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INDONESIAN COMMERCIAL NEWSLETTER
August 2009

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NATIONAL ECONOMY RELIES MORE ON STRENGTH OF REGIONAL ECONOMIES


Development with regional dimension - a hope

It is interesting to note the recent speech of President Susilo Bambang Yudhoyno in front of the House of Representatives when he stressed that in order to implement "Development for All" Indonesian development should have regional dimension. Each province, regency, municipal city and growth centers should be able to utilize all potentials they have including natural resources, human resources and geographical locations. The regions would be a domestic economic strength that would serve as the backbone for national economic resilience and a "capital" in facing the ongoing process of globalization.
Development with regional dimension also means that the government has to encourage the regions to develop their resources and comparative advantages, but balance between the regions should be maintained to prevent lopsided development. Regional economy could provide a buffer to sustain the national economy in the event of crisis like the present global financial woes.   

In his speech the president said that in order to develop local economic strength,  the government will strengthen domestic investment and funding sources by  developing  self reliance and  resilience in certain economic sectors mainly food and energy sectors. Development in all regions would be more intensive and equitable.

The government will encourage closer ties between the regions physically and functionally. For that purpose, development of infrastructure would be vitally needed and should be placed in a priority list. After the completion of the country's longest bridge spanning the sea between the eastern part of Java and the island of Madura, the government is mulling the possibility of building another long bridge across the Sunda Strait that would facilitate land transport between Java and Sumatra. Other major infrastructure project such as Trans Kalimantan, Trans Sulawesi, and Trans Papua would also need to be seriously addressed by the government.

Apart from promoting interlinks physically and functionally the government will also encourage closer ties between the regions that products from one region could be used to feed factories in other regions. For that purpose, various hurdles hampering trade between the regions would be removed. Illegal levies should be seriously dealt with and official regional levies should be reducing to the minimum. Too many levies have discouraged investors to do business in the regions.

Regional autonomy and challenges

Economic development with regional dimension as stated by the president constitutes also an implementation and follow-up of regional autonomy policy, which constitute a foundation for the implementation of the strategy of equitable and fair distribution of development.

The Law  No.22  of 1999  on regional economic policy  was later amended  with the Law No. 32  of  2004 on  regional administration and the Law No.25  of 1999, which was later revised  with the Law No 33 of  2004 on intergovernmental fiscal balance. The revisions caused fundamental change in the relations between the center and the regions. The policy brought about challenges and opportunities for the regional administration to have greater authority in managing their regional natural resources. 

The decentralization is aimed at improving the self reliability of the regions in running regional affairs as well as managing their own resources.

The transfer of part of the authority to the regions from the center has placed the region in the position to spearhead national development. The policy is also expected to help boost economic development in the regions and create equitable development. It is easy however, to create a fair and equitable economic development in all regions, which have big gap in natural wealth. 

Some observers said the transfer of such great authority to the region was given too early as the regions are not yet ready to accept and utilize the authority properly. The regions are still far short of skilled human resources to manage their affairs. They said the transfer has also taken place at a wrong time when the country was still beset by economic crisis. Not all regions have recovered from the 1997/1998 crisis. The economic disparity is still high. As a result the policy has created lopsided fiscal readiness among the regions.

The regions are expected to be able to optimize their income potentials by providing larger portion of budget for productive sectors. The policy was expected to boost investment. However, the result is not as expected. Inadequate infrastructure still poses a problem in attracting investors to the regions. A survey by the Monitoring Committee for the Implementation of Regional Autonomy (KPPOD) in 2007 showed that most business players complained about poor infrastructure condition mainly roads and power supply.

A survey in 243 regencies and cities by the Committee involving 12,187 respondents among business players in the manufacturing, trading and service  sector showed that 35.5% of the respondent said poor management of  infrastructure  was the main hindrance of  business in the regions; 37% said  inadequate  road illumination lamps  as the main culprits,  and  one third of the respondents complained about poor quality of  drinking water. Most of the respondents agreed that it would take 81 days to improve damaged infrastructure and 7 days for repair of telecommunication systems and 22 days to repair drinking water supply facilities.

The absence of program of regional administration for development of private business sector is also seen as deficiency in the region by 14.8% of the respondents.  Another 14% of the respondents said access to business area and business certainty is the biggest problem. Other problems in the region include absence of interactions between the administration and the business sector, red tape in the licensing procedure, security and integrity of heads of regional administration and low quality of regional regulations. See the following table.

