Chapter 1 Overview Competitiveness Analysis and Development Strategies for 33 Indonesian Provinces

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1 Chapter 1 Overview Competitiveness Analysis and Development Strategies for 33 Indonesian Provinces Associate Professor Tan Khee Giap Co-Director Asia Competitiveness Institute Lee Kuan Yew School of Public Policy Mr Mulya Amri Research Associate Asia Competitiveness Institute Lee Kuan Yew School of Public Policy This overview is hoped to give context, structure, and vision to the following section on competitiveness analysis and development strategies for each of the 33 Indonesian provinces. First, a review of methodology. The framework that Asia Competitiveness Institute (ACI) uses to construct its competitiveness ranking of Indonesian provinces, including the indicators used and sources of data. The methodology covers an approach used by ACI to go beyond ranking, but also to conduct a policy simulation on how each province can improve their competitiveness, as more constructive. Next, an overview of research findings is presented. Here the Overall Competitiveness ranking table along with the provinces scores is scrutinised across the 33 provinces. Common patterns and gaps are identified. The ranking is also plotted on a map of Indonesian provinces, to identify some geographic trends and possible regional conclusions. Key indicators and sub-environments are particularly reviewed due to their strategic importance for the competitiveness of Indonesian provinces. Finally, steps going forward are identified to bring the research results forward to a wider range of audience and sectors. Best practices need to be identified and studied in more detail to generate enthusiasm and optimism across the provinces. Also, the multi-dimensional nature of ACI s competitiveness framework allows the research to be further used by other parties to conduct analyses of specific sectors. Furthermore, contemporary approaches to regional economic development, such as analysis of clusters of provinces, are suggested to generate more policy insights into the study s findings. 1 METHODOLOGY The notion of competitiveness has been defined in various ways. ACI s approach to competitiveness is a comprehensive one, taking into account different factors that collectively shape the ability of a nation or region to achieve substantial and inclusive economic development over a sustained period of time. 1.1 Four Environments, Twelve Sub-Environments In line with the comprehensive approach, ACI defines competitiveness through four different environments: (1) Macroeconomic Stability, (2) Government and Institutional Setting, (3) Financial, Business and Manpower Condition, and (4) Quality of Life and Infrastructure Development. These four environments can be effectively visualised as quadrants, each contributing the same weight (25%) to the Overall Competitiveness index (see Figure 1). ACI s competitiveness framework also uses a nested approach, wherein each of the four environments is further divided into three sub-environments (alternatively, we can say that each sub-environment is nested within a specific environment). Therefore, there are 12 sub-environments altogether. Each sub-environment contributes the same weight (33.3%) towards their respective environment s index. In aggregating sub-environments into environments, and the latter into an overall ranking, ACI uses simple averaging mechanism (equal weights). While assigning weights for different levels of importance seems more 1

2 2 Competitiveness Analysis and Development Strategies Figure 1. ACI s Competitiveness Framework appropriate, the practical difficulties are as controversial. Thus a balanced view towards the different factors that make up an overall notion of competitiveness means equal weights. The four quadrants of ACI s competitiveness framework represent a holistic, integrated and systemic view of competitiveness. Two environments are specifically related to the economy. Macroeconomic Stability encompassing aggregated economic conditions includes three sub-environments: (1) Economic Vibrancy, (2) Openness to Trade and Services, and 3) Attractiveness to Foreign Investors. Finance, Business, and Manpower Conditions, on the other hand, represent conditions related to the micro-economy. They include an analysis on the performance of firms as well as challenges that they face in running their companies. The sub-environments are (1) Financial Deepening and Business Efficiency, (2) Labour Market Flexibility, and (3) Productivity Performance. Two other environments in ACI s four quadrants are more political, institutional, and social in character. Government and Institutional Setting cover efficacy of government institutions, but also include analyses on expectations of progress. The three sub-environments are: (1) Government Policies and Fiscal Sustainability, (2) Institutions, Governance and Leadership, and (3) Competition, Regulatory Standards and Rule of Law. Lastly, Quality of Life and Infrastructure Development combines an analysis on infrastructure as well as basic services and an overall sense of quality of life. The three sub-environments are: (1) Physical Infrastructure, (2) Technological Infrastructure, and (3) Standard of Living, Education and Social Stability. 1.2 Indicators For the study on Competitiveness Ranking and Policy Recommendations for 33 Indonesian Provinces, ACI used 91 unique indicators. Depending on availability of data, some environments and sub-environments have more indicators than others. The full list of indicators used in this study is provided in Appendix 1. To a certain extent, having more indicators ensures more robust interpretation of the aggregated subenvironment score. However, the uneven distribution of indicators across sub-environments due to data availability is not an issue. Regardless of the number of indicators in a sub-environment, they will simply average out. This also allows a certain amount of flexibility in adding or removing indicators when updating the index in the future, as long as the overall structure of the 12 sub-environments and four environments does not change. 1.3 Data Sources The data for the 91 different indicators used in this study come from various sources. The bulk of the data comes from official data sources, such as the Central Statistics Agency (Badan Pusat Statistik BPS), Investment Coordination Board (Badan Koordinasi Penanaman Modal BKPM), Central Bank (Bank Indonesia BI), and Ministry of Health. These are secondary, quantitative data. Another portion of the data is sourced directly by ACI surveys and interviews conducted in each province. These are primary and mostly qualitative data. Surveys of businesses were conducted in collaboration with the Indonesian Employers Association (Asosiasi Pengusaha Indonesia APINDO), which distributed the survey

3 Overview 3 Figure 2. Data Sources and Usage forms to their members in each province. Surveys of academicians were conducted by and regular airmail to economics and business professors (lecturers) in each province. Interviews were also conducted with at least four government agencies in each province, covering the Governor s Office (Sekretariat Daerah Setda), the Provincial Development Planning Agency (Bappeda Provinsi), the Provincial Investment Coordination Board (BKPM Provinsi), and the Provincial Trade and Industry Agency (Dinas Perindustrian dan Perdagangan, or other names that apply at the province). For the arrangement of interviews, ACI collaborated with the Regional Autonomy Watch (Komite Pemantauan Pelaksanaan Otonomi Daerah KPPOD) and also received helpful support from the central government, especially the Coordinating Ministry of Economic Affairs. Data from various sources were used to compose different competitiveness environments (see Figure 2). Data from official sources covers the range of all four environments. However, data from official sources as relevant for the Government and Institutional Setting environment is limited. Therefore, surveys and interviews were useful in generating more understanding of the performance of and perceptions about the provincial government. Expert panel analyses were conducted to review the interview transcripts and provide an interpretation of indicators related to this environment. Official data on firms and labour relations were also limited. Considering that these are critical to build an understanding of the microeconomic settings in each province, therefore ACI collaborated with APINDO to conduct surveys to their members. This provided more understanding of the business and manpower conditions that are related to the operations of firms in 33 provinces. 1.4 The Standardised Score The next question is how to aggregate the different types of data into one coherent way of analysis. Given 91 different indicators in this research, all in different value or quantity terms, such as Gross Regional Domestic Product in millions of rupiahs, or length of paved roads, in kilometres, how do we resolve these different units of measurement? ACI uses a statistical methodology of standardised score. The standardised score is a relative comparison to see how well is the performance of a certain province in comparison to the average province. Therefore the unit of measurement is no longer relevant. The standardised score has no unit of measurement because it simply measures relative performance among provinces, whatever the indicator is. In statistical terms, it measures how

