0218** 1.54 0.0297*** 1.63 0.0159* 1.32 0.0303*** 1.67 (3.23) (2.71) (4.18) (2.11) (4.23) High-skilled workers -0.0164 1.98 -0.00487 1.95 0.253** 3.55 -0.0199 2.90 0.224* 6.55 (-0.32) (-0.09) (3.23) (-0.28) (2.39) Mid-skilled workers 0.214** 4.70 0.211** 4.74 0.174* 4.91 0.220** 4.71 0.173* 5.00 (2.97) (2.88) (2.60) (3.00) (2.56) Low-skilled workers 0.0174 2.31 0.0154 2.30 0.0157 2.30 0.162 2.31 0.0161 2.31 (1.69) (1.50) (1.60) (1.57) (1.65) Unemployment -0.0676** 2.96 -0.0682** 3.01 -0.0682** 2.93 -0.0581* 2.89 -0.0687** 2.96 (-2.78) (-2.74) (-2.96) (-2.31) (-2.99) Tourism 0.0314 1.10 0.0458* 1.10 0.200 1.11 0.0426* 1.10 0.0220 1.13 (1.52) (2.01) (0.84) (2.20) (0.88) Constant 9.407*** 8.887*** 8.745*** 8.695*** 8.783*** (26.41) (37.09) (38.35) (35.89) (21.62) N 105 105 105 105 105 Adjusted R2 0.336 0.320 0.395 0.292 0.384

Notes: t statistics in parentheses.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

24 regional GDP per capita is positive with a coefficient of 0.156 and significant at 1 percent level of significance. It means that an increase 1 percent of flight per capita will rise regional GDP per capita by 0.156 percent. Manufacturing industry together with mid-skilled workers are also positive and significant, which means that they give an influence to regional GDP per capita positively. On the other hand, unemployment shows the adverse effect to regional GDP, and the impact is significant. The higher unemployment rate in a regency, it will result in the reduction of the regional GDP in this regency. The rest of independent variables which are population, high-skilled workers, low-high-skilled workers, and tourism are insignificant. The population is negligible perhaps because the market for their products is not inside the regency itself. They usually dispatch them to 7 primary biggest islands in Indonesia or even to foreign countries.

The relationship between passenger per capita and regional GDP per capita is described in column (2). Adjusted R2 shows that this model can explain regional GDP per capita by 32 percent. Air passenger per capita has a positive relationship with regional GDP per capita with coefficient 0.102 and significant at the level of 5 percent. One percent additional passenger per capita will incline regional GDP per capita by 0.102 percent. Manufacturing industry and mid-skilled workers remain positively significant. While unemployment still gives negative impacts to regional GDP per capita. The tourism sector in this model become significant and positive with the coefficient of 0.0458. The presence of air passenger per capita variable is likely accommodated tourists to reach the tourist destination regency so that they increase the share of employment in the tourism sector and gives a positive and significant impact to regional GDP per capita. One percent increase in the share of employment in the tourism industry will rise regional GDP per capita by 0.0458 percent. Population, high-skilled workers, and low-skilled workers are still insignificant.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

25 International dummy, which measured whether the airport serves for international flight or only domestic, shows insignificant influence on regional GDP per capita as shown in column (4). A possible reason for this insignificant effect is because not all regencies in Indonesia connected to foreign countries in term of air transportation. The regencies that have a connection with international airports are usually only the capital of provinces, but not all of them. Overall, most of the regencies in Indonesia connected only locally with other regencies. Manufacturing industry and mid-skilled workers are positive and significant. Although the effect of manufacturing is still significant, its coefficient is lower compared to previous three regression model. This means that the regencies who export their manufacturing products to foreign countries will give an important role to regional GDP per capita. Tourism sector also positive and significantly contributed to regional GDP per capita in this model. The presence of international airport will attract more foreign tourists to come to tourists destination regency, increases the share of employment in the tourism sector, and positively contributed to the regional GDP per capita. Unemployment still gives negative and significant impact to regional GDP per capita. Whereas population, high-skilled and low-high-skilled workers have no impact on regional GDP per capita. This model can explain regional GDP per capita by 29.2 percent, which is the lowest compared to other models.

