Regional Econom ics

1. Regional Economics Sri Adiningsih, M.Sc,Ph.D.

2. What is Regional Economics? A framework within which the spatial character of economic system may be understood. We seek to identify the factors governing the distribution of economic activity over space and to recognize that as this distribution changes, there will be important consequences for individuals and for communities (Hoover and Giarratani).

3. Regional or spatial economics might be summed up in the question “what is, where, why and so what? • What refers to every type of economic activity. Not only production establishments in the narrow sense of factories, farms, and mines, but also other kind of business, households, private and public institutions. • Where refers to location in relation to other economic activity. It involves question of proximity, concentration, dispersion, similarity, disparity, or similar patterns. It can be discussed either in broad terms such as among regions, in terms of zones, neighborhoods, and sites. • The why and the so what refer to interpretations within somewhat elastic limits of the economist’s competence and daring.

4. Regional Economics is concerned with the spatial distribution of economic activity across geographic areas within a nation. Regional Economics is also particularly well-suited as a complementary field, as most economic issues are at least in part regional issues. The primary focus of this specific course is the causes and consequences of regional growth, especially those factors that lead some regions to grow faster than others.

5. The Importance of The Region in Indonesia • In most country studies, the regional dimensions of economic development would hardly deserve serious attention. In Indonesia, region (daerah) has always been major preoccupation. • The colonial administration excerbated regional differential through the promotion of a highly uneven development strategy focusing on intensive agricultural development of Jawa and the development of extractive enclaves, centered mainly on plantation and petroleum, off-Jawa. • Post-independence governments have been grappling with the daunting challenges of establishing central authority throughout archipelago and of ensuring reasonably uniform development pattern. Jawa or mainly Jakarta is the politic and economic central decision (highly centralized governance). • Regional development has been one of the success stories of the New Order Regime. There have been vast investments in transport facilities, communications, and other physical infrastructure.

6. The Regional Issues • Some of the problems arise from highly uneven distribution of natural resources and of the requirement that revenue from these natural resources. Dissatisfactions among mineral-rich provinces of Papua, NAD, East Kalimantan, and Riau have been occurred. • The region is particularly important in contemporary Indonesia has to do with spatial dynamics. The regional problem has been seen primarily as one of the extreme imbalances between Jawa and the rest of the country. • From the 1990s, the major regional challenge facing the nation is the gap between west (Kawasan Barat Indonesia/KABARIN) and east (Kawasan Timur Indonesia/KATIMIN). • Entering the new millennium (in 2001), Indonesia has adopted a new region policy that highlights decentralization. The district (kabupaten) and city (kota) have full regional autonomy. The province has much greater autonomy power than before, and the central government has only limited areas of responsibility.

7. Development and income distribution gap between province and island

8. Patterns of Regional Development in Indonesia 2005 Source: BPS

9. The table clearly shows that until 2005 dwellers centered in Java Island mainly in Jakarta and the provinces around. • Not surprisingly, the density in Java was about 1002 population per square kilometer. It almost 100 times Maluku-Papua and more than 50 times compare to Kalimantan population density. • In other region such as Sumatera and Sulawesi, population density per square kilometer below national average (116), it was only around 93 and 83, respectively. • Indonesia has unequal population distribution among the Island.

10. Regional Development Indicator: Economy

11. Source: BPS, calculated

12. Within Jawa, Jakarta, Jawa Timur, and Jawa Barat stand out. Jakarta has been the magnitude for Indonesian economy. • In 2005, about 17.48 percent Indonesia economy came from Jakarta. It has nearly the same amount as total GRDP of Sulawesi, Kalimantan, and Eastern Indonesia (16.87 percent). • Value of Papua GRDP per capita (Rp8.83 milion) above national average (Rp7.7 milion). However, it needs to be interpreted cautiously since much of that economy is still subsistence in nature. • Several regions have GRDP per capita above national average because of oil and other mining resources existence. The high figures for Aceh, East Kalimantan, Riau, and Papua reflect the spillover from the mining sector.

13. Regional Economic Structure Continued next table

14. Source: BPS, calculated

15. These regional differences are reflected in quite distinct economic structure and specialization. • Until 2005, economic structure among the island was quite difference. Industrialization process has been well developed in Jawa and Sumatera. Middle-East Indonesia island (Kalimantan, Nusa Tenggara, Sulawesi, Maluku, Papua) has been dominated by agricultural activities. • Banten, Jawa Barat, Jawa Tengah and Jawa Timur have been the nation’s most industrialized provinces, as a measured by the share of manufacturing in GRDP. While outside Jawa, Kalimantan Timur has also relatively high share of industry (30,49 percent). • On the other hand, manpower who worked in Agricultural Sector still higher than Industry.