4 4 Competitiveness Analysis and Development Strategies many standard deviations away is each province from the average province. See Appendix 2 for technical explanation. If a province has a standardised score of zero, it is basically an average performer in terms of that particular indicator. Having a negative score means the province performs below average. Having a positive score, on the other hand, means above-average performance. The further away the score is from zero, the further away is the performance of said province from the national average. If a province has a high positive score, it means it is much above the average score. The standardised scores for each indicator are then aggregated at the sub-environment level, and then reaggregated at the environment level, and finally aggregated again at the overall level. This allows comparison of performance of 33 provinces at different levels, from the Overall Competitiveness to specific indicators. 1.5 What-if Competitiveness Simulation A competitiveness ranking in itself is like a beauty contest; it merely identifies who are doing well and who are facing challenges, but stops short of giving more constructive advice on improving the rankings. ACI takes one step further by tackling the so what question. What is the policy implication of a competitiveness ranking result for a particular Indonesian province? The data available to ACI allows us to do an indepth analysis of the performance of each province according to the different indicators, sub-environments, and environments. By analysing said data, we are able to identify not just the Overall Competitiveness ranking, but also specific indicators for which the province is doing well or struggling. This allows us to come up with policy recommendations for each province. ACI s What-if Competitiveness Simulation is based on an improvement of each province s 20% weakest indicators, and a re-calculation of the standardised score based on such improvement. To do this, first, we looked at each province and sorted the different indicators for each province from the highest to the lowest score. This allowed us to identify the 18 weakest indicators that each province has. Why 18? Because we are looking at the bottom 20% of the 91 indicators used in the Indonesia study. Next, we raised the scores of these 18 weakest indicators moderately, to match the average score. This means their average score is raised to zero if it was negative previously. For other provinces which were already competitive, we leave their scores alone. Their scores are not discounted if they are already competitive. Once these scores are raised, we re-calculate the ranking, assuming that other provinces stay constant. So we do this simulation one-by-one, by each province. Each province would then have a new, improved standardised score. This allows us to answer the question: if a particular province improves on its weakest indicators, and assuming other provinces remain constant, how would that province s competitiveness ranking improve? 1.6 Quantifying the SWOT Analysis The Strength, Weakness, Opportunity and Threat (SWOT) analysis is commonly used in qualitative terms. However, having access to a database of 91 quantified indicators for each province allows ACI to conduct the SWOT analysis in a quantitative manner. By sorting the 91 indicators based on their scores, the top as well as the bottom 20% indicators are possible to be easily identified. The top 18 (20% out of 91) indicators are considered as the province s Strengths, while the bottom 18 the province s Weaknesses. The score for Opportunity is composed by aggregating the scores for two indicators that signify external potential for the province, namely: 1) Openness to Trade and Services, and 2) Attractiveness to Foreign Direct Investment (FDI). The score for Threat is aggregated from five indicators that signify external challenges, namely: 1) Corruption Prevention Index, 2) Prevalence of Corruption, 3) Crime Rate, 4) Labour Relations, and 5) Incidence of Earthquakes with 5.0+ Richter Scale. By plotting these aggregated scores on a scale, we can identify the extent to which a province is exposed to Opportunities and Threats from outside its own control. The Opportunity and Threat scores are not included in the calculation of the competitiveness rankings, but contribute to the process of policy analysis and recommendation for each province.

5 Overview 5 2 FINDINGS Having explained the methodology for constructing the Competitiveness Index, we now turn to the results of the competitiveness ranking of Indonesian provinces for The ranking is derived by sorting the standardised score for each province. Thus an analysis of the ranking results should be done in conjunction with a review of the standardised scores (see Table 1). Table 1. Overall Competitiveness Ranking, Indonesian Provinces (Year 2010) Rank Province Score 1 DKI Jakarta Jawa Timur Kalimantan Timur Jawa Barat Jawa Tengah DI Yogyakarta Banten Kepulauan Riau Bali Riau Sulawesi Selatan Sumatera Selatan Kalimantan Selatan Sulawesi Utara Gorontalo Aceh Sumatera Barat Sulawesi Tenggara Sumatera Utara Lampung Sulawesi Barat Kalimantan Barat Sulawesi Tengah Papua Jambi Kalimantan Tengah Bengkulu Nusa Tenggara Barat Kepulauan Bangka Belitung Papua Barat Maluku Maluku Utara Nusa Tenggara Timur

6 6 Competitiveness Analysis and Development Strategies As explained in the methodology, this Overall Competitiveness ranking is an aggregate of the scores of four specific competitiveness environments. Therefore, aside from analysing the Overall Competitiveness ranking, we can also review rankings according to each of the four environments, the 12 sub-environments, and so on. These will be reviewed later. For now, we shall focus on the Overall Competitiveness ranking. 2.1 Review of the Ranking: Quantitative Spread Looking at the table for Overall Competitiveness, there are several items to take note in terms of standardised scores: the spread (maximum and minimum scores), the average score, and the median. From the spread, we see that scores range from a maximum of to a minimum of The province with the maximum score is DKI Jakarta, which is top in ranking. The one with minimum score is Nusa Tenggara Timur, as 33 rd. A closer look at the range, however, finds that 32 out of 33 the provinces fall under the range of positive 0.6 to negative 0.6. DKI Jakarta at the first place can be considered an outlier as its score (1.7576) is significantly different (much more competitive) from the other provinces. We can also say that Jakarta s score plays an important role in influencing the average score. Excluding DKI Jakarta, the spread of scores then becomes more symmetrical, from (Jawa Timur) to (Nusa Tenggara Timur). With DKI Jakarta in the picture, the average performing province (with score of zero) is somewhere between that occupying the 13 th position (Kalimantan Selatan, score: ) and that occupying the 14 th position (Sulawesi Utara, score: ). The median is always the middle position, which is the province holding the 17 th position out of 33 provinces. In this case, the median is Sumatera Barat with a score of We can see that the average score (0, at position 13 14) is higher than the median score ( , at position 17), meaning that the average score is skewed upwards towards DKI Jakarta s high score. With closer scrutiny of the spread, we can also find that there are several jumps in the standardised scores at several positions. For example, there is a wide gap between that occupying the fifth position (Jawa Tengah, score: ) and that occupying the sixth position (DI Yogyakarta, score: ). Similarly, there are also major gaps between that occupying the 31 st position (Maluku, score: ) and that occupying the 32 nd position (Maluku Utara, score: ). These gaps in the standardised scores are important to note because these provinces are only separated from each other by one rank/position, but actually their competitiveness as indicated by the scores is quite far apart. 2.2 Review of the Ranking: Geographic Spread The Overall Competitiveness ranking can also be viewed on a map of Indonesian provinces (see Figure 3). In Figure 3, the provinces are colour-coded based on three groups: the Top-10 positions (green), the Bottom-10 positions (red), and the Middle-13 positions (yellow). Figure 3. Map of Overall Competitiveness Ranking

7 Overview 7 By putting the competitiveness ranking on a map, several points come to the forefront of discussion. First, we can see that there is a noticeable geographic concentration of high-competitiveness and lowcompetitiveness provinces. Looking at the Top-10 provinces, all six provinces of Java belong to the Top-10. The other four most competitive provinces are Bali (ninth position, located right next to Java), Riau and Kepulauan Riau (10 th and eighth positions respectively, both located very close to Singapore and peninsular Malaysia), and Kalimantan Timur (third position, located around the geographic centre of Indonesia, rich in natural resources). Looking at the Bottom-10 provinces, six of the Bottom-10 provinces are located at the eastern-most parts of Indonesia (namely Papua, Papua Barat, Maluku, Maluku Utara, Nusa Tenggara Timur, and Nusa Tenggara Barat). The other three least competitive provinces are located in Sumatera (Bengkulu, Jambi, and Kepulauan Bangka Belitung), and one is located in Kalimantan (Kalimantan Tengah). Second, we can see that there is a set of general conclusions that can be drawn based on the major island groupings, in terms of their Overall Competitiveness ranking. This grouping based on major islands is relevant because it is roughly in-line with the economic corridors used by Indonesian government in the Master Plan for Acceleration and Expansion of Indonesian Economic Development (MP3EI). Conclusions are: 1) Provinces in Java are generally very competitive; 2) Provinces in eastern Indonesia (except Sulawesi) are among the least competitive; 3) Provinces in Sumatera and Kalimantan show mixed performance, each of these island groupings or corridors include the top, bottom, and middle-performing provinces; 4) Provinces in Sulawesi are generally average-performing, with none among the Top-10 or Bottom Review of the Ranking: Geographic Spread of the Four Environments More detailed mappings are done for the four environments, 12 sub-environments, and so on. We present four maps based on ranking of each environment. Looking at the map of rankings based on Macroeconomic Stability (Figure 4), we see a slightly different pattern, but still consistent with the overall ranking map. The Java provinces and those located closest to Singapore and Peninsular Malaysia are generally competitive, and the eastern Indonesian provinces are less competitive. Sumatera and Kalimantan, again, shows mixed performance, while Sulawesi s performance tends to be medium to challenged, alternating between the Bottom-10 and Middle-13. Looking at the map of rankings based on Government and Institutional Setting (Figure 5) we see a slightly different pattern. This time, the pattern is less consistent with the Overall Ranking map, except for the different performance between the provinces of Java and eastern Indonesia. Again, Java provinces are among the Top-10 while Maluku, Papua, and Nusa Tenggara provinces are generally challenged, and Sumatera provinces show mixed performance. However, we see that the Sulawesi provinces show medium to strong performance, Figure 4. Map of Macroeconomic Stability Ranking