It is interesting to note that six of 10 best regencies/municipal cities in economic management system, according to the survey, are in East Java, topped by Blitar.  Blitar is the best especially in infrastructure, access to business areas and in licensing procedure because of its implementation of "One Stop Services". In the regions it takes around 14 days to secure company registration approval or twice longer than 7 days according to regulation. In Trenggalek, one needs 100 days to have TDP.

Survey in business climate in 33 provinces in 2008 involving 1144 business players showed that four provinces outside Java were among the top five with only one province in Java.  Indicators used in arranging the ranks were 1) capital investment service agency, 2) Regional Investment Promotion, 3) Regional administration commitment, 4) Infrastructure, 5) Access to business areas, 6) Workers, 7) Business security, 8) Regional economic performance, and 9) Role of the business sector in economy.

North Sulawesi, which  topped the ranks, is made up of 13 regencies/municipal cities  with tourism , fishery and plantation potentials is given the highest rank in investment climate index. . North Sulawesi is seen as good in all indicators mainly in access to business area (score 82.51), regional administration commitment (score 72.85) and IPMP institution (score 72.59).

West Papua province was given the lowest rank in regional investment index. That province shows poor score in all indicators. The respondent said the regional administration showed no commitment to improve   and create favorable business climate as indicated by the poor condition of infrastructure, access to business area and business security.

Few regions make innovations to provide incentives for the business sector. Regional administrations even create many barriers instead of incentives. They issue regional regulations on tax and compensation fees to increase regional income.
Many conflicting regional regulations discourage investors. The central government already revoked 1,064 of 3,445 regional regulations considered controversial by the finance ministry.

Regional economic performance slowing
The global crisis was felt in all regions though not the same causing slow down in economic development in various areas especially those having export oriented commodities. The impact was felt more strongly in Sumatra, Kalimantan, Sulawesi, Ambon, Papua (Kali-Sulampua).

The world recession has weakened demand for a number of Indonesian export commodities. Exports of manufactured good dropped significantly from Java, Bali and Nusatenggara (Jabalnustra). The prices of primary commodities from Sumatra, Kalimantan, Sulawesi, Ambon, and Papua fell although the market of some of the commodities has recovered. The decline in the economic performance was marked by growing number of jobs cut.

The manufacturing industry in Jabalnustra, Jakarta and Sumatra slowed down badly on weak demand and increase in production cost. Contraction was even recorded in mining sector in Sumatra on falling prices of mining commodities. The agricultural sector, however, began to revive although the performance of the plantation sector remained in the doldrums on falling prices and declining productivity as well as weak demand from local manufacturing industries. Weak purchasing power of the people caused a slump in the trading sector in Sumatra and Java.

Inflation pressure is weak with weak demand and listless economic activities in the region in the first quarter of 2009.  However, inflation in Sumatra and Kali-Sulampua was still higher than the average in the country. Poor condition of infrastructure in those regions and dependence on supplies form other regions caused the inflation. See the following table.


Direction of short term development

BI predicted that in the second quarter of 2009 the economy in a number of regions was still affected by the global crisis. The impact of the global economic woes is felt more strongly in regions relying more on export oriented primary commodities such as in Sumatra, and Kalimantan and areas relying on export oriented manufactured commodities  such as in economic zones in Java.

The revival of the market of a number of primary commodities like cacao, CPO, and rubber, in the first quarter of 2009 was not strong enough to improve export performance. Exports of manufactured commodities are expected to remain in the doldrums with weak demand and tight competition in the global market.  The purchasing power of the people is not expected to improve significantly despite the grand harvest, increase in the salaries of civil servants and price fall as the wave of lay off still continued to worsen the unemployment problem. 

Realization of fiscal stimulus in a number of sectors is expected to help curb slow down in consumption in the following quarters. Companies operating in textile, electronic, automotive, and other export oriented industries are still going through hard times in facing weak demand.  Reports of cut jobs sending more workers to the labor market are expected to mar progress made in economic development in the coming quarter.

The mining sector is predicted to continue to face setback with falling prices of mineral commodities such as tin from Sumatra, and nickel from Sulawesi, Maluku and Papua.

The present condition shows that those having strong domestic economy or less export oriented economies will survive the crisis more easily. Indonesia fares batter than many other countries as it has stronger domestic economy and does not rely much on export market.

In order to support regional development, every year the central government allocates fund to be transferred to the regions. In 2010, the allocation is set at Rp 309.8 trillion including Rp293 trillion in fiscal balances or an increase of Rp7.7 trillion from this year.

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