WPS )882- POLICY RESEARCH WORKING PAPER 18 82 Interregional Resource Rapid economic growth in Indonesia starting in the Transfer and Economic 1970s was fueled by market- Growth in Indonesa *based resource transfers, which helped modernize regional economies, creating Toshibiko Kawagoe the driving force for industrialization; and more welfare-oriented. government-based resource transfers, or development spending, which favored the poorer outer islands. The World Bank Development Research Group February 1998 POLICY RESEARCH WORKING PAPER 1882 Summary findings In 1970, Indonesia was a poor agricultural state, with a country's economy grew, market-based resource transfers per capita GNP of only US$80 - the lowest among helped modernize regional economies, creating the Asian economies and substantially lower than such driving force for industrialization. By contrast, African countries as Kenya and Ghana. Agriculture - government-based resource transfers, in the form of with about 50 percent of GDP and 66 percent of the development spending, were more welfare-oriented, labor force - was the dominant sector. favoring the poorer outer islands (and did not contribute In the 1970s, however, Indonesia showed rapid to industrialization). economic growth (5 percent a year). Softened world oil In other words, economic growth was sustained by two markets brought a slowdown in growth in the early driving forces, government- and market-based transfers, 1980s, but growth recovered and per capita GNP in which complemented each other. The oil boom was a 1994 was US$880, comparable with the Philippines and bonanza, producing new fiscal revenue, a luxury only oil- substantially higher than many South Asian and African exporting countries could enjoy. It is not always a ticket countries. Agriculture had only a 22 percent share of to successful industrialization, as the tragic experiences GDP; industry, 41 percent; and services, 42 percent. of such oil-exporting economies as Mexico show. But Indonesia is enormously diverse and some parts of it did much better economically than others. As the This paper - a product of the Development Research Group - is part of a Japanese research project on the political economy of rural development strategies. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rebecca Martin, room MC3-354, telephone 202-473-9065, fax 202-522-3518, Internet address rmartinl@Cworldbank.org. February 1998. (42 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the pi'esentations are less than fully polished. The papers carry the names of the authors and shouid be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center Inter-regional Resource Transfer and Economic Growth in Indonesia Toshihiko Kawagoe Faculty of Economics, Seikei University** Table of contents 1. Introduction 2. Regional diversity in Indonesia: multiple structure (1) Regionalism in Indonesia (2) Demographic and ethnic factors (3) Modern vs. Traditional sectors 3. Economic growth and regional development (1) National economic growth (2) Changes in the export structure (3) Regional development and industrial structures 4. Inter-regional resource transfer and development policies (1) Government based resource transfer (2) Market based resource transfer (3) Driving forces for industrialization 5. Concluding remarks References 3-3-1 Kichijoji-Kitamachi, Musashino-shi, Tokyo 180 Japan. e-mail kawagoe(econ.seikei.acjp Fax: +81-422-37-3874 Tel: +81-422-37-3584 Inter-regional Resource Transfer and Economic Growth in Indonesia' Toshihiko Kawagoe Faculty of Economics, Seikei University 1. Introduction In 1970 Indonesia was one of the low income countries having only a GNP 80 US dollars per capita, which was the lowest among Asian economies and substantially lower than that of African countries, such as Kenya and Ghana.2 Like other low income economies, agriculture was the most dominant sector in the Indonesian economy, occupying around 50 percent of the GDP and 66 percent of the total labor force. ' This paper is a result of a research project, supported by Japan Center for Economic Research, Export-Import Bank of Japan and Overseas Economic Cooperation Fund, and presented at the World Bank workshop held May 5 - 6, 1997. The author wishes to thank Alberto Valdes, Peter Timmer, Gustav Ranis, Farrukh Iqubal, Juro Teranishi, Cristina David, Ronald Zavislak, Koichi Sakamoto for very helpful comments and suggestions. The usual disclaimers apply. 2 Per capita GNP in 1970 U.S.$, shown in the parentheses, was Ghana (250), Kenya (130), India (110), Bangladesh (100), Philippines (230) and Thailand (210). Source: World Bank, World Table 1992, Table. 1. Indonesia was a poor agricultural state at that time. However,, the Indonesian economy showed a rapid economic growth of at least 5 percent per year in the 1970s, and after a slowdown during the early 1980s, caused by softened world oil markets, recovered again with an annual growth of 6 to 7 percent in the latter half of the 1980s (Hill [1996, p.1 1]). Per capita GNP reached US$ 880 in 1994, which was almost comparable to that of the Philippines ($950) and substantially higher than those of South Asian and African countries, such as India ($320), Kenya ($250) and Ghana ($410). The experience of the Indonesian economy, while not exceeding the top runners of other high performing Asian economies, still showed a highly prominent growth comparecl with that of developing economies in other areas. Through the process of rapid economic growth, the structure of the Indonesian economy has changed significantly. In 1994 the share of agriculture in the GDP was only 22 percent, while the industry and service sector occupied 41 and 42 percent, respectively. Indonesia is now categorized as one of the lower-middle income countries.3 However, we should note that a discussion based on nationally aggregated data easily overshadows the regional differences of the country. Indonesia is a large country with great regional diversities. If we observe per capita GDP by region (propinsi),4 the poorest region earns only one seventh of the richest region, excluding oil and gas incomes. If we include these natural resources in the GDP, the difference expands to 3 World Bank, World Development Report 1996. 