8 8 Competitiveness Analysis and Development Strategies Figure 5. Map of Government and Institutional Setting Ranking Figure 6. Map of Financial, Business and Manpower Conditions Ranking alternating between the Top-10 and Middle-13. On the other hand, Kalimantan provinces show medium to weak performance, alternating between the Bottom-10 and Middle-13. The map of rankings based on Financial, Business and Manpower Conditions (Figure 6) is rather similar to the map of rankings based on Macroeconomic Stability (Figure 4). Both of these environments refer to economic performance, Figure 6 in terms of the micro economy, while Figure 4 in terms of the macro economy. Again, we see the strong performance of Java provinces, as well as Riau and Kepulauan Riau, and Kalimantan Timur. It is worthy to note, however, that two out of six Java provinces (Banten and DI Yogyakarta) are not within the Top-10 performers for this environment. Other provinces, namely Sumatera Selatan and Lampung (both provinces towards the south of Sumatera), as well as Papua, are also doing well. Again we see mixed performance among the Sumatera and Kalimantan provinces, and medium to low performance among the Sulawesi provinces. Finally, the map of rankings based on Quality of Life and Infrastructure Development (Figure 7) shows some new insights. Six of top-performing provinces in this environment are located somewhere towards the geographic centre of the country. These include Kalimantan Timur and Kalimantan Selatan, Sulawesi Selatan, Bali, Jawa Timur and DI Yogyakarta. The Top-3 provinces in this category are DKI Jakarta (consistently number one across four environments), DI Yogyakarta, and Kepulauan Riau. Again, the easternmost provinces show weak

9 Overview 9 Figure 7. Map of Quality of Life and Infrastructure Development Ranking performance, and Sumatera provinces show medium to low performance, except for Kepulauan Riau which is among the Top Review of What-if Competitiveness Simulation Results Next we turn to the results of the What-if Competitiveness Simulation of Indonesian provinces for Table 2 shows the ranking for each province along with their standardised scores, for before and after simulation. The results which have been presented previously are as-is, or before simulation was conducted. The simulation results (Table 2) show that different provinces have different potential to improve their rankings and scores. With the simulation that improves their weakest 20% indicators (assuming other provinces remain constant), some provinces have shown to be able to jump many positions while other provinces could perhaps only jump over one or two positions. Some of the provinces which show potential to jump many positions include Sumatera Utara (9 positions up), Jambi (10), Kalimantan Tengah (11), Bengkulu (12), Kepulauan Bangka Belitung (13), and Maluku (16). Other provinces could jump only a few positions up, although they are among the middle and low positions previously. These include Nusa Tenggara Timur (2 positions up), Maluku Utara (2), and Gorontalo (2). The potential to jump multiple positions up depends on several factors: 1) the spread of scores among the different indicators for each province; (2) the spread of aggregated scores among that particular province to the province at one position higher. If two consecutive provinces (with difference of one rank) have a wide gap among their scores, then the province with lower score will have difficulty to leapfrog over the province with the higher score. This is shown in the case of Maluku and Maluku Utara. Maluku (previously at 31 st position) was able to jump 16 places up to the 15 th position. On the other hand, Maluku Utara (previously at 32 nd position) was only able to jump two places up to the 30 th position. On closer look, it was clear that Maluku Utara s standardised score before the simulation ( ) was much lower than Maluku s ( ). Such that even after simulation, Maluku Utara s improved score ( ) is only slightly better than Maluku s score before the simulation.

10 10 Competitiveness Analysis and Development Strategies Table 2. What-if Competitiveness Simulation on Overall Competitiveness Ranking (Year 2010) Rank Score Province Before After Before After Aceh Bali Banten Bengkulu DI Yogyakarta DKI Jakarta Gorontalo Jambi Jawa Barat Jawa Tengah Jawa Timur Kalimantan Barat Kalimantan Selatan Kalimantan Tengah Kalimantan Timur Kepulauan Bangka Belitung Kepulauan Riau Lampung Maluku Maluku Utara Nusa Tenggara Barat Nusa Tenggara Timur Papua Papua Barat Riau Sulawesi Barat Sulawesi Selatan Sulawesi Tengah Sulawesi Tenggara Sulawesi Utara Sumatera Barat Sumatera Selatan Sumatera Utara THE WAY FORWARD The Competitiveness Analysis and Development Strategies for 33 Indonesian Provinces as presented by ACI provide detailed analysis on multiple factors that explain regional competitiveness within Indonesia. The multi-disciplinary nature of the framework is expected to generate interest from a wide range of national and international stakeholders. While the general findings will be of interest to many parties, economists might be particularly interested in the macroeconomic aspects, business owners in the microeconomic aspects, government agencies in the governance aspects, and Non Government Organisations (NGOs) in the quality of life aspects.

11 Overview 11 The following provides suggestions on how the findings of this research can be brought forward to advance the competitiveness of Indonesian provinces. 3.1 Best Practice Analysis Further review of specific indicators and sub-environments of competitiveness holds more promise to explain the competitiveness of the Indonesian provinces. Some possibilities for further studies of best practices are suggested. Labour Market Flexibility At the international level, when compared to other ASEAN countries, Indonesia s competitiveness is challenged by relative weakness in the sub-environment of Labour Market Flexibility. There are national factors that create this condition, for example the presence of rigid labour laws. However, the performance of provinces also matter, especially considering that minimum wage is set at the province-level. ACI s competitiveness analysis confirms that Labour Market Flexibility is weak across the 33 provinces (median ). Even in major provinces like DKI Jakarta (score , lower than median), labour market is considered a challenge. Labour Market Flexibility is an important sub-environment to consider as it contributes to the growth of the private sector as an important provider of employment. The SWOT analysis conducted for each province shows that indicators such as Labour Relations, Minimum Wage per Month, Employment Participation Rate, and Unemployment Rate usually go hand-in-hand, either as strengths, or as weaknesses. Despite the general trend of weak Labour Market Flexibility across the provinces, there are actually very competitive provinces in this matter. They are Jawa Timur (score ), Jawa Tengah (score ), and Jawa Barat (score ). This means a detailed analysis on the situation in these three provinces could yield new insights into their labour market practices. If they can be used as best practices to popularize nationally, it would make major contribution to national competitiveness. It is generally easier and more acceptable for provinces to learn from each other than from other countries. Physical Infrastructure Infrastructure (both physical and technological) has been identified as bottlenecks to Indonesia s economic development. A closer look at both types of infrastructure is worthwhile to understand how such issues could be resolved. Jawa Timur came out at the top of the league for Physical Infrastructure, instead of DKI Jakarta. Kalimantan Selatan also holds a high rank (fourth out of 33 provinces), despite its location. These provinces potentially provide insights into how to develop Physical Infrastructure. What has this provincial leadership done that result in such achievements? Can they be replicated in other provinces? These are some of the questions that can be explored in further research. Banten s positon at number two also deserves attention. This might be explained partially through its position next to DKI Jakarta, however, it also highlights the importance of agglomeration effects. This could lead to further research on the relationship between neighbouring or cluster of provinces. Technological Infrastructure The sub-environment on Technological Infrastructure shows two major outliers: DKI Jakarta (score ) and DI Yogyakarta (score ). Another province that is less of an outlier but still having high score in this sub-environment is Kalimantan Timur (score ). While it is understandable for DKI Jakarta as the nation s capital and economic centre to have good Technological Infrastructure, it is interesting to learn about the performance of DI Yogyakarta and Kalimantan Timur on this matter. Perhaps DI Yogyakarta is a special case due to its size and unique special province status. However, detailed studies could possibly reveal useful lessons for other provinces in these areas where they are weak.

12 12 Competitiveness Analysis and Development Strategies 3.2 In-Depth Topical Research The multi-dimensional nature of ACI s competitiveness framework allows further analysis on specific and strategic indicators which could be analysed by sector. The different sub-environments and indicators could also be further scrutinised by conducting correlation analysis, for example, to find out which indicators are more closely correlated to the performance of specific sub-environments. This opens up a whole range of possibilities for further research. Specific analyses could be done for specific sectors, such as health or tourism, resulting in analyses of healthcare competitiveness or tourism competitiveness. Further studies on governance, for example on the topic of multiple-layers of governance (decentralisation) is also timely and appropriate for Indonesia, considering Indonesia s comprehensive adoption of decentralisation since In comparison to other ASEAN countries, the two key competitive strength of Indonesia is Attractiveness to Foreign Investors and Government Policies and Fiscal Sustainability. These should be seriously guarded and preserved as a key strength. Research focusing on how to maintain and further improve Indonesia s competitiveness in these areas is beneficial to further strengthen the country s position internationally. 3.3 Analysis of Clusters of Provinces Learning from other countries, a key successful experience in regional development in China over the past 20 years is the success of regional clusters. The 11th five-year plan of the People s Republic of China places importance on regional development strategy. Regions such as the Pearl River Delta covers a range of cities in the province of Guangdong (including Guangzhou, Shenzhen and Zhuhai), but also the Special Administrative Regions of Hong Kong and Macau. The Yangtze River Delta also covers multiple cities in multiple provinces, including Shanghai, Jiangsu Province, Zhejiang Province, and Anhui Province). In Northern America, regional clusters have also risen to the forefront of analyses on regional development, with the identification of clusters of city-regions such as Northeast (also known as Bos-Wash, covering the range of cities in multiple States, from Boston to Washington D.C.), and Cascadia (covering Seattle, WA, Portland, OR, and Vancouver, BC). For Indonesia, several provinces with different strengths complement each other to sustain regional competitiveness and cluster of industries. There could be significant cross-provincial cluster development opportunities in Indonesia, for example, coastal and inland provinces complementing each other in their development. In the MP3EI, Indonesia has identified six major Economic Corridors, based on major island groupings. This analysis of clusters of province is welcome, and hoped to be further developed and analysed based on possible industrial and urban/regional complementarities.

