Throughout the developing world, many countries have created special economic zones to attract
investment and spur industrial growth. In some cases, these zones are designed to promote development
in poorer regions with limited market access and lower quality infrastructure, an example
of a “big push” development strategy. In this paper, Bazzi, Chari, Nataraj and Rothenberg (2016) study the effects of Indonesia’s Integrated
Economic Development Zone (KAPET) program. This program provided substantial tax-breaks for
firms that locate in certain districts in the Outer Islands of Indonesia, a country with large regional
differences in per-capita income and a history of policies to promote inclusive growth. The authors find that
along many dimensions, KAPET districts experienced no better development outcomes, and in some
cases fared even worse, than their non-treated counterparts. If anything, the strongest finding is that
firms in KAPET districts paid lower taxes, but these tax reductions neither encouraged greater firm
entry, increased migration, nor raised local measures of output or welfare. Overall, the KAPET program
does not appear to have achieved the intended outcome of promoting growth in lagging regions.
While there are many possible reasons that the KAPET program failed, their findings suggest caution
in spending scarce resources to subsidize development in lagging regions.