INTRODUCTION

There is a large literature on the relationship between the quality of governance – broadly defined – and long-run economic performance (North 1990; Acemoglu, Johnson and Robinson 2002). The general conclusion from this literature is that institutions, and the quality of their governance, matter for economic performance at the country level. There is also evidence to suggest that subnational governance is related to economic performance at the subnational level, although the evidence here is more mixed (Eckardt 2002; McCulloch and Malesky 2011). This chapter asks a different question: what are the drivers of the quality of subnational economic governance? The general assumption in the literature, and by policy makers, is that the quality of governance is a choice, that is, that ‘good’ leaders choose to have good governance and ‘bad’ ones choose otherwise. Leadership is clearly critical (von Luebke 2009; Patunru, von Luebke and McCulloch 2012), but there may also be structural factors, such as the size of the local economy, its location and its natural resource endowments, that influence the quality of governance by shifting the incentives faced by local leaders. We explore the influence of such factors in both Indonesia and Vietnam using quantitative data on the quality of subnational governance and the characteristics of subnational regions.

To preview our results, we find some interesting similarities in the determinants of subnational governance between the two countries, but also some marked differences. In particular, we find support for the idea that the complexity and size of modern cities reduce the quality of local governance. But we also find that being located outside Java appears to have a negative impact on the quality of governance in Indonesia, as does the size of the local economy, whereas neither location nor GDP appears to influence the quality of governance in Vietnam. We suggest that the structure of the political institutions in the two countries has provided a different set of incentives for local leaders, and that it is this that may be responsible for the differences in the determinants of subnational economic performance in Vietnam and Indonesia.

The chapter is structured as follows. Section 9.2 describes the structural drivers of subnational economic governance in Indonesia. Section 9.3 examines the drivers of changes in the quality of governance at the provincial level in Vietnam, exploiting both quantitative and qualitative evidence.

INTRODUCTION

This chapter examines regional development patterns in Indonesia since the 1970s. In earlier work (Hill, Resosudarmo and Vidyattama 2008; Vidyattama 2008) we concluded that, although inter-regional inequality was high, growth during the period 1975–2005 was spatially quite broadly distributed. A very gradual convergence in provincial per capita income levels was discernible according to the two most widely used economic indicators (discussed below), suggesting some catch-up among the poorest regions. The precise magnitudes depended on which concept of inequality and which income series were used. Few provinces performed consistently poorly and, apart from the special cases related to conflict, very few grew significantly more slowly than the national average. Greater Jakarta became ever more dominant during the period. Together with East Kalimantan, it continued to be the richest province from the 1980s. In general, the better-performing regions were those that were more connected to the global economy, through commodity exports, tourism or the modern industrial–service economy.

However, the unit of analysis in our earlier work was confined to the provinces, as the district (kabupaten/kota) dataset was still in its infancy, covering a relatively short time span of about a decade. Moreover, we were able to draw only limited inferences about the effects of decentralization, both because the analysis was conducted at the provincial level and because the regional accounts data were then available only through to 2005. The purpose of this chapter is to extend this research in two directions. First, we pay greater attention to the district as the unit of analysis, consistent with the longer and better data series now available, and with the fact that districts have been the focus of the decentralization measures legislated in 1999 and implemented since 2001. Second, as we now have data for the decade since decentralization commenced, we are able to examine the effects of these reforms on regional development outcomes.

The chapter is organized as follows. In section 4.2 we provide a broad overview of regional development dynamics, among the major island groupings and at the provincial level, extending and updating our earlier research. We also examine the correlations between economic and social indicators, and trends in inequality. Section 4.3 repeats this analysis at the district level, examining in particular whether the broad regional mosaic at the provincial level holds at the more disaggregated district level of analysis.

INTRODUCTION

The western part of the New Guinea islands is a unique part of Indonesia. Situated furthest from the nation's capital, Jakarta, it is Indonesia's most sparsely populated and geographically challenging region, and has some of the country's lowest socio-economic indicators. The combination of these difficult geographical and demographic conditions has meant that development in the region has always been challenging (Garnaut and Manning 1972, 1973; Manning and Rumbiak 1989).

Papua formally became part of Indonesia through a long and bitter process that took place between 1963 and 1969. At the time of annexation in 1969, the region was renamed West Irian (Irian Barat) and became a province of Indonesia, with Jayapura as its capital. In 1973, the name was again changed, to Irian Jaya. This controversial history led to the formation of movements among the local elites calling for Papua to become an independent state. Though relatively low level, sporadic and only intermittently violent, these independence movements have consistently challenged the legitimacy of Indonesian rule ever since (McGibbon 2006).