13 Review 1 Competitiveness of Indonesia Provinces: Leveraging for Regional Economic and Human Development Professor Umar Juoro Member of the National Economic Council (KEN), appointed by the President of Republic of Indonesia INTRODUCTION The study on competitiveness of 33 Indonesian provinces is timely and very important to understand potential and obstacles for development at provincial level in Indonesia. This study not only shows SWOT analysis but also leads to better understanding inter-provincial competition and complementary. The analysis is important for the island country given the heterogeneity of the regional economies so that provide insights into the structure of economic interactions that useful for policy makers for implementing decentralization, and also useful for private sector to develop their business activities in certain provinces. The nature of the competition and complementarity raises important issues for the development of appropriate policy alternatives designed to address problems of efficiency and equity by central and local government, and opportunities for private sector. For policy makers, competition among provinces would lead them to design to better policy to cope up with the competition. For private sector, competition among provinces would likely give better opportunity for investment, as each province offers better environment for investment. Meanwhile, complementarity would lead cooperation and division of roles among provinces to achieve a common goal. This chapter consists of three parts. The first part is a review of literature on regional competition. The second part is regional development in Indonesia highlights several important studies in this area. Part three discussed the finding of the study that ranks 33 provinces in four different categories and overall. Part four is policy implications. It is closed with conclusions. REGIONAL COMPETITION: A REVIEW OF LITERATURE In the literature, the notion of inter regional competition and complementary is well illustrated by the competitive-generative theory of regional growth as outlined by Richardson (1973). The theory offers two ways of looking at national growth from regional perspective. In the competitive framework, regions are seen as competing for a somewhat existing and predetermined national level of economic growth. The national level growth is then to be distributed among competing regions in a zero-sum manner, in the sense that higher growth received by one region must be at the cost of growth in another region. Consequently, regions in the system are in a competitive rather than in a complementary mode. From the policy perspective, recommendation is made to maximize the national growth as well as to find a suitable way of distributing it among the regions (the efficiency-equity trade off). How each region would maximize its growth given endowment available, and how central government would be able to do redistribution among provinces with different economic conditions. On the other hand, looking at regional growth as a generative process, the national level growth is seen as an aggregate of what happens in the regions. Regions form the nation. In this sense, regions are not in competing mode with one another. Economic growth is attached to particular region. Hence, economic growth of one region is seen as making a favorable contribution to national growth. Policy recommendations will center on 13

14 14 Competitiveness Analysis and Development Strategies how to maximize the growth at a particular region, as this will be identical to maximizing overall national growth. Implicit in Richardson s view are two notions of interregional relationship captures the spatial hierarchical ties between upper (nation) and lower (region) economies. On the other hand, the horizontal interregional relationship, explores relationship among the regions at the same level in the hierarchy of the economy. The relationship in question may take the form of competition or complementarity. However, a region does not literally compete one with another. Cheshire and Gordon (1998) define regional competition as the promotion of local economic development in competition with regions. In the same spirit, Poot (2000) defines the term as the actions of economic agents that are taken to enhance the standard of living of their own territories, such as regions, cities, or countries. Hence, it is the agent within a specific region who carries out the competition. The government is of course an important agent in regional economies. In most cases, the government may even become involved in a policy making process that would benefit other agents in the region in their competition with agents in the rest of the region. Johanson (2000) calls this the policysupported competition. Elements of competition in regions is very important to identify, in order to understand the level of competitiveness of each region. Funck (1995, 2000) categorizes the elements into two broad types: the hard factors and the soft factors. He outlines those factors as follows; Hard location factors: (1) Geographic situation, topographic situation. (2) Transport and communication network. (3) Utility supply and disposal systems. (4) Access to infrastructure establishments of various kinds (e.g. R and D, educational, cultural, health, jurisdictional, administrative institutions), their capacity and levels of quality. (5) Capacity, level of quality, and degree of diversity of human resources (or structure of labor market). (6) Sectoral, size, and control structure of existing economic activities. (7) Structure and levels of wages, prices, etc. (8) Structure and levels of taxes, subsidies, etc. Soft location factors: (1) Intensity, diversity and level of quality of cultural activities, and recreational offers. (2) Quality of natural and man made environment. (3) Creative climate (as expressed in the degree of multiplicity of political and intellectual discussion, participation of citizens in public affairs, etc. (4) Identification of local citizens with their location, city or region, based on historical, cultural motivation, and future aspirations. (5) Condition that result in external benefits and diseconomies. (6) Conditions that result in internal benefits and diseconomies. (7) Pecuniary external effects (market imperfections). These regional differences are inputs to production process that determine competitiveness of a region. This is in line with this study on competitiveness of 33 provinces in Indonesia undertaken by ACI. In a system of territorial interaction, the early tradition in trade economics refers to the Heckser-Ohlin- Samuelson theorem. It says that the countries will produce and export goods that use intensively the locally abundant factors. Another important feature of regional interactions is the assumption of free factor mobility. Krugman (1979) and Helpman and Krugman (1985) point out another important factor, namely economy of scale. Large markets enable firms to specialize and lower the costs of production. The explanation roots in the old policy perspective in the development economics, the famous big-push theory (Rosenstein-Rodan, 1943) that also has increasing returns to scale as the main backbone.

15 Review 1 15 Referring back to the hard and soft location factors outlined above, it is not surprising that the increasing return to scale are also important in explaining the distribution of regional development. It is implicitly present in two forces of spatial allocation of economic activity, namely the growing centripetal and the diminishing centrifugal forces (Fujita and Thisse, 1996). The growing centripetal force takes its form from the growing agglomeration economies, while the diminishing centrifugal force is basically a result of decreasing transportation costs. The concept of competitive advantage was introduced by Porter (1990) that emphasized competitiveness of an economy based on factor of production, market competition, industrial linkage, and institution. The concept is adopted by World Economic Forum that ranks countries based on macro and micro-economic indicators. Macro indicator consists of macroeconomic stability, infrastructure, and public institution. Micro indicators consists of business sophistication, human resource, and technology. In line in the tradition of hard and soft location factors identified by Funck, and competitive advantage of Porter, this study of competitiveness of 33 Indonesia provinces undertaken by ACI. REGIONAL ECONOMIC DEVELOPMENT IN INDONESIA Competition and Complementarity, and Convergence in Provincial Economic Development The study on regional development in Indonesia is usually focuses on vertical interaction between local and central government than horizontally interactions among regions. The reason is that regional economies are dominated by public sector, and limitation of data on regional horizontal interaction. The notion whether region within a country are in a competitive or complement fashion is very relevant to Indonesia. The country has 33 provinces now, and the parliament just passed the law for creation of the 34th province, North Kalimantan. Six major regions are normally identified for analysis and also policy purposes. They are Sumatera, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Maluku-Papua. Naturally regions follow the administrative, provincial boundaries. It has been a general fact that the western part of Indonesia is much more prosperous than the eastern part. The data shows highly inequal distribution of income between Sumatera and Java that consists around 80 percent of GDP, while Kalimantan only 10 percent, and the rest is 10 percent. Java itself is still dominated with 58 percent of GDP. This pattern of regional inequality has been persistent for a long time, and it seems hard to change. The question is whether convergence happened among the provinces. Rooted in the neoclassical growth theory, an empirical study confirmed this convergence. Study by Garcia and Soelistianingsih (1997) find the evidence for the period In the same spirit, Nazara (1999) following Mankiw, et al. (1992) using Solow growth model confirmed the evidence of convergence among provincial per capita income in Indonesia. That exposition may suggest a contradiction. On the one hand, one finds evidence of convergence, while on the other hand, a relatively constant distribution of regional income over time is evident. A study by Nazara, Sonis, and Hewings (2000) shows that western part of Indonesia is complementary each other, i.e. their relative share of income increases simultaneously. In addition, there is also evidence that the western part is in competition with the eastern part of Indonesia, i.e the increase income of the former at the expense of the latter. To understand regional analysis of Indonesia, one requires to distinguish the origin of resources and the ultimate beneficiary of income. This is especially true for provinces with oil, gas, and mining incomes. In the past the revenues went to central government go to central government, and local government just received some distribution. However, since decentralization law passed in 1999, producer of natural resources have received significant proportion of the revenue. This gives a lot of benefit for rich natural resources provinces, like East Kalimantan and Riau. To show competition among districts/cities in Indonesia, KPOD has been undertaken annual study on competiveness of district sand cities based on economic, infrastructure, governance, and overall categories. Based on decentralization law, the emphasized of decentralization is at district/city level. The problem is on limited

