7 - State Restructuring in Indonesia: Towards a Balanced Regional Economic Development

Summary

This study investigates the effects of the decentralization and AFTA on regional convergence between 1993 and 2005, by applying quantitative statistical analysis and historical institutionalism to explore the effects. This chapter summarizes the research findings and analysis results by discussing the current impact of state restructuring on persistent regional disparities and the growing economic convergence, the politico-economy complications of the AFTA beyond trade liberalization per se, and how local governments and actors develop various opportunities and development trajectories depending on their institutional history. The chapter ends by providing some suggestions on policy implications and limitations.

CURRENT IMPACT OF STATE RESTRUCTURING

This research on the effect of state restructuring on Indonesian regional development focuses on two events: decentralization and AFTA implementation. From the study, we can draw several research conclusions. First, despite evidence of convergence process, persistent and severe regional disparities continued throughout the state-restructuring period. The statistical analysis showed that regional disparities fluctuated and peaked during the financial crisis between 1998 and 2001, while the geographical analysis demonstrated significant regional disparities between Java and non-Java districts. Outside of natural resource industries, the western part of Indonesia reported higher economic levels and growth than the central and eastern regions. The sectoral analysis accordingly revealed that manufacturing industries were concentrated and agglomerated in the western part of Indonesia. Additionally, the case study on high-technology manufacturing industries showed a high index of spatial concentration in Java and Sumatra districts. Consequently, these areas have higher economic levels and growth than other regions.

Second, the econometric analysis revealed evidence of regional economic convergence over the observation period, and indicating regional endowments and capacities that determine variations in development. The state restructuring of decentralization and AFTA have different effects on regional economic development. The economic analysis showed that decentralization was associated with lower regional economic growth, whilst AFTA impact was insignificant. This finding was found both in the OLS and panel data analysis. The study also revealed that the control variables — the road accessibility and labour productivity — corresponded proportionally with higher economic growth. A higher share of manufacturing industries on GRDP is associated with economic growth, implying that this sector contribute significantly on local development.