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DR. WOLFGANG FENGLER, SENIOR ECONOMIST
WORLD BANK OFFICE JAKARTABOGOR, 23 JULY 2009
Indonesian Regional Science Association Conference (IRSA Institute) Regional Development in Indonesia: Political Economic Perspectives
Indonesia’s Economic Geography and Fiscal Decentralization 10 years after designing the big bang
Main messages
Growth will always be unbalanced but development can still be inclusive (message from the World Development Report 2009)
Indonesia is a high diverse and unequal country but decentralization has been equalizing because …
… poor provinces have been the main beneficiaries of Indonesia’s decentralization, particularly in the last 5 years.
Today, main challenge is not to transfer additional funds to poor regions, but to help poor regions spend the resources well.
Density: Tokyo—the biggest city in the world 35 million out of 120 million Japanese, packed into 4
percent of Japan’s land area
Distance: USA—the most mobile country More than 35 million out of 300 million changed residence in
2006; 8 million people changed states
Division: West Europe—the most integrated continent About 35 percent of its GDP is traded, almost two thirds
within the region
The three 3Ds and three Special Places in the world
WDR Conference in Central Asia, February 26-27 2009
at the global spatial scale
….can fit onto 1.5% of its land, less than the size of Algeria
Indonesia: one of the most diverse countries; living standards range from developed country standards to entrenched poverty
• City of Bontang (East Kalimantan) has the highest GDP per capita in Indonesia. The city has 120,000 inhabitantsand its economy is dominated by oil&gas
Indonesia's population is heavily concentrated: 90% of the population lives in Java and Sumatra
Note: Provincial’s size shows the proportion of provincial population relative to national population
Note: Provincial’s size shows the proportion of provincial GDP relative to national GDP
… and so is Indonesia’s economy – but not more than its population – …
Note: Provincial’s size shows the proportion of provincial GDP relative to national GDP
However, Indonesia’s fiscal decentralization is counterbalancing its economic concentration
The phase out of the “hold harmless” rule made the transfer system more equalizing
-300
-250
-200
-150
-100
-50
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n
-100
-80
-60
-40
-20
0
Gro
wth
200
7-20
08 (%
)
Differences in DAU allocation (07-08)
DAU Growth (07-08)
The challenge is on spending – well
Province
Kabupaten/Kota
0
20
40
60
80
100
120
Jan.
Fe
b.
Mar
. A
pr.
May
. Ju
n.
Jul.
Aug
. S
ep.
Oct
. N
ov.
Dec
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Feb.
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ar.
Apr
. M
ay.
Jun.
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l. A
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Sep
. O
ct.
Nov
. D
ec.
Jan.
Fe
b.
Mar
. A
pr.
May
. Ju
n.
Jul.
Aug
. S
ep.
Oct
. N
ov.
Dec
. Ja
n.
Feb.
M
ar.
Apr
. M
ay.
Jun.
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l. A
ug.
Sep
. O
ct.
Nov
. D
ec.
Jan.
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b.
Mar
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pr.
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Jul.
Aug
. S
ep.
Oct
. N
ov.
Dec
. Ja
nFe
bM
arA
prM
ay Jun
Jul
Aug
Sep Oct
Nov
Dec Ja
nFe
bM
ar
2003 2004 2005 2006 2007 2008 2009
IDR
Trill
ions
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
% o
f GDP
Kabupaten/Kota (IDR Trios)Province (IDR Trios)% GDP
Conclusions
Indonesia is becoming an urban country – 60% urban by 2015.
It is important that decentralization policies take on the “urban challenge”.
Indonesia’s inter-governmental transfer system has been equalizing Indonesia’s disparities.
The challenge is to provide – direct and indirect –incentives to improve the quality of spending.
Transfers have increased 5 times since 2000, and stabilize at the high level
0
50,000
100,000
150,000
200,000
250,000
300,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bill
ion
rupi
ah
Beginning of decentralization
Substantial increase in transfer across Indonesia
Start of subsidy 'burden sharing'