4 Indonesia comprises 27 regions, called propinsi. See Figure 1, Map of Indonesia for the name and location of these regions. 2 nearly fourteen-fold.5 The share of agriculture in the regional GDP in 1990, excluding oil and gas, is the highest in East Nusa Tenggara at 52 percent and the lowest in East Kalimantan at only 16 percent, aside from Jakarta where agriculture is negligible. The contribution of manufacturing also varies significantly from region to region. The most industrialized region is Java where 24 to 26 percent of the income is generated from manufacturing, while the lowest region is East Timor where the share of manufacturing is only 2 percent.6 Accordingly, "[The Indonesian] economy comprises both the advanced technology of the modem cities of Java and ... tribal groups in isolated regions barely exposed to the outside world (Hill and Weidemann [1991, p.3])". The regional diversity is, thus, an important factor in analyzing Indonesian economic growth. Another factor, that we have to keep in mind, is the fact that the Indonesian government is highly centralized and autonomy of the local governments is limited in 5 Per capita regional GDP at cuLrrent market price in 1990 are compared. The poorest region is East Timor with Rp. 364, while the richest region is Jakarta with Rp.2,473, if we exclude oil and its products, or East Kalimantan with Rp.4,985, if we include oil and its products. Source: BPS, Statistical Yearbook of Indonesia 1994, p.593. 6 Some outer islands reveal a high share of industry, such as 50 percent in East Kalimantan. However, this does not mean these regions are highly industrialized areas. In these regions, a few large factories, such as plywood manufacturers, are located in less densely populated and spatial areas, while other economic activities are rather limited. The industrial base is rather thin in both a spatial and an industrial composition sense. (Hill [1996, p.171]). 3 both political and economic affairs. Regional governments have few fiscal revenue sources of their own. Most of their financial revenue is comprised of transfers from the central government. The highly centralized nature can be umderstood from the historical context; "the memory of strong secessionist efforts in 1957-58 is still embedded in the government's consciousness and has set limits to the extent of decentralization it permits "(Ranis and Stewart [1994, p.42]). Skepticism towards "regionalism" has affected the basic structure of the governance in Indonesia. "[I]n the last 20 years of sustained economic development...the national goal of "Unity in Diversity" (Bhinneka Tunggal Ika) has started to become a reality. ... [T]he emergence of a strong central government with hitherto undreamt of financial resources at its disposal,...have all powerfully contributed to national economic integration. (Hill and Weidemann 1989, p.3)". Huge oil revenue collected by the central government has been transferred to regions as public investment in physical and social infrastructures. The purpose of this paper is to identify a working mechanism of inter regional and/or inter-sectoral resource transfer in Indonesia as one of the driving forces for modernization. First, conditions of regional diversity are identified. Then, Indonesian economic growth is briefly reviewed nationally as well as inter-regionally in section 3. The functions of private market and government based resource transfers are investigated in section 4. 2. Regional diversity in Indonesia: multiple structure Indonesia is one of the largest countries in Asia with 1'95 million inhabitants in 1995, which is the third largest population in Asia, following Chiina and India. The Indonesian 4 archipelago comprises 13,677 islands and covers nearly 2 million square kilometers of the land area (Figure 1). The longitudinal distance stretches 5,760 kilometers over the globe from the far-westem city, Banda Aceh, the capital city of D. I. Aceh province, to Jayapura, the far-eastern city and the capital of Irian Jaya province. The distance is comparable to the distance from Ireland to the Caspian Sea in Europe. Accordingly, Indonesia is a highly diverse state in terms of ethnic, religious, cultural and economic makeup. (1) Regionalism in Indonesia At the beginning of the 20th century, a sense of common Indonesian identity did not exist, though most of the regions which are now under the Republic of Indonesia were brought under Dutch rule by about 1910. In the course of anti-colonial movements throughout the 1920s and 1930s, indigenous Indonesian leadership and self-awareness of their identity was gradually formed. The Dutch colonial rule ended with the occupation of the Japanese in 1942. The three