Economic Geography of Indonesia: Can Mp3ei Reduce Inter-Regional Inequality?1
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South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 2 (June) ISSN 2289-1560 2013 ECONOMIC GEOGRAPHY OF INDONESIA: CAN MP3EI REDUCE INTER-REGIONAL INEQUALITY?1 Mudrajad Kuncoro Professor in Economics, Faculty of Economics & Business, Gadjah Mada University, Yogyakarta, Indonesia Email: [email protected] Phone: ++62811254255 URL: http://www.mudrajad.com ABSTRACT Recent Yudhoyono’s government set a development of the Masterplan for Acceleration and Expansion of Indonesia Economic Development (Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia – MP3EI) to drive the realization of high, balanced, fair and sustainable economic growth (CMEA, 2011). MP3EI highlights 6 major economic corridors to accelerate and induce interconnectivities across regions, provinces, and districts. This paper will explore to what extent the MP3EI can address the interregional inequality? It will examine the inter-provincial per capita GRDP(Gross Regional Domestic Product)disparities during 2001-2010 in Indonesia using Theil entropy index. Regional inequality tended to increase during the period due to between-island and within-island inequality. We will show that diversity does matter in Indonesia across provinces, districts, and islands. Java and Sumatra islands have predominated the Indonesian economy about 80%, while other islands in the Indonesian Eastern Regions have played a minor role.The better performing provinces are those that are resource-rich, densely populated, or better connected to global economy. We will also identify some major challenges to implement MP3EI. To implement MP3EI succesfully, it requires a thorough understanding of Indonesia’s growth poles, leading sectors in every province, and backward regions, and also debottlenecking infrastructure and financing problems. Keywords: MP3EI, inequality, regions, geography, Theil index INTRODUCTION With 241 millions inhabitants ranked the 4th most populous country in the world in 2012 (BPS, 2013), Indonesia is a country endowed with the highest population and the richest natural resources within its archipelago of 17 thousand islands. It is the world’s largest archipelago, stretching from east to west with a length of 5,200 km and a width of 1,870 km. As a country consisting of thousands of islands and located between two continents and two oceans, the archipelago has a unique combination of economic potentials with specific major islands or regions having its own strategic future-role in achieving Indonesia’s 2025 vision. Susilo Bambang Yudhoyono (SBY)’s government set a development of the Masterplan for Acceleration and Expansion of Indonesia Economic Development (Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia – MP3EI) to drive the realization of high, balanced, fair, and sustainable economic growth (CMEA, 2011). On February 21-22, 2011, a meeting between the Central Government and Head of Regions in Bogor Presidential Palace discussed various government and state owned enterprise projects in the six Indonesia’s Economic Corridors (Figure 1). As a result, president SBY declared that the Masterplan for the Acceleration and Expansion of Indonesia's Economic Development (MP3EI) 2011-2025 was different from other existing plan documents because it set obvious targets, simple but complete plan with clear responsibilities, investments, and the results. 1 This paper is presented at the Kuala Lumpur International Business, Economics, and Law Conference KLIBEL 2013, at Hotel Putra, Kuala Lumpur Malaysia, 8-9 April 2013. I am very grateful for useful comments from the anonymous reviewers of the South East Asian Journal of Contemporary Business, Economics, and Law. My thank also goes to Muhammad Irka Irfa’Darojat, my assistant, for preparing this paper. 17 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 2 (June) 2013 ISSN 2289-1560 Figure 1. Indonesia’s Economic Corridor Based on MP3EI Source: CMEA (2011) This paper will focus on the following question: can the MP3EI address the Indonesia's economic geography that tends to concentrate geographically in the Indonesian Western Regions (KBI)? To implement MP3EI succesfully, it requires a thorough understanding of Indonesia’s growth poles, leading sectors in every province, backward regions, and also debottlenecking infrastructure and financing problems. This paper will attempt to solve the fundamental question by inquiring Indonesia’s recent development, followed by analysing the geographic dimension of the Indonesian economy, and exploring regional inequality by Theil entropy index. SURVEY OF RECENT INDONESIA’S DEVELOPMENT SBYnomics Following inauguration of President SBY and Vice