5 - Decentralization and the ASEAN FTA Impact on Regional Economic Convergence

Summary

There are limited studies on developing countries that question the impact of devolution and trade liberalization on regional economic growth (Logan 2008; Rivas 2007; Rodríguez-Pose and Sanchez-Reaza 2005). This study thus aims to complement existing literature by analysing the economic impact of devolution and trade liberalization during the state-restructuring period in Indonesia between 1993 and 2010. The effects of devolution, ASEAN FTA variables, and selected control variables on the growth of district GRDP are observed using econometric analysis. The research finds that there is evidence of regional convergence throughout the periods under observation, but while devolution has significantly increased economic divergence, the ASEAN FTA appears to have an insignificant impact on Indonesia regional economic growth.

This chapter is divided into five sections. The next section discusses the econometrics model and data construction. The third analyses the ordinary least square (OLS) and panel regressions for four periods: the pre-decentralization period (1993–97), transition period (1998–2001), early decentralization period (2001–05), and advanced decentralization period (2005–10). The final section presents discussion and debates on regional disparities in Indonesia.

STUDIES ON INDONESIAN REGIONAL ECONOMIC CONVERGENCE

Decentralization proponent literature emphasizes that decentralization promote efficiency on decision-making and planning (Calamai 2009). For instance, Tiebout (1956) argues decentralization brought citizen participation into planning and decision-making through the ability of people to move between regions to choose the public service and taxes that suit them. Thus, decentralization introduces market-like solution to local public goods problems and the provision of public goods and services through the preferences of individual by market mechanism. As a result, efficiency of public goods is achieved as there is a large variety of local institutions, not merely the central government (Rondinelli 1989, p. 59).

Many studies of convergence determinants seem to point to similar findings (Akita and Alisjahbana 2002; McCulloch and Syahrir 2008; Resosudarmo and Vidyattama 2006; Vidyattama 2013). First, the Asian Financial Crisis (AFC) was found to contract economic growth and to cause persistent economic disparities. The divergence of regional development continues after the fall of the New Order regime in 1998 to the early period of the AFC as poorer regions were badly affected and hindered in its development growth.