and a half years of occupation dismantled the colonial system and brought extraordinary changes that enabled Indonesian independence, though it took another five years of fierce struggle from the declaration in 1945, to the attainment of independence in 1949. A new Republic of Indonesia with a unitary constitution was established, however, many religious, ethnic, cultural and economic issues remained (Ricklefs, 1993, pp.13 1-147, 163, 199-233). After gaining independence, the central government was politically and economically dominated by Java, while the outer islands tended to be neglected. The resource rich outer islands were major earners of foreign exchange, from which petroleum and non- 5 petroleum goods, such as rubber, palm oil and tobacco, were exported. Thereby the pro- Java policy, export taxes and overvaluation of exchange rates, distressed the outer islands and induced regional separation movements in the late 1950s. These revolts were suppressed by the military, while adjusting the policy towards a more pro-exporters' line. As a result of those movements, skepticism towards regionalism and more consideration for regional benefits set the basic framework of the development policy in Indonesia. The former policy is characterized by the heavy centralization of the government and limiting of autonomy of the regional governments. And the latter is characterized by massive transfers of revenue from the center to regional governments. (2) Demographic and ethnic factors On the national average Indonesia is moderately populated at 93 persons per square kilometer, which is comparable with that of 109 in Thailand and that of 118 in China (Asian Development Bank [1993, p.4]). Annual population growth rate in the 1980s also show a modest figure of 2 percent. However, if we observe these demographic factors in Indonesia by region, substantial diversities are found. Population distribution has been highly skewed over the islands. Although the island of Java occupies only one tenth of the total land area of the country, it had nearly 70 percent of the population in 1930 and still has 60 percent in 1990 (Table 1 (a)). Accordingly, the population density of Java is as high ats 813 persons per square kilometer, which shows a large contrast with the outer islands where the population density ranges from only 14 to 77 (Table 1(a)). The outer islands are thus characterized by labor scarce economy, while Java is labor abundant. The vvage differentials between 6 regions and provinces are significant. In the early 1970s, average wages on public works projects in Kalimantan and Sumatra were two to three times higher than those in Java.7 Though the inter-regional wage differentials were narrowed in recent years, they still exist more than 50 percent of the differences. Accordingly, a steady stream of labor migration from Java to outer islands is observed. Indonesian government has adopted transmigration program, the world largest land settlement scheme, by which people are moved from Java to the outer islands with government support. Under this program, 133,000 families moved in the 1970s and 286,000 families settled during the third five year development plan (Repelita III, 1979/80 - 83/84). Besides the government sponsored migrants, there has been a considerably larger flow of spontaneous migrants from Java to the outer islands (Arndt 1983). In recent years, spontaneous migration from outer islands to Java, mainly Jakarta, is pervasive, though there is net outflow in Java (Table 1 (c )). Rural to urban migration of the labor force is also the norm in Indonesia. Population growth is much higher in urban areas than that in rural areas, resulting in the increase of the urban population ratio (Table 1(b)). Though urban population between 1980 - 90 increases by around 5 percent in most of the areas, the growth of rural population reveals more variations depending on the areas, for example around 2 percent in Sumatra and Kalimantan, while only 0.13 percent in Java. This is partly because the fertility rate is still high in some remote areas and partly because the transmigration program reallocated population from Java to the outer islands. 7 Calculated from Table 1 of Amndt (1972). 7 Indonesia is comprised of nearly 300 ethnic groups. Each ethnic group has its own local language, which often has many dialects within it. Although the official language in Indonesia is Indonesian (Bahasa Indonesia), most Indonesians speak their own local language at home (Table 2). Religion is another important factor for regional diversity. Though 88 percent of the Indonesians are Moslems, some ethnic groups represent other religions, such as Christianity in North Sumatra, East Nusa. Tenggara, North Sulawesi, Maluku and Irian Jaya, and Hinduism in Bali. Therefore, regional diversity in Indonesia means not only locational diversity but also shows ethnic, regional, and social diversities. (3) Modern vs. Traditional sectors Inter-sectoral resource transfer is defined as a process of modernization, in which major economic activities shift from traditional sector to modem sector (Figure 2). In empirical analysis, the dichotomized classification, traditional vs. modem sectors, may be replaced with more specific definitions, such as agricultural vs. industrial sectors, or rural vs. urban sectors. Though these specifications are done for operational simplicity such as subject to data constraints, they often improperly classify some economic activities