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
Indonesias 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
Indonesias 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: Tokyothe biggest city in the world
35 million out of 120 million Japanese, packed into 4
percent of Japans land area
Distance: USAthe most mobile country
More than 35 million out of 300 million changed residence in
2006; 8 million people changed states
Division: West Europethe 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 worlds 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
Indonesias 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 inhabitants
and 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: Provincials size shows the proportion of provincial population relative to national population
Note: Provincials size shows the proportion of provincial GDP relative to national GDP
and so is Indonesias economy but not more
than its population
.. resulting in very high economic
concentration in Java
Note: Provincials size shows the proportion of provincial GDP relative to national GDP
However, Indonesias 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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(
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Differences in DAU allocation (07-08)
DAU Growth (07-08)
The challenge is on spending well
Province
Kabupaten/Kota
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%

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G
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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.
Indonesias inter-governmental transfer system has
been equalizing Indonesias disparities.
The challenge is to provide direct and indirect
incentives to improve the quality of spending.
TERIMA KASIH
DANKE
ASANTE SANA
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
B
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l
l
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o
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r
u
p
i
a
h
Beginning of decentralization
Substantial increase in transfer
across Indonesia
Start of subsidy 'burden
sharing'