16 16 Competitiveness Analysis and Development Strategies economies of scale. The study shows indication of competition and complementarity among districts/cities within a province and also inter-province. The importance of agglomeration in economic development at provincial level has been gaining serious attention. Juoro (1989) shows the present of agglomeration in national level, provincial and manufacturing sector in Indonesia that support economic growth. Recently, World bank (2011) study shows a strong correlation between economic growth and rate of urbanization at the national as well as provincial level. Larger cities in general are more economically productive and competitive than smaller cities and rural areas because of positive externalities known as agglomeration. Urbanization and agglomeration economies should be an important element in Indonesia s development as a middle income country. The ability to manage urbanization properly, it can generate productivity gains, economic opportunities, and rising incomes needed to support the increasingly large proportion of Indonesia s middle income earners. The core cities lead in economic output, however the urban periphery should also play an important role as a driver of growth and agglomeration. Using the agglomeration index, the World Bank study identifies 44 agglomeration areas in Indonesia. The majority of these agglomeration areas are in Java, Bali, and Sumatera, in which islands most of the urban population now located. There is only one agglomeration in the large island of Papua, namely Jayapura, and also only one in the Maluku archipelago, while Kalimantan and Sulawesi have five and six agglomeration areas, respectively. In terms of size of population, Indonesia has two megacities with population of more than 10 million population (Jakarta and Surabaya), four metropolitan areas with population in the range of 5 10 million, 13 metropolitan with population in the range of 1 5 million, and 8 medium size metropolitan areas with populations in the range of million. Convergence in Human Development Despite economic disparities, human development seemed to converge. HDI (Human Development Index) shows large inequalities across provinces. Jakarta is the top not only in economic, but also in HDI. While Nusa Tenggara and Papua were lagging in at the end of HDI list. World Bank study (2011) shows a negative connection was found between the initial of HDI and its growth rate. This suggests that Indonesia is on path leading to a regionally more balanced landscape in terms of human development. GDP per capita is associated positively with HDI across the provinces. However, economic and human development might not correlate in every case. Kalimantan Timur is one of the richest provinces because of its natural resources. Mining companies that are dominant in contributing to GDP there, mainly recruit employees from other parts of the country, consequently, the large GDP is not the result of local human development, but it is rather due to the performance of natural resources. Intra-province inequalities are reported by the number of poor, their share in population, and the poverty line expressed in income levels. The bigger the province, the less percent of poor in total population. Provinces like Papua and Maluku, account for the highest share of poor. These provinces are slightly populated in Indonesia terms (e.g. Papua inhibits only 1.2 percent of the country s population); they are less developed being on the Eastern periphery of the country. However, the high share of poor lies in other factors as well: isolation, lack of employment, etc. COMPETITIVENESS OF PROVINCES Profile of Provinces Regional competition should not be literally understood as regions competing one another. Rather, it is a result of agents within a region trying to behave so as to enhance their own regional development. In that sense, central to the concept is the interaction of agents both within the region as well as across the boundaries. The agents can be government officials and private sector.

17 Review 1 17 Indonesia province competitiveness analysis done by ACI is a really good start to assess how 33 provinces in Indonesia are compared each other in five main category namely overall, macro economy, government, financial, and quality of life. Provinces are ranking in overall category and in each category with the same weight for each of them. Based on the data from ACI study on profile of provinces, we can see some important correlations that explain regional development in Indonesia HDI Poverty (%) Linear (Poverty (%)) RGDP/Cap (Rp million) Figure 1. Positive Correlation Between RGDP/Capita with HDI (2010 Data). The Higher Income, the Higher HDI Poverty (%) Poverty (%) Linear (Poverty (%)) RGDP/Cap (Rp million) Figure 2. Negative Correlation Between RGDP/Capita with Poverty Level. The Higher Income Per Capita, the Lower Percentage of Poor in Population

18 18 Competitiveness Analysis and Development Strategies Urban (%) Urban (%) Linear (Urban (%)) RGDP/Cap (Rp million) Figure 3. Positive Correlation Between Urban Population and RGDP/Cap. The Higher Urban Population, the Higher also RGDP/ Capita HDI HDI Linear (HDI) Popula on (000) Figure 4. Positive Correlation Between Population and HDI. The Larger the Population of a Province, the Higher HDI.

19 Review HDI HDI Linear (HDI) Poverty (%) Figure 5. Negative Correlation Between Poverty and HDI. The Lower the Poverty, the Higher HDI Poverty (%) RGDP/Cap (Rp million) Linear (RGDP/Cap (Rp million)) Popula on (000) Figure 6. Negative Correlation Between `Population and Poverty. The Higher Population in a Province, the Lower Percentage of Poor

20 20 Competitiveness Analysis and Development Strategies Competitiveness of Provinces The result shows that Jakarta top in overall and all other four categories. Provinces in Java in general are at the top five in overall and each category. Nevertheless, Kalimantan Timur and Kepulauan Riau are able at the top five in several categories. Kalimantan Timur number three in overall, number four in macro economic stability, number two in financial, and number four in infrastructure. Meanwhile, Kepulauan Riau number five in macro economy and number three in infrastructure. However, in government category Kepulauan Riau and Kalimantan Timur is at the low ranking. The policy simulation is undertaken that makes province able to improve its ranking by overcome the weaknesses. This certainly encourages the policy makers in provincial level to improve its province competitiveness instead of just unhappy with the low ranking of its province. For investor, this is a very good reference to see what are the strength and weaknesses of a certain province that they are interested to enter or expand their business activities in that province. While for researchers and general readers, this analysis is a very good information that they can use it for further analysis and understanding of certain province Overall Macroeconomy Govt Fin. Business Infrastr.Quality life Figure 7. Competitiveness of 33 Provinces. Jakarta is Dominated in All Categories Govt Govt Linear (Govt ) Macroeconomy Figure 8. Positive Correlation Between Macro Economy and Government and Public Institution. The Better the Government, the Higher Macro Economy.

21 Review Infrastr.Quality Life Infrastr.Quality life Linear (Infrastr.Quality life) Fin.Business Figure 9. Positive Correlation Between Financial and Business with Infrastructure and Quality of Life. The Better Infrastructure and Quality of Life, the Higher Financial and Business Infrast. Quality Life Infrastr.Quality life Linear (Infrastr.Quality life) Macroeconomy Figure 10. Positive Correlation Between Macro Economy and Infrastructure and Quality of Life. The Better Infrastructure and Quality of Life, the Higher Macro Economy.

22 22 Competitiveness Analysis and Development Strategies Infrast. Quality Life Infrastr.Quality life Linear (Infrastr.Quality life) Govt Figure 11. Positive Correlation Between Government and Infrastructure and Quality of Life. The Better the Government, the Better Infrastructure and Quality of Life. On Methodology Certainly there is criticism for the study, such as why the weight for each category is the same. Why the weight for certain category is not higher than the other. The different weight certainly can be done in the analysis that might change the ranking, but this would not give much more valuable information. While by giving equal weight for the categories, it is a neutral way to compare the provinces considering that each province has different characteristic. A certain province emphasizes more on one category than the others, for example Bali and Yogyakarta are emphasize more in quality of life and government than macro economy and financial aspects. The other attention is that decentralization in Indonesia is emphasized not at the provincial level, but at district level. This is important when we see for the government aspect, but from economic analysis point of view a district is too small unit, while province is reasonable unit of analysis. For specially government and infrastructure categories, a further effort to analyze in the district level is certainly important. As district administration is responsible in giving mining license and land for plantation, its role is becoming very important. Central government is trying to bring back the license issuance in its own hand, but this requires a change of decentralization law that is very difficult politically. In addition, districts are strongly oppose this proposal and seen it as a back lass for decentralization. Deriving from the analysis, we can see that Indonesia provinces can be divided into five different groups. The first is provinces that play as the hub, similar to the role of provinces in Java such as East Java, and Central Java with its capital city Surabaya and Semarang. The other provinces that fall under this group is South Sulawesi, North Sumatera, and South Sumatera. The second group is the rich natural resource provinces that can utilize the rich natural resources in sustainable way in mining as well as plantation. In this group includes East Kalimantan, Riau, Aceh, South Kalimantan, Central Kalimantan, West Kalimantan, Sulawesi Tenggara, Papua and West Papua. The third group is provinces that emphasize on quality of life that includes Bali, Yogyakarta, West Sumatera and Nusa Tenggara Barat. The fourth are the provinces that play the role as the hinterland and support for the hub that include Jambi, Bengkulu, Lampung, Banten, Nusa Tenggara Timur, West Sulawesi, Central Sulawesi, Gorontalo, Maluku, North Maluku. The fifth is center for growth province that takes strategic location in the region that includes Kepulauan Riau and Sulawesi Utara. Kepulauan Riau with growth centers in Batam, Bintan and Karimun. North Sulawesi with its growth center in Bitung. While, Batam has quite developed, the other growth centers are still in the early stage.