Over the ensuing decades, the Indonesian government attempted to weaken Papuan independence movements and accelerate development by allocating a higher level of funding per capita to Irian Jaya than to the other Indonesian provinces. Critics argued, however, that it was far less than the revenue generated by the region's natural resources. In particular, much of the revenue from the hugely profitable Freeport mine in Mimika district went straight to the central government, fuelling tensions between Jayapura and Jakarta (Resosudarmo et al. 2009a, 2009b).

The most critical time in the relationship between Jakarta and Jayapura was the period 1998–2001. The resignation of President Soeharto in mid-1998 and East Timor's successful demand for a referendum on independence intensified separatist hopes in Irian Jaya. When Abdurrahman Wahid became president at the end of 1999, he introduced a more accommodative and culturally sensitive approach to the question of ethnic conflict and separatist demands by changing the name of the province to Papua – the name by which parts of the main island were known before contact with the West (Sumule 2003; McGibbon 2004, 2006). To maintain good relations with the provincial elites, the president also endorsed the development of a draft bill on special autonomy for Papua.

INTRODUCTION

Nation-states launch decentralization programs in highly different historical contexts and for a wide variety of reasons (Eaton, Kaiser and Smoke 2010: 8–9). China and Vietnam, for example, have pursued moderate decentralization policies in order to respond to economic modernization pressures. Brazil, South Africa and Mexico introduced decentralization as part of their post-authoritarian transitions, while Cambodia, Rwanda and Uganda gave more power to the local level to heal post-conflict traumas. Most importantly, many developing countries use decentralization as a tool to improve government effectiveness, responsiveness and accountability (Asante and Ayee 2004: 3). Few states, however, implement decentralization as an urgent measure to prevent the disintegration of the state in the middle of a severe political crisis. Arguably, Indonesia in 1999 was such a state: many observers were concerned that, having emerged from 40 years of centralist authoritarianism, post-Suharto Indonesia could become the next Yugoslavia or Soviet Union. Fuelled by the secession of East Timor in 1999, anxiety spread within Indonesia that other parts of the archipelago could also demand independence. While most serious foreign scholars believed that a territorial break-up was unlikely (Cribb 1999; Emmerson 2000; Aspinall and Berger 2001), they nevertheless devoted much time to discussing such a probability. This, in turn, did little to reassure Indonesian policy makers.

Faced with the threat of territorial disintegration, the Indonesian elite turned to decentralization. First designed in 1999 and implemented since 2001, decentralization transformed Indonesia from one of the most centralist nations in the world into a polity with near-federal structures. As a result, the share of regional spending in total government expenditure increased from 17 per cent in 2000 to 40 per cent in 2009 (World Bank 2002, 2009: 65). This reform was implemented despite a number of well-documented risks inherent in decentralization. First, the empirical record of decentralization around the globe is ‘mixed at best in terms of realizing many of the stated objectives of reform’ (Eaton, Kaiser and Smoke 2010: xi), providing no ‘unambiguous proof of its desirability’ (Smoke 2003: 7). Second, ‘decentralization is likely to accentuate the already precarious imbalance within the state’ because it often favours already rich districts over poorer ones (Asante and Ayee 2004: 2). Third, decentralization frequently leads to wasteful spending on bureaucratic apparatuses (Mawhood 1993).

INTRODUCTION

Poverty in Indonesia has fallen markedly since 1976, although there have been significant differences in rates of reduction between regions. In the wake of the Asian financial crisis of 1997–98, and the accompanying financial, economic, social and political upheaval, Indonesia entered a new democratic period known as reformasi. Shortly afterwards, Indonesia implemented in a relatively short period one of the largest-scale decentralizations ever seen, bypassing the provincial level of government to transfer substantial power and resources to the districts. Since then, the economy has recovered and continues to perform strongly, with average annual growth in GDP of 5.6 per cent, a stable currency and inflation record, and continued reductions in poverty. This new economic expansion has been achieved in part by riding a (largely Chinese-driven) boom in global commodity prices.

As Hill, Resosudarmo and Vidyattama (2008: 408) note, ‘Development dynamics are a long-term phenomenon, involving decades rather than years’. It is now over a decade since Indonesia recovered from the crisis, implemented its decentralization reforms and embarked on a period of renewed economic expansion, meaning that only now has sufficient time elapsed for us to take a look at long-run patterns of regional poverty in Indonesia, with a detailed examination of the decentralization period. We update the provincial analysis to cover the two decades from 1993 to 2012, while also offering some initial analysis on district-level poverty performance since decentralization.

