Trade Spillover-Induced Backwash Effect and Regional Growth Disparities: A System GMM Approach in Central Java

This study investigates the determinants of regional economic growth in Central Java Province, focusing on trade spillovers, total factor productivity (TFP), and labour composition. Using panel data from 35 regencies and cities over 2011–2024, the analysis applies the System Generalized Method of Moments (SYS-GMM). Results reveal persistent growth, as past output strongly influences current performance. Specifically, the coefficient of the lagged GRDP variable remains above 0.96 across specifications, indicating strong path dependence. Investment, measured by Gross Fixed Capital Formation (GFCF), significantly drives short- and long-term growth. Human capital also matters, with educated and less-educated labour contributing, though the latter remains dominant. Elasticity estimates show that the long-run effect of GFCF reaches approximately 0.45, reinforcing its central role in capital-driven expansion. In contrast, TFP shows weak and insignificant effects, reflecting technological adoption, infrastructure, and workforce quality constraints. Notably, trade spillovers exert a negative influence. Having a commercial link or geographical proximity to a main growth centre does not always guarantee positive outcomes and may even lead to a backwash effect. Indicating a conditional spillover pattern whereby only regions with sufficient absorptive capacity benefit, while others experience backwash tendencies. These findings highlight the need for spatial policies that focus on enhanced connectivity, the creation of additional growth hubs, and upgrading workforce skills to ensure a more balanced spread of development benefits.