Bambang PS Brodjonegoro

Bambang PS Brodjonegoro Department of Economics, University of Indonesia

The period of severe economic crisis that has prevailed for the last six years might be over, what with continuing macroeconomic stability, indicated by modest economic growth and a controllable inflation rate.

The economy should continue to recover, with expected higher annual economic growth, stronger economic fundamentals and eventually job creation to reduce acute unemployment and poverty.

It is truly a daunting task for the new, directly elected government, which already faces high public expectations to solve multifaceted problems. The challenge, then, will be how to optimize all possible sources of growth.

Since Indonesia is a large territory with many local governments, one possibility is to apply a bottom-up process to generate economic growth at each locality, ensuing cumulatively in higher growth at the national level.

Current local economic systems are completely different from prior to 2001, when so-called local economic policies were, in essence, the national economic policy executed at the local level due to a strong centralized system; provincial and local governments were merely "branches" of the central government with little or limited local initiatives.

After the implementation of regional autonomy on Jan. 1, 2001, it became a totally different ball game.

Today, provincial and local governments are basically autonomous and no longer branches of the central government. Local governments must now determine their economic policies and strategies in order to provide basic public services to the local population, and furthermore, to remain economically competitive.

It was, understandably, difficult for local governments to become autonomous during the economic crisis. As such, some people might have made an early conclusion that decentralization might have a negative impact on local economic development.

With the national economy on track to recovery, the autonomous local governments need to challenge that early conclusion by proving decentralization a productive asset of the national economy.

Meanwhile, regional economic conditions reflect the national economic structure: Most provinces rely on private consumption to generate growth, with investment having a diminished role.

Prior to the late-1990s crisis, few provinces relied on investment and relied more on productive growth component for economic growth. During the crisis, these provinces lost their investment attractiveness and, as with the other provinces, had to resort to private consumption. Consequently, annual average economic growth in the regions declined during the crisis.

Across Indonesia's regions, the manufacturing sector was clearly the economic sector most severely affected by the crisis. On the other hand, the agriculture and traditional service sectors were the least affected.

However, the nationwide crisis generally did not change the regional economic landscape and hence, regional disparity is still considerably high, with high economic activities concentrated in only a few regions, particularly Jabodetabek -- the greater Jakarta metropolitan area consisting of Jakarta, Bogor, Depok, Tangerang and Bekasi.

The more autonomous local governments now have absolute freedom from the central government in determining their budgets, with local legislative councils (DPRD) the only institution that can influence significantly the local budgeting process.

With a relatively limited budget dedicated to development and local economic growth activities, the DPRD and local administrations must cooperate to provide welfare and basic services to their people. Misuse of the local budget would only bring disaster to the local economy and furthermore, to local economic growth, and thus eventually fail to answer the basic needs of local residents in job creation and better incomes.

The view that decentralization is a negative factor to the national economy seems to find justification in the many publicized stories and news on the local investment climate.

Certainly, the first four years of regional autonomy have generated differences in the attitude of local governments, some of which are supportive of local economic growth.

The imposition of new local taxes and charges against a relatively low local revenue (PAD) has triggered the issuance of illegal and disruptive local taxes, fees and charges, which have led to a local business climate that is less-than-conducive to investment.

In some cases, such practices have prevented the interregional flow of people and goods, although the essence of decentralization is the free movement of people and goods from region to region.

Further, these illegal charges and fees could hurt local farmers more than local conglomerates. For example, additional charges imposed on local produce to be sold in other regions have clearly put pressure on local farmers and will reduce the competitiveness of local products in the national market.

A 2003 survey by the Regional Autonomy Watch (KPPOD) for local competitiveness revealed that the tendency of local governments to impose disruptive fees and charges was a key factor affecting the decision of potential investors to enter Indonesia. In broader terms, local institutional capabilities -- or the local government's behavior toward potential investors -- is the most crucial factor in making a region attractive to new investment.