President Boediono on 20 October 2009, SBY said that his priority for the next five years, which will be his final term under the Constitution, would be to improve public welfare through economic growth "coupled with equity" (Yudhoyono, 2009). Figure 2 elaborates the paradigm of growth with equity in three pillars: pro- growth, pro-job, and pro-poor programmes (Jakarta Post, 2009). Most of the resources and policies will be prioritized to ensure the implementation of the following eleven national priorities, namely: (1) reform of the bureaucracy and administration; (2) education; (3) health; (4) reducing poverty; (5) food security; (6) infrastructure; (7) investment in the business sector; (8) energy; (9) environment and natural disasters; (10) left-behind, frontline, most outer, and post conflict regions; and (11) culture, creativity, and technological innovation (Figure 3). The 2010-2014 National Medium-Term Development Plan (RPJMN 2010-2014) is the elaboration of the Vision, Mission, and Program of the President, the formulation of which is guided by 2005-2025 National Long-Term Development Plan (RPJPN 2005-2025). The vision, mission, and action programs of current regime state explicitly their roapmap for realizing an Indonesia that is more advanced and prosperous, more self-reliant, more secure and peaceful, more democratic and equal (Yudhoyono & Kalla, 2004; Yudhoyono, 2006, 2009). 18 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 2 (June) 2013 ISSN 2289-1560 Figure 2. Recent Government Framework To Achieve ”Prosperity, Democracy And Justice” - Fiscal Policy PRO-JOB and Monetary - Acceleration of PRO-POOR Infrastructure GROWTH Development GROWTH - Investment with Climate EQUITY - Policy of Energy PRO- - SMI Policy POOR Package - Industrial Policy Community Social Assistance Based on SMI Empowerment Family Empowerment Program Programs Ideal Family Program (PKH), RASKIN PNPM KUR, Access to Productive Scholarship for Poor, Health Insurance Resources, Training Source: Alisjahbana (2010) More specifically, in the ‘pro-growth’ agenda, economic growth has been accelerating (Kuncoro, 2010). In the period 1997- 1999, the economic crisis resulted in an economic decrease of 2.9% per year. In the period 2000-2004 also known as the period of economic recovery, the economy again had a positive growth of 4.5%. Within the period 2005-2008, the economic growth has reached an average of 6%. In fact, by excluding the oil and gas sector, the non-oil and gas economic growth has already approached 7%. It reached 6.6% in 2005-2008, this compared with 5.4% in between 2000 and 2004. In 2009, the average economic growth reached 4.5%. The performance of Indonesia’s economic growth has made Indonesia to be deemed as having a well performing economy, compared to many nations who were experiencing negative economic growth rates. 19 South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 2 (June) 2013 ISSN 2289-1560 Figure 3. National Priorities of Unity Indonesia Cabinet II 2010-2014 1 Bureaucracy reform and governance 2 Education 3 Health 4 Poverty Reduction 5 Food Security 11 National Priorities 6 Infrastructure 2010-2014 7 Investment and business climate 8 Energy 9 Environment & disaster management 10 Backward, border, & after-conflict regions 11 Culture, creativity & technology innovation 12 Political, law and security Others Priorities 13 Economy 14 Welfare of society Source: Presidential Instruction No. 1 Year 2010 The Indonesian government quite effectively steered the national economy through ‘storm’ of the 2008 Global Financial Crisis (GFC) (Kuncoro, et al. 2009). In the first quarter of 2008, Indonesia’s real Gross Domestic Product (GDP) was comparable with other Southeast Asian countries. From then on, Indonesia’s economic performance faired much better than economic contractions in the other economies in Asia. Less exposure to external shocks from the international trade and expansionary fiscal and monetary policies in particular allowed the economy weather the worst of the crisis and rebound during the first half of 2009 (IMF, 2009: 71-74). Table 1 shows that the ASEAN-5 economies (i.e. Indonesia, Malaysia, Philippines, Thailand, and Vietnam) are projected to grow by 5.4% in 2010 and 5.6% in 2011. Private domestic demand is expected to be the main driver of growth, with net exports playing a lesser role than in the past, reflecting stronger imports relative to historical standards. Among the ASEAN-5, the Indonesian economy has proved to be remarkably resilient, with output growing at 4.5% in 2009 compared with 1.75% for the ASEAN-5 as a whole, thanks to strong domestic demand. Indonesia’s growth is expected to accelerate to 6% in 2010 and to 6.25% in 2011, reflecting a pickup in private investment. Table 1. Selected