We ask two main questions. First, what are the patterns of regional poverty in the periods immediately before and after reformasi? Have trends in poverty reduction remained much the same, or did the crisis, reformasi and decentralization mark a structural break in patterns of provincial poverty reduction? Second, has decentralization led to faster poverty reduction, as many had hoped? Have the winners and losers with respect to poverty among the districts remained the same, or changed? And what role has the fragmentation of districts – the process of districts splitting to form new ones, known in Indonesia as pemekaran – played in poverty reduction and district development?

Section 5.2 provides an overview of poverty at the national level since 1976, along with a brief summary of the literature on regional poverty in Indonesia. Section 5.3 examines provincial poverty trends during three periods: 1993–96, 1996–2003 and 2003–12.

INTRODUCTION

It is now over a decade since Indonesia embarked on massive administrative and political decentralization, including in the land-based natural resource sector. The arguments for the decentralization of natural resources hinge on the assumptions that ‘locals know best’ and that reducing the distance between decision makers and ordinary citizens will result in policies that better address local needs and circumstances. The dynamics of decentralization in the natural resource sector, especially the forest sector, during the early post-reform years have been widely documented. Despite a lack of capacity, local governments scrambled to take the new opportunities to exploit the forests in their regions, resulting in distinct and undesirable patterns of governance – in particular, the indiscriminate allocation of timber licences, the benefits of which accrued disproportionately to local elites, and a failure to reinvest the proceeds in the forests. Inconsistencies in the legal framework led to incoherency in the workings of government institutions, and to a struggle between the different tiers of government for authority over natural resources. The critical elements of a national system of checks and balances, and downward and upward accountability of local governments, were missing or weak.

What has happened since those early years of decentralization? Has there been a change in direction over the past decade? What have been the effects of decentralization in the forest and land-based sectors? Can recent initiatives in these sectors improve the management of Indonesia's forest estate (kawasan hutan)? Focusing on the governance of forest lands, this chapter examines whether decentralization has fundamentally changed the ways in which the fragile ecologies of Indonesia's Outer Islands are managed.

We focus on forests and forest lands for at least three reasons. First, from a conservation perspective, Indonesia's forests house an invaluable wealth of biodiversity, much of it found nowhere else and some of it yet to be fully explored.

Second, the country's forest lands remain an important economic resource. It is true that, with the exception of the pulp and paper industry, the readily measurable economic returns from timber and wood products have declined, particularly when compared with the rising shares in national GDP of other natural resource-based sectors.

INTRODUCTION

The rural hinterlands of Medan in North Sumatra and Pontianak in West Kalimantan are known for growing lots of oranges. You can find oranges from those areas in supermarkets in Jakarta and Surabaya, although their market share is limited because of strong competition from countries such as China. The main reason for this is that trade logistics costs in Indonesia are high – so high that it is cheaper to ship oranges to Jakarta from China (and even the United States) than from Medan and Pontianak. The cost of shipping a container from China to Jakarta is about $400, but as much as $600 from Pontianak. A study by the World Bank (2010) found that 70 per cent of the difference in the prices of staple agricultural commodities across the Indonesian archipelago was explained by a region's degree of remoteness. Essentially this reflects the poor state of logistics, especially the low quality of transport infrastructure. The distance from the large industrial estates in Cikarang in West Java to the port of Tanjung Priok in Jakarta, and from the industrial estates in Pasir Gudang to the port of Tanjung Pelepas in Malaysia, is more or less the same: about 55 kilometres. However, there is a substantial difference in the cost of transporting containers from these areas to the ports. In Indonesia, it costs about $750 to transport a container from Cikarang to Tanjung Priok, but in Malaysia it costs only $450 to transport a container from Pasir Gudang to Tanjung Pelepas.

The Indonesian government recognizes the importance of efficient transport networks to promote inclusive economic development. As a huge archipelago, the country depends on efficient, affordable and reliable shipping services to glue the nation together. Seeing itself more and more as a ‘maritime economy’, Indonesia has prepared both a Shipping Law and a Port Master Plan in recent years. The importance of toll roads and highways to bring down land transport costs has also been recognized. For example, when the toll road between Surabaya and Jakarta is finished, it is estimated that travel time between the two cities will fall from 18 to eight hours.

In recent years, the issue of logistics has attracted increased attention.