Despite negative coverage on the local business climate, the KPPOD survey found that some regencies and municipalities demonstrated promising performances, with the most attractive regions being Purwakarta regency in West Java and Batam municipality in Riau Islands province.

The drive to be more competitive has also spread across Indonesia. Of the 10 most investment-attractive regencies, only four are in Java. The rest are in Bali, Kalimantan and Sulawesi, but none are in Sumatra.

That less well-known regencies -- such as Enrekang and Jeneponto in South Sulawesi, Banggai in Central Sulawesi, Bulungan in East Kalimantan, Barito Utara in South Kalimantan and Jembrana in Bali -- are included in the top 10 is a relief, since it shows the seriousness and commitment of their regents in promoting local investment and therefore, local economic growth.

As for the top 10 most investment-attractive municipalities, the story is a bit different: About six cities are in Java, although Batam tops the list. The list's inclusion of Gorontalo in Gorontalo province, Balikpapan in East Kalimantan, Sawahlunto in West Sumatra is also a relief, as mentioned above.

Another concern regarding the local business climate and local competitiveness is the love-hate relationship between non-local investors -- from abroad or from other regions -- and local governments and their people. Stories about investors withdrawing or about local people blocking investors' operations are certainly not good advertisement on the attractiveness of local or national economies.

One of the main causes of such incidents is miscommunication between investing companies and local communities. Local governments, in this era of decentralization and free market competition, should be more proactive in mediating good and productive relationships between itself and companies.

Meanwhile, investing companies, especially big ones in "sensitive" sectors such as mining, should collaborate with host local governments in defining their approach toward community development and ensure that such corporate social responsibility funds are on target and reach the people of communities around their area of operations.

Although some areas or sites remain under the supervision of the central government, local governments should be more involved and proactive in security and industry-related issues in their jurisdiction. Greater responsiveness is certainly a positive and significant point for local economic competitiveness.

Following the achievement of competitiveness, local human resource development becomes key to sustaining competitiveness. Development should not only focus on capacity-building activities targeting local officials, but also local residents.

A higher quality of human resources -- in both the local government and communities -- could reduce possible misunderstandings and tensions between non-local investors and the local people.

The Human Development Index (HDI) 2002, which covers education, health and purchasing power, revealed that several provinces had been active in developing their human resources.

Jakarta tops the list, given its high level of economic activities, but North Sulawesi, Yogyakarta, Riau, Central Kalimantan and East Kalimantan filling the next five slots on the list is rather surprising.

Riau and East Kalimantan are resource-rich provinces and thus have the capacity to utilize their budget for massive development of human resources. However, that the governments of the other three provinces -- which are not resource-rich -- are committed to providing the best services to the people toward eventual competitiveness is a relief.

It may require more time for local economic competitiveness to boost national economic growth during this period of recovery, but the idea of interregional competition -- as in a healthy, not hostile, competition -- should be disseminated among all local governments and legislatures.

The amendment of Law No. 22/1999 on regional governments and Law No. 25/1999 on fiscal balance between local and central governments has provided an important legal basis for more solid local economic development.

Imposing direct local elections of executives and legislators is a fundamental way to "force" local governments and legislatures to pay more attention to their constituents' needs, such as reliable public services, more job creation, higher personal incomes and higher local economic growth.

To complement this, the amendments must place some emphasis on the local investment climate and free interregional movement of people and goods.

The amended laws must also set up an early warning system in establishing a maximum budget deficit and maximum cumulative debt at the national and local levels, to ensure that local economic activities contribute to national macroeconomic stability.

With the improved regional autonomy laws, it remains to be seen if the central and local governments have the political will to implement the new laws next year in the best interests of the people.

The government should set a goal to optimize decentralization as a means to accelerate economic recovery, instead of being uncomfortable with the current progress in decentralization.

The vitalization of local economies toward contributing significantly to national economic recovery would mark the beginning of a new economic structure in the regions. In turn, Indonesia would develop the ability to generate their own growth, to manage disputes among themselves and last, but not least, to improve the people's quality of life.