In column (5) we firstly consider all the air transportation variables together to regional GDP per capita. But the results imply a high degree of collinearity in the variable passenger per capita. So, we decide to drop passenger per capita variable. The model in column (5) can explain regional GDP per capita by 38.4 percent. The effect of air cargo per capita which is the strongest will diminish the effect of other air transportation variables. So that, air freight per capita is the only significant variable compared to other air travel measurements. its significance is at the level of 0.1 percent. One percent increase in air cargo per capita will rise regional GDP by 0.0973 percent. Manufacturing industry and mid-skilled workers positive and significantly correlated with regional GDP. The presence of air freight per capita once again makes the impact of high-skilled workers significant and positively influenced regional GDP per capita. On the other hand, the unemployment rate remains negatively correlated with regional GDP per capita. Whereas population, low-skilled workers, and tourism sector are insignificant.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

26

5.2 The likelihood of a regency to have an airport

Our second analysis is the probability of a regency to have an airport. The dependent variable is a binary variable which takes the value 1 if the regency has an airport and 0 otherwise. The independent variables are manufacturing industry, high-skilled workers, mid-skilled workers, low-skilled workers, unemployment rate, tourism, and independent island dummy. We used a logit regression for analyzing the likelihood of a regency to have an airport based on the equation 2.

Table 8. The likelihood of a regency to has an airport

Variable Coefficient Population -0.0193 (-0.66) Manufacturing industry 0.0233* (2.43) High-skilled workers 0.470* (2.39) Mid-skilled workers 0.271*** (4.10) Low-skilled workers -0.0437 (-1.47) Unemployment 0.0391 (0.96) Tourism 0.106*** (4.47)

Independent island dummy 2.178***

(6.97)

Constant -2.558***

(-6.18)

N 497

Pseudo R2 0.2091

Notes: t statistics in parentheses.

* statistically significant at α=5 percent, ** statistically significant at α=1 percent, *** statistically significant at α=0.1 percent

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

27 industries together with the existence of high-skilled and mid-skilled workers show a positive and significant relationship with the likelihood of a regency to build an airport, implying that these increase the motivation of a regency to have an airport. This is understandable in Indonesia because the results in the first analysis show that these three variables positively contributed to regional GDP per capita. With the establishment of an airport in a regency, they hope that it can increase their regional GDP per capita. In the end, they could catch up their left behind to more advance regency.

Another consideration for a regency to build an airport is tourism. It has gained a highly significant positive coefficient. When the tourism in a regency become popular, it will attract more tourists to the regency, which necessitates providing better facilities including building an airport. When an airport is established in a regency, it will make both domestic and international tourists easier to reach that place. And the easiness of transportation will subsequently attract more visitors to the area.

Population, low-skilled workers, and unemployment rates are three variables which are insignificant in the model. The population does not appear to be a consideration for regencies to have an airport, perhaps because the markets for their products are not inside the regency itself. They usually dispatch them to 7 primary biggest islands in Indonesia or even to foreign countries. Low-skilled workers are not one of the considerations of a regency to build an airport because it has no impact on regional GDP as in the previous analysis. While unemployment rates are not one of the motivations of a regency to build an airport because the type of unemployment in developing country like Indonesia is usually countercyclical, means it will be lower when economic health is high and higher during economic downturns. They can still work in the less productive sector or even informal sector (Bosch and Maloney, 2008).

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

28

Chapter 6

Conclusion

6.1 Concluding remarks

This research paper’s purpose is to analyze the effect of air transportation in term of flight per capita, passenger per capita, cargo per capita, and international dummy on regional economic development in Indonesian. The analyses are made through two channels. First, we examined the influence of air transportation variables to regional GDP per capita. After knowing the impact of air travel on economic development, we did a second analysis to figure out what motivations behind the likelihood of a regency to have an air transportation center in the form of the airport.

