6 - The Institutional Effects on Regional Policies and Development: A Historical Institutionalist Perspective

Summary

This chapter explains the findings obtained from the quantitative study through a regional institutional analytical tool, which combines economic performance and historical institutionalist approaches to investigate institutional antecedents, path dependences, and political shocks. There is a difference on the manufacturing analysis scope in Batam and Bandung based on the type of economic structure that is under observation. In Batam, the manufacturing industries are historically spillovers from Singapore and other countries and are dominated by medium and large manufacturing firms. In Bandung, the creative city analysis focuses on creative industries that are dominantly small and emerging firms.

From the findings in this chapter, I argue that regional disparities and variations in Indonesia, inherited from the past institutions, have shaped current institutions through path dependence, and were further disparaged by the state restructuring.

Using case studies from Batam and Bandung to illustrate my findings, the chapter is organized as follows. The first section discusses institutional changes and adaptations during the post-decentralization period that have occurred in the forms of dispersed institutional layering in relation to politics, economics, and ethnics. The second section examines the development of manufacturing and creative industries in Indonesia, by discussing the antecedent institutions and developments in the manufacturing city of Batam and the creative city of Bandung. Using these two case studies, I analysed the impacts of decentralization and ASEAN FTA on regional development.

THE TALE OF TWO SECTORS: MANUFACTURING AND CREATIVE INDUSTRIES

Manufacturing in Indonesia

The impact of state restructuring institutional change on manufacturing industry is an important study because decentralization changes the manufacturing policies and AFTA trade tariff directly affect the manufacturing production. Since the pre-decentralization period, the industry faces ongoing problems that include: (1) persistent high degree of labour intensity, (2) inconsistent policies, and (3) land acquisition issues.

First, while the high degree of labour intensity in manufacturing may increase labour absorption rate, its value-added is insignificant, and has little impact on technological and knowledge spillover in Indonesia. Wages and consumption also remain low for the workers.

Second, the changing policies meant inconsistency and insecurity for foreign direct investments (FDIs). For instance, the report by KPPOD (2007) points out that decentralization has not improved public services at the district level despite the shifts in business and investment procedures.