SUSTAINABLE DEVELOPMENT IN INDONESIAN REGIONS: TOWARDS AN ASSESSMENT Noor Syaifudina,b, email: [email protected]. Yanrui Wua, email: [email protected]. Abstract: Sustainable development has attracted much attention among economists and policy makers. Yet, there are few studies of sustainable development measures, particularly in Indonesian regions. This paper contributes to the literature by developing sustainable development indicators for Indonesian regions and presents an empirical assessment of sustainable development at the provincial level. Specifically, this paper reviews economic theories of sustainable development and then applies a composite index method to examine relevant indicators of sustainable development for the Indonesian regions. Various scenarios are explored to accommodate variations in Indonesian regions namely economic, social, environmental and institutional aspects of sustainable development. The finding shows the increasing trends of sustainable development level, even though there are issues about equality among the Indonesian provinces. The other result indicates that development in Indonesia emphasizes short term goals by focusing on the economic and social aspects of sustainable development and tends to ignore environment aspect. Key words: Sustainability; sustainable development indicators; composite index; scenario analysis; regional indicators; Indonesia JEL codes: C43, H79, Q01 a Economics, Business School, The University of Western Australia b Center for Climate Change Financing and Multilateral Policy, Fiscal Policy Agency, Ministry of Finance, Indonesia 1 | Page 1. Introduction In economic development, there is a trade-off between boosting economic growth and conserving the environment. Economic development which does not aim for environmental preservation may have negative impacts on the environment because of the limited capacity of the environment and risk the economic future of a nation in the long term. Concern about economic growth and sustainability was first raised by Malthus (1798) when he addressed the limitation of natural resources to satisfy the vast growth of population in England (Fauzi and Oxtavianus, 2014). Much later, Meadows et al. (1972) concluded that economic growth will be limited by the scarcity of natural resources and there will be no sustainable flow of services and goods. This paper reviews the existing literature on sustainable development including the underlying economic theories, relevant indicators of sustainable development and economic models addressing sustainable development. The relevance of these issues in the Indonesian context is discussed and a composite index method is used to examine relevant indicators of sustainable development at provincial level in Indonesia. Four different scenarios are used to capture the variations in various natures of Indonesian provinces in terms of four sustainable development aspects, specifically economic, social, environmental and institutional aspects. 2. Literature Review Sustainable development was first addressed at the United Nations Conference on the Human Environment in Stockholm in 1972 (Rogers et al., 2006). The discussion focussed on how to boost the economy without harming the environment. The concept was explored further in the World Conservation Strategy prepared by the United Nations Environment Programme (UNEP), the International Union for Conservation of Nature and the Natural Resources (IUCN), and the World Wide Fund for Nature (WWF) in 1980 and again at the UNEP summit in Nairobi, Kenya in 1982 (Elliott, 2006). One key result was the 2 | Page establishment of a special council under the United Nations (UN), called the World Commission on Environment and Development (WCED). In 1987, the concept of Sustainable Development was formally defined in a WCED Report as “development which meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987). Today, this definition of sustainable development continues to be debated. Several scholars argue that the definition is too general, ambiguous and difficult to implement (O’Riordan, 1995; Mawhinney, 2002; Holmberg & Sandbrook, 1992; Lélé, 1991). Others are still keen to operationalise the definition. Some of them look at it as an issue associated with the intergenerational environment and economic sustainability (Rogers et al., 2006; Elliott, 2006), while others view it as an issue of equity and balance (Soubbotina, 2004). Ene et al. (2011) suggests that sustainable development concurrently examines the presence of environmental fortification and economic improvement from global and long term position. From these different points of view, it can be concluded that sustainable development is related to equity, economic sustainability, and environmental protection in the long term. 2.1. Defining Sustainability Economists have different views of the meaning of sustainability. Before defining sustainability, they tried to distinguish the difference between growth and development. Daly (1990) correlated growth with physical characteristics and development with qualitative improvement. He saw growth as something caused by natural processes like assimilation or accretion, and development as something that expands capacity. Daly concluded that growth is not sustainable in the long term and suggested sustainable development. Daly (1990) mentioned two principles of sustainability. The first is sustainability in yield, when the yield rate same with the number of new generation born. The second is the rate of natural ability to reduce waste also the same with the number waste produced. These two principles which 3 | Page related with regenerative and assimilative capacity are regarded as natural capital and in order to meet the sustainability, these two capacities must be maintained. Asheim (1993) stated that sustainable development requires sustainability of resource management over generations and Pezzey (1997) who noted sustainability is attained when human well-being trend is not decreasing. Alisjahbana and Yusuf (2003) also adopted the definition of sustainability as a non-declining welfare per capita of human being, by using capital as the basis of the measurement. More recently, the definition of sustainability has been extended to distinguish weak sustainability from strong sustainability. Two neoclassical economic scholars, Solow and Hartwick, introduced the term weak sustainability to explain how natural capital can be replaced by man-made capital (Davies, 2013). In contrast, strong sustainability refers to man- made capital that cannot replace natural capital (Davies, 2013; Neumayer, 2003). These two schools of thoughts have at least three common backgrounds (Davies, 2013). The first is there is common understanding about the meaning of capital as “stock that provides current and future utility”. The second argument is that the capital will be transferred to the next generations. The third is both weak and strong sustainability are having temporal dimension. There are several arguments on how to deal with these two concepts. Weak sustainability view sustainability from a neoclassical economic theory viewpoint and capital accumulation which includes non-renewable resources. Strong sustainability view sustainability stands from the notion of steady-state economy. In weak sustainability, the natural capital can be substituted by man-made capital, while strong sustainability does not substitutable. In strong sustainability, sustainability can only be reached if each of the two kinds of capital stock i.e. natural and man-made capital can be preserved. In weak sustainability, it requires the overall stock of capital due to its substitutability. 4 | Page 2.2. Sustainable Development Indicators Different institutions almost have the same perspective about the aspects that underpin sustainable development. UN via Commission on Sustainable Development (CSD), European Union (EU) and Central Statistics Agency of Indonesia (UN, 2007; EU, 2013; Central Statistics Agency, 2014) outlined four aspects of sustainable development: economic, social, environmental and institutional aspects. OECD looked at only socioeconomic and environmental aspects (Table 1). Table 1: Aspects of Sustainable Development Institutions Economic Social Environmental Institutional UN (2007) √ √ √ √ OECD (2001) √* √ EU (2013) √ √ √ √ Central Statistics √ √ √ √ Agency (2013) * Socio-economic aspect Any discussion of sustainable development without consideration of appropriate indicator remains incomplete. Sustainable development indicators (SDI) should be management tools (United Nations, 2007), evaluation criteria (OECD, 2001; United Nations, 2007; Pintér et al., 2005), and a means to deliver ideas and values (United Nations, 2007; European Union, 2013). SDI should be supported by operational definitions (Rennings and Wiggering, 1997), related to policy priorities, flexible, and communicable (European Union, 2013; Pintér et al., 2005). The UN (2001) via CSD provides a framework for countries to determine their own SDIs. This framework requires the themes and sub-themes of each SDI to be determined. There are six themes (equity, health, education, housing, security and population), three economic themes (economic structure, consumption and production patterns) seven 5 | Page environmental themes (atmosphere, land, oceans, seas and coasts, fresh water and biodiversity) and two institutional themes (institutional framework