1 - Introduction

Summary

This book is an attempt to decipher regional district economic disparities during the state-restructuring events that occurred after the entry into the ASEAN Free Trade Agreement (AFTA) in 1992 and the governmental decentralization policy in 1999. Following the financial crisis in 1997, Indonesia's political arrangement shifted from a centralized regime to a decentralized government system. The new system delegates political, administrative, and fiscal autonomies to provincial and districts level. The decentralization process increased the Indonesian administrative size from 26 provinces with 292 districts in 1997 to 33 provinces with more than 491 districts in 2012.

This book examines the determining factors for Indonesia's development from a centralized government regime to the state-restructuring period. This book has adopted an empirical approach by using growth theory and the historical institutionalism approach in order to examine the impact of state restructuring. However, the impact would be determined by institutional capacities and the governance level of local governments to exploit opportunities from state restructuring processes as it would affect the rate of growth and economic development.

State restructuring refers to the creation of more logical organization where the state operates more efficient and effective (Young 2002). In this sense, the book defines state restructuring as a politico-economy shift of state organization and operation through two events (AFTA and decentralization) that accelerates state management and service delivery through the participation of stakeholders, management of production factors, and state administration to achieve development goals. This study worked with the hypothesis that decentralization and AFTA would provide local district authorities ample opportunities in which to accelerate economic growth through authority over resource allocation and mobility. Furthermore, state restructuring provided opportunities in which to accelerate economic growth through the promotion of property rights and lower transaction cost. The book investigates how the state restructuring policy would affect regional economic convergence and what are the economic growth determinants. The main argument for this book is that state restructuring institutional changes would be able to explain regional economic divergence through path dependence and inherited past institutions within individual regions.