INTRODUCTION

Administrative fragmentation, through the process known as pemekaran, is transforming political dynamics in Papua, strengthening clan identities, generating a new assertiveness among elected Papuan officials and nurturing new conflicts. Papua has undergone greater administrative division than any other area of Indonesia. What in 1999 was a single province with 10 subprovincial districts or municipalities (kabupaten/ kota) has become two provinces, Papua and West Papua, with 42 districts and municipalities, and further new units in process – all of this taking place in one of the poorest and most violence-wracked regions of Indonesia.

Papua is historically and culturally different from the rest of Indonesia. Whereas the rest of the former Dutch East Indies secured independence in 1949, the western half of the island of New Guinea was incorporated into Indonesia only in 1969 following a controversial United Nations-supervised referendum. It has been home to an active independence movement ever since. It is culturally Melanesian, not Malay, and it has over 200 indigenous ethnic groups. In addition, a large migrant population from the rest of Indonesia has grown up over the last several decades, including migrants from both Java and elsewhere as part of an official resettlement program during the 1970s and 1980s, as well as many others who came on their own to trade or to take jobs in the civil service. In 2001, the Indonesian government granted Papua ‘special autonomy’ in the hope that this would weaken the independence movement, but whatever good will might have emerged from this initiative was destroyed two years later when, without consultation, the government divided the province first into three, then back into two, provinces. In the decade since special autonomy came into force, there has been limited progress on devolving political powers that would be significantly greater than those enjoyed by other Indonesian provinces; the main impact has been to flood Papua and West Papua with cash, much of which has disappeared through corruption. Both provinces remain at or near the bottom of the country's Human Development Index (HDI), despite huge wealth from various extractive industries and, increasingly, palm oil.

It is in this context that the ‘blossoming’ (pemekaran) of administrative units is taking place today, without any clear strategy or development logic, other than the tired refrain of ‘bringing government closer to the people’.

INTRODUCTION

Recent urban development in many Asian countries has been marked by the physical growth of cities, radiating from the centre in all directions and spilling over beyond their formal administrative boundaries. This development has been characterized by a mixture of many different kinds of land uses and economic activities, including the appearance of new towns and large housing and industrial estates alongside existing agricultural activities. This phenomenon, often referred to as ‘mega-urbanization’, has occurred in many Asian countries, including Indonesia, China, India, Malaysia and Vietnam.

In earlier research (Firman 2009), I have identified seven characteristics of mega-urbanization in Indonesia:

1. 1 development of economic activities on a global scale;

2. 2 division of functions between the core and the outskirts of large cities;

3. 3 change from single-core to multi-core urban areas;

4. 4 land-use change in the city centre and conversion of farmland to urban uses on the outskirts;

5. 5 large-scale urban infrastructure development;

6. 6 greatly intensified use of space; and

7. 7 considerable increases in commuter numbers and commuting times.

Over the past decade, the development of Indonesia's mega-urban regions has also reflected the urban fragmentation resulting from the new decentralization policy implemented since 2001 (Firman 2008, 2009).

One of the biggest challenges in mega-urban development is how to build an appropriate mechanism of governance that can optimize the potential of an urban region to improve its competitiveness and the quality of life of its residents. Governance includes the power exercised not only by formal government institutions, but also by civil society and the private sector. Against this backdrop, this chapter examines mega-urbanization in the greater Jakarta metropolitan area, which has the country's largest concentration of economic activities and urban population, and the governance systems that could be used to manage urban development in the region. In addition, the chapter will update my earlier research on the development of the greater Jakarta area (Firman 2004, 2008, 2009, 2010).

The greater Jakarta area consists of the city of Jakarta and the surrounding metropolitan area, including Bogor, Depok, Tangerang and Bekasi – hence its acronym Jabodetabek, consisting of the first two or three letters of each region.

INTRODUCTION

In 2006, the Indonesian government committed to a community-driven development program on a nationwide scale. Project planners subsequently rolled out this program across nearly 70,000 villages in 6,681 subdistricts (kecamatan) from Aceh to Papua. A scaled-up version of a program pioneered by the World Bank, the initiative created one of the largest and most publicized international examples of a ‘social capital’ turn in development programming. Over the period 2007–12, $1,200 million (Rp 1.2 trillion) was allocated to the program.

The National Community Empowerment Program (Program Nasional Pemberdayaan Masyarakat, PNPM) came out of years of research and policy work on the need for beneficiary participation in development (Hickey and Mohan 2005), and followed the mainstreaming of social capital ideas in public policy (Bebbington et al. 2004; Fine 2010). This approach derives from the original argument that social capital not only facilitates collective action and economic development, but also is ultimately the mechanism that connects the two (Woolcock 2010: 481). Social capital, embedded in participatory groups and encompassing shared understandings of fairness, leadership, rights and duties, has come to represent a resource that can be mobilized and built upon for developmental ends (Nakagawa and Shaw 2004).