23 Review 1 23 Jakarta and Java Concentration It is understandable that Jakarta and other provincial in Java are at the top of the list mainly because Java contributed around 53 percent of the economy, better government, sophisticated financial service, and much better infrastructure. East Java, West Java, and Central Java have been developed a lot more than other provinces in the outer islands for a long time. As capital city Jakarta is practically dominating in all categories. This mainly caused by since the beginning Jakarta has been developed as center for government, business, and even tourism. The history of centralistic government strengthened the domination of Jakarta that is very difficult, if not impossible, to be replicated by other provinces, or cities, in the country. However, the concentration of government and business in Jakarta brings costly consequences. The slow development of infrastructure does not keep up with the fast growth of economic activities and people mobility. As a consequence, very bad traffic jam is a daily experience in the city. As the center of government, political events also very often disrupt business activities in Jakarta. Jawa Timur province is persistently as runner up except in the category of financial (number three under Kalimantan Timur) and in infrastructure category number seven. This is very interesting result. Common sense would put East Java above Kalimantan Timur in financial and infrastructure. However, this analysis is not supposed to just put what province is higher ranking than the other, but to initiate a policy that a certain province can improve its competitiveness. It is understandable with the fast growth of manufacturing and trade activities, not to mention high people mobility in Jawa Timur, infrastructure is inadequate. From this result, it is clear that Jawa Timur needs significant improvement in infrastructure development to keep up with its economy. By this its financial category would also improved. Jawa Tengah dan Jawa Barat in general they are equally competitive with Jawa Barat province is slightly ahead. However, as for the case of Jawa Timur, those two java s provinces a lack behind in infrastructure. We can see that in industrial estate located mainly in greater Jakarta area, and its crowded urban areas, Jawa Barat has serious problem in supporting infrastructure development. Similar problem is experienced by Jawa Tengah as manufacturing and trade are fast growing sector in this province. The Rich Natural Resource Province Since decentralization is implemented in 1999 more resources are allocated to regions. Around 30 percent of budget expenditure are allocated to the regions. Before 1999, around 63 percent bank credit in Jakarta, after 1999, that level of credit is outside Jakarta. This also explains why Kalimantan Timur is in the top five for overall category, macro economy, financial, and infrastructure. As a resource rich province, East Kalimantan is the largest recipient of revenue sharing mainly from natural resources. The other province is Riau that also rich in natural resources, but Riau is not at the top five in any category. Meanwhile, Kepulauan Riau is at the top five for macro economy and infrastructure categories with Batam as the growth center for manufacturing with its strategic location near Singapore and quite developed infrastructure. However, for government category, there is not a single province in outer island that ranked at the top five. East Kalimantan and Kepulauan Riau that ranked quite good in macro economy, financial, and infrastructure, they have low ranking for government. The problem of labor relation, corruption, and regulatory quality drag down the province competitiveness. This is serious issue that Indonesia has to face both at the national as well provincial level. The other rich natural resources province such as Riau, Aceh, Papua, Papua Barat, Kalimantan Selatan, Kalimantan Tengah, Sulawesi Tenggara are very potential to increase their rank in macro economy category, financial and infrastructure. With the potential of natural resources those provinces have a chance to improve their competitiveness. However, the process is not easy mainly because low capacity of local bureaucrats and weak institutions. The Growth Center Province The experience of Kepualauan Riau with Batam as the growth center encourages for other strategic province to follow. There are many provinces that would like to be growth center like Kepulauan Riau, however, there is a

24 24 Competitiveness Analysis and Development Strategies certain requirement to do so. The most important factor is the strategic location and full support from the central government. The province that could fulfill the strategic location, and still need full support from central government is Sulawesi Utara with its growth center Bitung. The location of is quite strategic at the most northern part of Indonesia. Sulewesi Utara has a better local bureaucracy capacity. The Quality of life Province Bali is an example for a quality of life province that utilize nature and culture as the main attraction for tourism. The other provinces that eligible as a quality of life province is Yogyakarta, Nusa Tenggara Barat, and Sumatera Barat. Yogyakarta has been known for a long with very attractive Javanese culture surrounded with beautiful landscape. Yogyakarta also has very good government with strong support of capable local; bureaucrats. Similarly Sumatera Barat has a strong cultural character which is Minangkabau. The nature is also very beautiful starting from mountainous area down to beautiful sandy beaches. The capacity of local bureaucrats is also quite good. Nusa Tenggra Barat has potential as a quality of life province with its location close to Bali. What this province needs is improvement in government and social condition that support tourism to utilize a large potential of the province. The Hinterland Support Provinces Several provinces play the role as hinterland support for the hub. Provinces like Banten in Java, Jambi, Bengkulu and Lampung in Sumatera, Gorontalo, Sulwesi Barat, and Sulawesi Tengah in Sulwesi, Maluku and Maluku Utara can play the role as hinterland to support the hub. POLICY IMPLICATIONS The analysis of Indonesia province competitiveness has a quite wide ranging of policy implications. It shows clearly that competition among provinces is strong, especially among provinces that have high overall score, and in macro economy category. For central and local government, it is important to encourage elements of competition among provinces for the optimality of their potentials. Nevertheless, the elements of compelementarity are also very strong. For example, it is impossible for each province to be able to develop international airport or port in efficient way. For this reason, complementarity because of its proximity and potentials would lead for intra-provinces cooperation. For private sector, competition among provinces would offer better opportunity for investment. For example, an investor in manufacturing would carefully learn the potential location for the location of its business expansion whether in Banten, West Java, Central Java, East Java, or even East Kalimantan. Similarly, for other business sector. For the rich natural resources province, they can not just rely on depleted natural resources, but they not only have to use the revenue wisely for infrastructure and human development, have also to develop their competitiveness in other areas. For what considered as hinter land provinces, this does not mean they would always be underdeveloped, but their role as hinterland would mean develop together with more developed economy province in a complementarity way. The division of role is important in order to achieve common goals for economic and human development. These hinter land provinces have inadequate infrastructure, inadequate supply of skilled labor and low access to market in major provinces (cities), impeding their ability to compete. They need to better connected to large and medium-sized metropolitan centers. They also need to invest more heavily in basic infrastructure. They need to improve their level of access to larger and more prosperous regions, to improve infrastructure, and to create a more positive business climate. The provinces can be developed based on their strength. Some provinces can play the role as a hub, the other can be growth center province, quality of life province, and hinterland provinces. This is in line with the existing policy such as accelerated development (MP3EI) through corridor development that emphasizes on

25 Review 1 25 infrastructure development and the economic strength of the corridor. MP3EI was formulated on the assumption that each region needs to be treated differently in terms of policy and investment. Linking the pattern of competitiveness of provinces to the MP3EI presents an opportunity to focus on ensuring that existing growth center perform even better and play even more significant role. Differentiating policy approaches on the basis of variation of province competitiveness will also help the government to ensure that its support to different provinces is appropriate in their needs. Indonesia needs a multi-faceted strategy for managing regional development to further leverage regional growth. Indonesia s regional development strategy needs to focus on ensuring greater consistency between provincial disparities and investment priorities. In addition, the strategy needs to stratify local governments according to provincial characteristics (growth center, rich natural resources, quality of life, and hinterland). From human development point of view, the study shows clearly the strong positive relationship between economic development and quality of life. The effort to overcome poverty and improve HDI is effectively addressed along with economic development, especially in providing employment for people. Certainly, for all provinces the role of government is still very important. The role of government is very important in providing infrastructure that is important not only for economic development, but also improving quality of life. REFERENCES Fujita, M. and J.F. Thise (1996). Economics of Agglomeration. Discussion Paper 1344, Center for Economic Policy Research, London. Funck, R.H. (2000). Hard and Soft Determination of Interregional Competition in P.W.J. Batey and P. Friedirich (eds.), Regional Competition, Springer, pp Garcia, J.G. and L. Soelistianingsih (1998). Why Do Differences in Provincial Incomes Persist in Indonesia?. Bulletin of Indonesian Economic Studies, 34(1), Helpman, E. and P. Krugman (1985). Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy. Cambridge, MIT Press. Johansson, B. (2000). Regional Competition: Endogenous and Policy-Supported Processes in P.W.J. Batey and P. Friedrich (eds.), Regional Competition, Springer, pp Juoro, U. (1989). Agglomeration in Indonesia and the Philippnes. Philippines Journal of Economics and Business. Krugman, P. (1979). Increasing Returns, Monopolistic Competition, and International Trade, Journal of International Economics 9, Mankiw, N.G., D. Romer, and D. Weil (1992). A Contribution to the Empirics of Economic Growth, Quarterly Journal of Economics, 107(2), Nazara, S. (1999). Provincial Convergence Within the Neoclassical Growth Theory in Indonesia. Paper presented at 21 st Conference of Northeast Sectionof Regional Science Association International (RSAI), held by Cornell University and SUNY Binghimton, Ithaca. Nazara, S., M. Sins, and G. Hewings (2000), Interregional Competition and Complementarity in Indonesia. The Regional Economics Applications Laboratory (REAL), Urbana, Illinois. Porter. M (1990). Competitive Advantage Among Nations. New York, Free Press. World Bank (2011a). Regional Development and Disparities in Indonesia: GDP per capita, HDI, and Poverty Rate, World Bank (2011b). Indonesia: The Rise of Metropolitan Regions: Towards Inclusive and Sustainable Regional Development, No

