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DR. WOLFGANG FENGLER, SENIOR ECONOMIST WORLD BANK OFFICE JAKARTA BOGOR, 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

IND Decentralization

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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.

The new Economic Geography:Seeing Development in 3D (World Development Report 2009)

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

Concentration, a fact of life,Half of the world’s production…..

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’s social and economic geography

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 as we know it:With 17,000 islands in 33 provinces

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 – …

.. resulting in very high economic concentration in Java

Note: Provincial’s size shows the proportion of provincial GDP relative to national GDP

However, Indonesia’s fiscal decentralization is counterbalancing its economic concentration

Fiscal Decentralization and Equalization in Indonesia

Poor provinces have become the main beneficiary of transfers

Transfers to poor region has become more pro-poor

The phase out of the “hold harmless” rule made the transfer system more equalizing

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DAU Growth (07-08)

The challenge is on spending – well

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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.

TERIMA KASIHDANKE

ASANTE SANA

Transfers have increased 5 times since 2000, and stabilize at the high level

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Beginning of decentralization

Substantial increase in transfer across Indonesia

Start of subsidy 'burden sharing'