Through its Social Capital Initiative, the World Bank took up this idea and applied it across the globe in community-driven development (CDD) and social fund approaches. These aimed to get communities involved in choosing how funds might be spent and monitoring the progress of the projects they chose, thereby developing interventions that more effectively supported community development and fostered local accountability mechanisms. In some respects this represented a logical extension of the decentralization of government taking place across Indonesia. However, rather than devolving authority through state actors who were to be held downwardly accountable, the new CDD initiatives aimed to avoid accountability deficits within the state by establishing parallel frameworks to engage local participation. Accordingly, the PNPM program has two main components: facilitation of participation in the selection, design and implementation of local development projects, and accountability mechanisms to achieve this goal (King, Samii and Snilstveit 2010).

INTRODUCTION

Aceh has a troubled history (Box 20.1). During much of the last century, and notably during the three decades to 2005, local conditions across much of the province were hardly conducive to sustained economic growth and development. Although the development process proceeded apace across most of the rest of Indonesia, throughout much of this period broadly based development in Aceh was slow. Today, widespread poverty is still a major problem in many parts of Aceh and the challenges to be faced of promoting growth remain daunting.

In order to consider options for a development strategy during the period ahead, this chapter will first survey trends in Aceh during the past decade (section 20.2). It will then outline the key development challenges facing Aceh today, focusing first on the impact of the aid program and the 2005 Helsinki peace agreement, and then on the policy issues that need to be considered to promote development (sections 20.3–20.7). Finally, it will set out some of the main points of a development strategy for Aceh (section 20.8).

DEVELOPMENTS SINCE 2000

The past decade has been a tumultuous period for Aceh. In order to consider both the opportunities and the challenges that Aceh is facing today, it is necessary to consider the difficult situation in the province in the period after the turn of the century, and then the recent history of transformation since 2005.

In the first few years of the post-Suharto period, during the transition to the reformasi (reform) era, there was much political change across Indonesia and considerable political upheaval in Jakarta as several presidents came and went in quick succession. There was turmoil in Aceh too, but of a different kind. In the early 1990s the central government had initiated military operations against the separatist Free Aceh Movement (Gerakan Aceh Merdeka, GAM) and around 12,000 troops had been deployed to the province. Clashes between the Indonesian military and GAM were common, with frequent allegations of human rights breaches on both sides. Orderly governance in the province was barely possible. In many areas local development was badly held back.

When the subject of workers and the labour movement in Myanmar is discussed, it has been widely assumed that the labour movement became (and remained) very weak after the 1962 military putsch. Before that, under the leadership of political parties during the parliamentary period from January 1948 to March 1962, the labour movement had been very active and quite militant, and workers were incorporated into party politics by politicians. When the military took political power in 1962, all independent workers’ movements were curtailed. Instead, the state incorporated workers into the party-state structure, under an institution called the People's Workers’ Council (later known as the Workers’ Association), and limited their political freedom.

After the military putsch in 1988, in contrast, the State Law and Order Restoration Council (SLORC) and the State Peace and Development Council (SPDC) governments excluded the labour movement from political participation and collective bargaining, and subjected it to repressive measures. Workers held very few strikes in industrial factories but were unprotected and suffered retaliation by the SLORC/SPDC government.

This scenario changed suddenly when, in March 2011, the SLORC/SPDC government handed over political power to a new military-dominated civilian government under President Thein Sein. Upon taking office in March 2011, the president initiated a series of reforms that widened the current political space and allowed many people to enjoy a degree of political freedom that the country had not seen since 1962. In doing so, the Thein Sein government surprised many people both inside and outside the country.

The reform process seemed slow at first, but the pace of reform quickened in 2012. Hundreds of political prisoners were released, in three groups (BBC 2011; Nelson and MacKinnon 2012). Controls on trade unions were relaxed, and censorship of the press was formally abolished in August 2012 (Nelson 2012). Moreover, the parliaments passed a number of new laws, including a law under which peaceful public protests and demonstrations were to be allowed (Win Ko Ko Latt and Ei Ei Toe Lwin 2012).

(Some commentators interpret these reforms as an attempt on the part of the former military generals to avoid huge public protests, like the “Arab spring”, in Myanmar. Whatever the reasons behind the changes, it has to be agreed that since 2011 the Myanmar government has undertaken many positive reforms.)