Spatial race to district competitiveness

Spatial race to district competitiveness

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.