INDONESIA'S CHANGING ECONOMIC GEOGRAPHY

Abstract

Indonesia's regional socio-economic data base extends over 30 years, so it is now possible to draw conclusions about regional development dynamics since the 1970s. We examine economic growth, inequality, convergence, structural change, demographic dynamics and social indicators over this period. There continues to be great diversity in economic and social outcomes, but growth and social progress have been remarkably even: the poorest regions, located mainly in Eastern Indonesia, have generally performed about as well as the national average. The better performing regions include those that are the most ‘connected’ to the global economy. In this respect, Jakarta stands out, growing richer than the rest of the country over time. As expected, conflict is harmful to economic development. There is no clear natural resource story: the performance of the resource-rich provinces has varied considerably.

Notes

¹Thus, for example, ‘West Java’ refers to the currently existing provinces of West Java and Banten, and ‘North Sulawesi’ to North Sulawesi and Gorontalo.

²For example, between 1997 and 2006, the number of provinces rose from 26 (excluding East Timor) to 33, but the number of third-level governments increased from 341 to more than 456.

³Commencing in January 2001, regional governments receive 80%, 15% and 30% of the government's net returns from timber, gas and oil revenues, respectively. Most of these revenues fl ow to kabupaten and kota rather than to provinces. Since 2002, special arrangements have been in place for the province of Papua, whereby it receives 80%, 70% and 70% of net returns from timber, gas and oil revenues respectively.

⁴For simplicity, we henceforth use the phrase ‘non-oil’ to refer to ‘non-oil and gas’.

⁵There are various definitions of 'Eastern Indonesia’, ranging from the grouping used here (the eastern islands other than Bali, Sulawesi and Kalimantan) to a broader one including these islands. The current official definition comprises Kalimantan, Sulawesi and all the eastern islands except Bali.

⁶The province was sub-divided in 2004, with the offshore islands becoming the province of Riau Islands.

⁷In 2002, following the introduction of special autonomy measures, the budget of the Papuan provincial government was three times its 1999/2000 level in nominal terms.

⁸The first systematic set of regional price estimates was prepared by Arndt and Sundrum (1975) but, as these are not comparable with the Nashihin (2007) estimates, we are restricted to adjusting the 2004 data. Our defl ators are derived from the regional accounts, and are therefore based mainly on wholesale prices, whereas the Nashihin estimates include both wholesale and consumer price data.

⁹The very high growth rates of small provinces like Southeast Sulawesi in the earlier period need to be interpreted with great caution. The statistical infrastructure was still rudimentary then, and the transition from subsistence to a monetary economy may have infl ated measured growth rates. The regional accounts for Papua were similarly very approximate.

¹⁰See for example Barro and Sala-I-Martin (1991) and Rey and Montouri (1999).

¹¹These islands have become a separate province only since decentralisation, so it is not possible to estimate separately their longer-term growth rate.

¹²Structural change index =  i = agriculture, industry, services.

¹³For analyses of Indonesian regional demographics, see Hugo et al. (1987); Jones and Hull (1997); and Muhidin (2002).

¹⁴For studies of Indonesian social outcomes at the regional level, see Ananta (2003); Balisacan, Pernia and Asra (2003); and UNDP (2004).

¹⁵Conditional β convergence is the result achieved if one or more of the variables that are presumed to infl uence regional growth (e.g. education, infrastructure, institutional quality) is controlled for (Barro and Sala-I-Martin 1995).

¹⁶See for example Akita and Lukman (1995) for earlier Indonesian estimates.

¹⁷The small increase in inequality since the crisis appears to be due mainly to regional differences in infl ation. The constant price series show very little change, whereas the current price series increases slightly.

¹⁸See also Akita and Alisjahbana (2002), who decompose Indonesian inequality into within-province, between-province and between-region inequality over the period 1993–98, finding the first of these to be the largest source of inequality in 1997.

¹⁹See Shankar and Shah (2003) for a comprehensive summary of the comparative convergence literature through to around 2000.

²⁰Namely, Argentina, Brazil, Chile, Colombia, Mexico and Peru.

Additional information

Notes on contributors

Yogi Vidyattama*

*We thank Ross McLeod, Chris Manning, two anonymous referees and seminar participants at the Australian National University for helpful comments on an earlier draft, and Terry Hull for advice on the demographic and social data base