The finding from first analysis by regressing aviation factors separately to GDP per capita are, flight per capita, passenger per capita, and cargo per capita have a positive and significant relationship to regional GDP per capita whereas international dummy is insignificant. Freight per capita gives the strongest effect on regional GDP per capita compared to three other air transportation factors because it is significant at the level of 0.1 percent. The strongest effect of air cargo per capita will diminish the impact of flight per capita and passenger per capita when we regressed them together. The presence of freight per capita also makes the effect of high-skilled workers on regional GDP per capita positive and significant. When air cargo per capita is absent from the regression models, high-skilled workers always insignificant.

Manufacturing industry and mid-skilled workers in a region consistently give positive and significant impact to regional GDP per capita. The presence of cargo per capita makes the effect of manufacturing industry on regional GDP per capita become stronger both in the coefficient and level of significance. Also, the importance of high-skilled workers increases and gain a positive coefficient when cargo is included in the regression. Oppositely, unemployment continually gives negative and significant effect to regional GDP per capita.

The presence of international dummy, even though its effect directly on regional GDP per capita is insignificant, makes tourism sector gives positive and significant impact to regional GDP per capita. The easiness access to a tourist destination will attract foreign tourist to visit the region, results in the increase in the share of employment in the tourist sector which will contribute positively to GDP per capita in a regency.

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

29 worked in a less productive sector which only provides a minimum contribution to economic development (McMillan et al., 2014).

It seems that regional income per capita will be higher if a region has larger business and trade activities through air cargo. The impact of air freight is greater compared to the number of flight and air passenger. Even though the quantitative magnitude of these factors are similar (varying from 0.1 to 0.15 percentage point), the level of significance is higher for air cargo. This may imply that the effect will be more significant if the airport is intended to use for trade and business activities. So the impact of air transportation on regional per capita income will be more if the airport is used for larger trade purpose rather than tourism purpose. Moreover, manufacturing industry which is tradable sector also has a high impact on regional GDP per capita. This fact supports the argument that the presence of trading activity in a regency has a larger impact on per capita income.

All regressions are controlled the heteroscedasticity and multicollinearity issues. Heteroscedasticity is controlled by a heteroscedastic-consistent standard error that provides consistent estimator in the least square variance. Multicollinearity is controlled by variance inflation factors (VIF). VIF values in all regressions are below ten indicate that there is no high multicollinearity level.

Our second analysis results suggest that the location of a regency is the strongest motivation to build an airport. If a regency is an independent island located separately by the ocean with its mainland, it will increase the likelihood to have an airport in their area. The existence of manufacturing industries in regency together with high-skilled and mid-skilled workers also become a consideration for a regency to have an airport. The establishment of an airport will facilitate manufacturing sector to have a larger linkage to potential buyer and supplier outside their area because the market for their product is not inside the regency itself, indicates by insignificance coefficient of the variable population. The advancement of the tourism sector of a regency also become a motivation for a regency to establish an airport. The more advanced tourism industry will attract more tourists to visit a regency. Local government should provide easiness access to their area in term of transportation network by building an airport. Lastly, mid-skilled workers who usually work in less productive sector or even informal sector which less contributes to economic development is not a consideration of a regency to build an airport.

6.2 Limitation and further research

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The Effect of Air Transportation on Regional Economic Development: Evidence from Indonesian Regions

30

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Bilotkatch, V. (2015). Are Airports Engines of Economic Development? A Dynamic Panel Data Approach. Urban Studies Vol. 52 (9), 1577-1593.

Bloningen, B., & Cristea, A. C. (2012). Airport and Urban Growth: Evidence from Quasi-Natural Policy Experiment. NBER Working Paper 18278.

Bosch, M., & Maloney, W. (2008). Cyclical Movements in Unemployment and Informality in Developing Countries. IZA Discussion Paper No. 3514.

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