16. Indicator of Regional Development: Poverty Source: BPS

17. At other extreme, most of the poor provinces are concentrated in the east. Nusa Tenggara Barat, Nusa Tenggara Timur, and Papua, seem to be the group of poor provinces in the nation. Compare to the other region, they are relatively further behind. • While in the west side of Indonesia, the percentage of population below poverty line in Nanggroe Aceh Darussalam was the highest with 28.47 percent. • Based on BPS data 2005, Papua and NAD were the provinces with abundant natural resources, particularly mining material such as oil, gas, copper, and gold. They have higher GRDP per capita relatively. However, welfare problems have arisen since years ago. • Higher GRDP per capita didn’t completely address poverty problems. There was something wrong in the income distribution system within province.

18. Unemployment Rate by Province, 2003-2006 (%)

19. Unployment and Poverty Rate (%) Note: Unemployment 2005: November 2005; 2006: Agustus 2006 Poverty 2005: Februari 2005; 2006: Maret 2006 Sources: BPS

20. Investment Indicator 2006 *) until November 2006 Source: BKPM, calculated

21. Total realized foreign (PMA) and domestic investment (PMDN) in Indonesia until Oktober 2006 around 4.48 billion US$ and Rp 13.54 trillion respectively. • The graph also indicates that most of investors (domestic and foreign) who listed in BKPM rather put their fund in Jawa-Bali than other region in Indonesia. • Throughout 2006, Jawa-Bali region has successfully attracted almost 60 percent domestic investment. Sumatera was at the second with 27.11 percent. However, it was not happened well in Kalimantan, Sulawesi, and Eastern Indonesia region. Total PMDN in these region was only around 12.47 percent, 0.51 percent, and 0,16 percent respectively. • More than 76 percent realized foreign investment placed in Jawa-Bali area and followed by Sumatera with 12 percent. Kalimantan, Sulawesi, and Eastern Indonesia are the smallest with percentage less than 1 percent. • Riau is the province which successfully attracted domestic investment fund while DKI Jakarta foreign investment. • In 2005, around 31,67 percent of total domestic investment placed in Riau. Jakarta successfully attracted nearly 37 percent from total foreign investment which was registered by BKPM.

22. Regional Autonomy and Income Distribution • In 2001, Indonesia adopted new development policy that implemented regional autonomy. • Have this policy been successfully narrowing disparities among islands?

23. GRDP Distribution Among Islands (%) Source: BPS

24. Peranan Wilayah/Pulau dalam Pembentukan PDB-Nasional (persentase) Triwulan IV Wilayah/Pulau 2007 2008 2009 2008 2009 (1) (2) (3) (4) (5) (6) Sumatera 22,9 23,3 23,5 23,4 23,5 Jawa 58,8 57,7 58,1 57,8 57,6 Bali dan Nusa Tenggara 2,7 2,5 2,7 2,6 2,8 Kalimantan 9,4 10,5 9,2 10,0 9,5 Sulawesi 4,1 4,2 4,54,4 4,6 Maluku dan Papua 2,1 1,8 2,0 1,8 2,0 Indonesia 100,0 100,0 100,0 100,0 100,0 Sumber : BPS

25. The changing structures of spatial GRDP among the Islands indicates the changing structures of economic development efforts among the provinces. • Jawa-Bali has dominated Indonesia’s economy. Since 1999, their contribution to Indonesia economy gradually increased. In 2005, approximately 61.38 percent of the country’s economic activities have come from Jawa and Bali. • By Contrast, the economies activity in Sumatera slowly declined. After reached around 22,60 percent in 1999, GRDP from this region fell into 21.77 percent in 2005. • The same pattern has also been taken place in Kalimantan. Total GRDP gradually decreased from 9,56 percent into 9.03 percent in 2005. • Eastern Indonesia (NTT, NTB, Maluku, Maluku Utara, and Papua) has large area and natural resources. In fact, contribution of these provinces were very small indeed, just around 3,4 percent to Indonesia economy in 2005. • Until 2005, regional autonomy has not seen as a good policy to allocate income equally. • Regional autonomy widening indeed the gap among regions. Whereby wealthy and progressive region could develop their economy better and faster while poorer regions are left behind.

26. Concluding Remark • Regional disparities have been occurred among regions in Indonesia since previous years. • These regional disparities reflect both on social (such as population) and economy field (regional income, GRDP per capita, investment). • High poverty rate has arisen in region with abundant natural resources and higher income per capita. It reflects unequal distribution income problem has been taken place within provinces. • It has been seen a general fact that the western part of Indonesia is much more prosperous than the eastern counterpart. Sumatera, Jawa, and Kalimantan is believed to have received a more favorable share of national development. • Regional autonomy didn’t seem address interregional disparities. The gap among regions wider indeed. Jawa-Sumatera still going faster than the rest others.