26 Review 2 Asia Competitiveness Institute (ACI) Review Seminar on Competitiveness Ranking and Policy Recommendations for 33 Indonesian Provinces Purba Robert M Sianipar, Ph.D. Assistant Deputy Minister for Water Resources Infrastructure Coordinating Ministry for Economic Affairs, Republic of Indonesia WHAT THE STUDY MEANS FOR INDONESIA? The study on the competitiveness ranking of 33 Indonesian provinces is very useful and important as a tool not only for the provincial governments but also for the central government to do internal evaluation for the purpose of improvement. This tool could be used to identify areas of strengths that should be maintained or enhanced, and shortcomings that should be overcome or minimized. As a consequence of regional autonomy era in Indonesia, competition between provinces to excel in domestic market or even for international market is getting stiff. It means that any province should look to make the best use of its potential and at the same time should pay attention to what other provinces have been doing. It also means that development of a province is closely related with investment in that province and complementarity among provinces. Hence, though there are limitations and challenges, a provincial government holds the responsibility of creating conducive environment for investment in that province. Provincial government usually prepares provincial economic development plan, provincial spatial plan, provincial investment plan, and acts as coordinator to synchronize economic planning activities inter regencies or cities within its province. The analysis and result of ACI-LKY-NUS (Asia Competitiveness Institute at Lee Kuan Yew School of Public Policy National University of Singapore) study should be worthwhile for supporting the provincial governments overcome their inadequacies and become more competitive in comparison to other provinces. Based on the duty and function of a provincial government as mentioned above, the result of the ACI-LKY- NUS study could serve as current portrait to each province to comprehend existing condition, problems and challenges, then address them. Meanwhile, at the national level, by launching the Master Plan for Acceleration and Expansion of Indonesia Economic Development (MP3EI) in 2011, the Indonesian Government is committed to pursue fair and inclusive growth for all provinces. The MP3EI is an integral part of the Indonesian National Development Plan and it considers long-term national interest for survival of the nation. The MP3EI puts emphasis on breakthrough and business not as usual approach to accelerate the economic development. Mapping of the MP3EI programs and the result of the ACI-LKY-NUS study could give feedback to central Government on provinces that need to be assisted to become more competitive. It means from the study the central Government would have enough information and, hence, could make policy and decision to use fiscal or non-fiscal measures as intervention to help least competitive provinces to become more competitive. In addition, the ACI-LKY-NUS study provides SWOT (strength-weakness-opportunity-threat) analysis that could be used not only by provincial governments and central Government, but also give information and references for potential investors in making decision on where to invest. We learned that potential investors are increasingly interested to know more about a particular province where they would like to invest and, hence, they would like to get a copy of this study. It is our hope that the result of the study would be beneficial to all, especially to all provincial governments in Indonesia. 26

27 Review 2 27 MASTER PLAN FOR ACCELERATION AND EXPANSION OF ECONOMIC DEVELOPMENT (MP3EI) AS LEVERAGE The result of the ACI-LKY-NUS study shows that the top 10 most competitive provinces, as of now, are dominated by provinces in Java Island and provinces that are rich in natural resources (with exception of Papua and Papua Barat provinces). The bottom 10 least competitive provinces are dominated by eastern provinces in Indonesia, as well as a mix of some provinces in Sumatera and Kalimantan. In fact, provinces in Sumatera Island and Kalimantan Island show mixed performances, where each Island has one of the best and of the least competitive provinces. As of Sulawesi Island, as shown in Figure 1 below, all provinces are in the mid-range competitiveness ranking Table 1. Provinces Overall Competitiveness Ranking in Major Indonesian Islands Rank Province Score Rank Province Score JAWA KALIMANTAN 1 DKI Jakarta Kalimantan Timur Jawa Timur Kalimantan Selatan Jawa Barat Kalimantan Barat Jawa Tengah Kalimantan Tengah DI Yogyakarta Banten SULAWESI 11 Sulawesi Selatan SUMATERA 14 Sulawesi Utara Kepulauan Riau Gorontalo Riau Sulawesi Tenggara Sumatera Selatan Sulawesi Barat Aceh Sulawesi Tengah Sumatera Barat Sumatera Utara BALI & NUSA TENGGARA 20 Lampung Bali Jambi Nusa Tenggara Barat Bengkulu Nusa Tenggara Timur Kepulauan Bangka Belitung MALUKU & PAPUA 24 Papua Papua Barat Maluku Maluku Utara The disparity on the competitiveness ranking between provinces in Java and outside Java has to be addressed swiftly and systematically if the Republic of Indonesia would like to achieve its vision by 2025, which is a realization of a prosperous, advance, self-sufficient and fair Indonesian society. The result of ACI-LKY-NUS study which shows SWOT analysis of each province would help not only the provincial governments in dealing with

28 28 Competitiveness Analysis and Development Strategies Figure 1. The Six Indonesian Economic Corridors of MP3EI their deficiencies, but also the central Government to identify and plan strategy and affirmative policy to increase the competitiveness of least competitive provinces. For the central Government, the policy is now known as the MP3EI. The MP3EI describes the means to transform the Indonesian economy into a developed nation through high, inclusive, and sustainable economic growth. At the same time, the MP3EI is also intended as a leverage to cultivate the full potentials of all provinces. Through the MP3EI programs the Indonesian Government is committed to pursue fair and inclusive growth for all provinces to achieve prosperity and welfare. The MP3EI encourages the central government, local governments, and business sector to embrace a new way of thinking in doing business. It fosters out-of-the-box thinking that would encourage every stakeholder to take a collective approach toward improving and utilizing the province resources, strategic position, and manpower potential, in order to propel provincial development forward. In MP3EI, the government will not only be a regulator, it also be a facilitator and catalyst to support growth. As a regulator, the government will amend or remove regulations that deter the implementation of investments. As a facilitator and catalyst, the government will provide incentives both fiscal and non-fiscal. In this way the government is able to help least competitive provinces to increase their competitiveness. The MP3EI, launched by the President of the Republic of Indonesia in May 2011, is a complementary working document for the ongoing national and regional development plans. It describes in detail breakthrough steps and national goals to be achieved at certain period of time, utilizing various resources pertinent to different provinces and regions in Indonesia. Basically, the implementation strategy of the MP3EI focuses on eight main programs which consist of 22 main economic activities. The 8 main programs are on agriculture, mining, energy, industrial, marine, tourism, telecommunication, and the development of strategic areas. The 22 main economic activities are palm oil, rubber, cocoa, animal husbandry, timber, oil and gas, coal, nickel, copper, bauxite, fishery, tourism, food agriculture, steel, defense equipment, food beverages, textile, shipping, ICT, transportation equipment, Sunda Straits Strategic Area, and Jabodetabek Area. Therefore, the MP3EI development strategy is essentially an integration of the sector and regional development with a purpose to improve provincial and regional economic potential. The main strategy of MP3EI is an integration of 3pillars: Economic potential development through economic corridors, Strengthening the national connectivity, and Strengthening national human resources capability and science and technology. There are 6 economic corridors that cover all provinces in Indonesia. They are Sumatera Economic Corridor, Java Economic Corridor, Kalimantan Economic Corridor, Sulawesi Economic Corridor, Bali-Nusa Tenggara Economic Corridor, and Papua-Kepulauan Maluku Economic Corridor. These regional

29 Review 2 29 economic corridors are developed based on the potentials and advantages inherent in each province throughout Indonesia. It would be interesting to see how the competitiveness ranking of the 33 provinces would fare in the near future when the implementation of the MP3EI programs has really triggered development in least competitive provinces. Of course there are basic principles and prerequisites, combined with various development strategies, which will strongly influence a successful implementation of the MP3EI. The MP3EI Economic Corridors provide new themes of economic and social development. The old theme was economic development focusing on extracting and exporting commodities, the new theme now is economic development focusing on creating added value from focus sectors. When the old theme was economic concentration on limited places, the new theme now is diverse, but inclusive economic development. When the old theme was centrally-driven economic development, the new theme now is synergy between sector and regional development to sustain national competitiveness advantages. When the old theme was transportation focusing on land (especially toll-road) development, the new theme now is transportation focusing on multi-modal development. When the old theme was building only infrastructure we badly need now, the new theme is building infrastructure we want for long term economic competitiveness. The theme of the 6 Indonesia economic corridors, as shown in the Figure 1 below, could be summed up as vision that is: Indonesia as basis for global food security, center of processing products of agriculture, plantation, fishery, mineral and energy resources, as well as a center of global logistic. Based on the competitiveness ranking of ACI-LKY-NUS study, provinces in Sumatera Island show mixed performance. Provinces of Sumatera Utara, Lampung, Jambi, Bengkulu, and Kepulauan Bangka Belitung rank in the bottom half of the competitiveness ranking, while Provinces of Kepulauan Riau, Riau, Sumatera Selatan, Aceh, and Sumatera Barat positions in the top half. In the MP3EI, the Sumatera Economic Corridor development Figure 2. The Sumatera Economic Corridor of MP3EI

30 30 Competitiveness Analysis and Development Strategies Figure 3. The Java Economic Corridor of MP3EI theme is the Center for Production and Processing of Natural Resources, and as the Nation s Energy Reserves. Sumatera Island strategic location is an asset, and it can propel the Island to become the Front Line of the National Economy into the European, African, South Asian, East Asian, and Australian markets. Its main economic activities are palm oil, rubber, and coal. In addition, the development of shipping and steel industries, as well as the development of Sunda Straits Strategic Area and Infrastructure, would help less competitive provinces in this Sumatera Island to promote their potential and, hence, become more competitive. Moreover, the central Government is committed to develop infrastructure such as road, port, power and energy, airport railway, water utility, ICT, in this economic corridor to help these provinces be more competitive. All provinces in Java Island are in the top seven of the competitiveness ranking of ACI-LKY-NUS study. It means that provinces in this economic corridor have better economic and social conditions in comparison to others. However, it does not mean that they have to be content with the position they are now in. All provinces in Java Island have potential to grow in their value chain, to transform from manufacturing-based economy to service-based economy. In fact, Java Economic Corridor could be the benchmark for other regions for economic changes, evolving from primary industry focus towards tertiary industry. Such value chain evolution has been successfully developed in Singapore. Java Island now is the home for 57% of Indonesia population of 242 million people. In addition, Java Island contributes about 57% to national GDP. Based on the number of population and economic activities it creates, the ecological carrying capacity of Java Island has been exceeded, and this fact has caused environmental and social strains. The ecological strains have caused lack of water and space, and other environmental problems, which would eventually be caught up with the growth of Java. Hence, it is the policy of the central Government to be more selective on the type of investment allowed in Java, and to distribute the national growth more evenly

31 Review 2 31 Figure 4. The Kalimantan Economic Corridor of MP3EI to outside Java Island. The MP3EI is expected to promote opportunities based on provincial potential and specialization and, hence, facilitate a diverse and inclusive development by creating new economic regions outside of the existing economic growth centers. The result of ACI-LKY-NUS study shows that provinces in Kalimantan Island show mixed performance in competitiveness ranking. Provinces of Kalimantan Barat and Kalimantan Tengah rank in the bottom half of the competitiveness ranking, while Provinces of Kalimantan Timur and Kalimantan Selatan positions in the top half. In the MP3EI, the Kalimantan Economic Corridor development theme is the Center for Production and Processing of National Mining and Energy Reserves. Province of Kalimantan Timur, ranked 3 in the competitiveness ranking, is one of the richest provinces in Indonesia in terms of natural resources. Kalimantan Timur is blessed with oil and gas, coal, and other mining resources. Opposite is the non-oil and gas province of Kalimantan Tengah is ranked 26 in the competitiveness ranking. In this case the MP3EI program is expected to accelerate the development of the Kalimantan Tengah and Kalimantan Barat provinces by facilitating development of basic infrastructure services, physical and nonphysical (education and healthcare). Provinces in Sulawesi Island have competitiveness ranking in the middle of the pack. Sulawesi Selatan province ranks 11 and Sulawesi Tengah province ranks 23. The other 4 provinces in Sulawesi Islands lie between these ranks. Sulawesi is blessed with fertile land and, hence, the MP3EI puts a theme for Sulawesi Economic Corridor as the Center for Production and Processing of National Agriculture, Plantation, Fishery, Oil and Gas, and Mining. This corridor is expected to be at the forefront of national economy serving the market of East- Asia, Australia, Ocenia, and America. The MP3EI programs facilitate the development of roads and bridges in all provinces of Sulawesi, which will provide reliable transportation along the economic corridor. In addition, recognizing that Sulawesi Economic Corridor is located along the Pacific Ocean Rim and international cruise

32 32 Competitiveness Analysis and Development Strategies Figure 5. The Sulawesi Economic Corridor of MP3EI lines, Bitung port has been determined as an international hub port. Having an international hub port in Bitung is expected to accelerate development not only in Sulawesi but also in eastern part Indonesia. Provinces in Bali and Nusa Tenggara have differing competitiveness ranking, Bali province ranks number 9but both Nusa Tenggara provinces rank number 28 and 33. Bali is well known as the tourist destination of the world, while Nusa Tenggara provinces are known for animal husbandry. Fittingly, the MP3EI puts a theme for Bali Nusa Tenggara Economic Corridor as the Gateway for Tourism and National Food Support. This corridor faces various problems at this time, including the unequal population distribution, low investment level, and limited availability of basic infrastructures. The MP3EI programs are expected to facilitate the provision of basic infrastructures and promote the 3 main economic activities: tourism, fisheries, and animal husbandry. Provinces in Papua and Kepulauan Maluku are among the least competitive provinces in the result of ACI- LKY-NUS study on competitiveness ranking in Indonesia. Though these provinces are blessed with abundant natural resources, there are some problems that should be addressed such as in the area macroeconomic stability, government and institutional settings, and infrastructures,in order to boost the economy and their competitiveness. In fact, infrastructures right now are the most crucial thing to be developed in order to support economic activities in Papua and Kepulauan Maluku provinces. The MP3EI programs would facilitate the development of infrastructures as shown in Figure 7 below.

33 Review 2 33 Figure 6. The Bali Nusa Tenggara Economic Corridor of MP3EI Figure 7. Main Infrastructures of the Papua Kepulauan Maluku Economic Corridor of MP3EI

34 34 Competitiveness Analysis and Development Strategies The MP3EI puts a theme for Papua Kepulauan Maluku Economic Corridor as the Center for Development of Food, Fisheries, Energy, and National Mining. Accordingly, this economic corridor focuses on food agriculture, copper, nickel, oil and gas, and fisheries. In addition, due to the huge potential and vast areas to be developed in Papua and Kepulauan Maluku, it is suggested that the government should start feasibility studies of development activities for the region, as to make it easier to market the region to potential investors. As a summary of MP3EI programs, there are milestone projectsthat have been identified to developed within each of these 6 Economic Corridors as shown in Figure 8. The MP3EI programs may be interpreted as the initiative of the central Government and being implemented together with provincial governments. However, the result of ACI-LKY-NUS study shows that there are other weaknesses that the provincial governments have to deal and overcome themselves. If the provincial governments address and deal with their respective 18 weakest indicators identified in SWOT analysis as mentioned in the study, the simulation scenarios shows that each province could improve in its competitiveness ranking meaningfully. Therefore provincial governments should use information of their ranking based on the 4 main parameters and 12 related sub-parameters used in the ACI-LKY-NUS study as a benchmark to make internal improvement. The 4 main parameters are: macroeconomic stability; government and institutional setting; financial, businesses, and manpower condition; and quality of life and infrastructure development. The 12 related sub-parameters are: regional economic vibrancy, openness to trade and services, attractiveness to foreign investors, government policies and fiscal sustainability, institutions-governance and leadership, competition-regulatory standards and rule of laws, financial deepening and business efficiency, labor market flexibility, productivity performance, physical infrastructure, technological infrastructure, and standard of living-education and social stability. At least there are three major factors that could spark improvement in provincial competitiveness standing if provincial governments deal with them. They are: sector productivity improvement, worker education and labor productivity improvement, and public service spending improvement. If these factors are addressed, the result would be significant in upgrading provincial competitiveness level. Figure 8. Milestone Projects in MP3EI 6 Economic Corridors