into different sectors. The modem sector includes not only modem industry but also includes modem commercial farming. Examples of this are hydroponic/greenhouse horticultural farms which supply fresh food/flowers to urban consumers or chicken raisers who apply advanced technology on their farm operation with capital intensive facilities. These scientific farmings are located both in the suburbs of urban areas and rural areas. If we apply a criterion, agricultural vs. industrial sectors, these commercial farrns are categorized into the traditional sector. A major part of the traditional sector is occupied 8 by the indigenous agricultural sector, i.e., peasant agriculture, but also includes rural based cottage industries and various manufacturing activities in the urban informal sector. The boundary of the two sectors, therefore, is not clear in terms of economic activities (agricultural vs. industrial) or in terms of their location (rural vs. urban). In analyzing inter-sectoral resource transfer in Indonesia empirically, the sectors may be classified into various ways based on available statistical data. The first and most straightforward classification is to compile the data by industrial origin, such as agriculture vs. manufacturing. However, this approach also improperly categorizes modem commercial farning into the traditional sector and many rural based manufacturing activities into modem sector. In Indonesia, especially in Java, rural based cottage industry plays an important role in the rural economy. The second approach may be to compile the data by location, i.e., urban vs. rural. In this approach urban and rural sectors are represented by relatively urbanized areas and less-urbanized areas based on various criteria, such as the share of agriculture in the regional GDP or the share of the agricultural labor force. As discussed in the following section, this approach also does not give us a clear enough classification, since there is no region which typically represents urban or rural areas in Indonesia. In this paper, we therefore handle regional data without aggregation based on an artificial dichotomy of rural vs. urban. 3. Economic growth and regional development Until the mid-1960s, Indonesia was regarded as a chronic dropout, whose economic problems were as serious as those of developing countries in Africa (Hill, 1996, pp. 1 -8). 9 Since then, the Indonesian economy has recovered and has attained an accelerating growth as one of the HPAEs.8 (1) National economic growth In the new rapid and sustainable growth, the real GDP increased at a 7.7 percent annual rate in the 1970s and after the slowdown to around 4 percent during the early 1980s. This slowdown was caused by softened world oil markets. The economy recovered again with an annual growth of 6 to 7 percent in the latter half of the 1980s (Hill 1996, pp. 15-7). Accordingly, per capita GDP substantially increased from $190 in 1960 to $628 in 1994.9 In the course of rapid economic growth, the industrial structure has changed significantly (Table 3). The share of agriculture, including forestry and fishery, has declined from 54 percent in 1960 to only 17 percent in 1995. Accordingly, the share of industrial sectors, such as manufacturing, electricity, gas ancd water supply, and construction, has increased significantly from 11 percent in :1960 to 33 percent in 1995. The mining sector occupied only 4 percent of the GDP share in 1960. However, the increase in oil production, coupled with high oil prices in the 1970s pushed up its share to 26 percent in 1980. It declined again to 19 percent in 1995, partly because of lower oil prices since the 1980s and partly because of the development of non-oil manufacturing sectors. Steady changes in the industrial structure, from the agricultural sector to 8 High Performing Asian Economies, World Bank (1993). 9At 1987 constant price in US$. Source: World Bank, Worlc DATA 1995. 10 industrial sectors, are clearly observed from national level data. The share of labor force by each sector also indicates a change in the industrial structure. The agricultural labor force steadily decreased from 73 percent in 1961 to 50 percent in 1990, while that in industry and services increased from 8 and 19 percent in 1961 to 12 and 33 percent in 1990, respectively.10 (2) Changes in the export structure Merchandise exports of Indonesia expanded more than six-fold in real terms over the past three decades. Not only the scale, but also the composition of the exports has significantly changed (Figure 3 (1)). Until the end of the 1960s, agricultural products were the most dominant export commodities. For example, throughout the 1960s, agricultural produce occupied 50 to 60 percent of the exports. Major export products were cash crops, such as natural rubber, palm oil, coffee, and tea. These crops are often referred to as "estate crops' or "plantation crops", since they are mainly produced by large plantation farms. However, in Indonesia almost 70 percent of total value added in cash crops accrued from the small holder sector by 1960 (Booth [1988, p.198-9]). In the 1960s, the second most important export commodities were petroleum and its products, which occupied the other 30 to 40 percent of the total exports, while the export of industrial products was negligible. The export structure drastically changed in the early 1970s. The decline of the share of farm produce was compensated for by the increase of forestry products. In 1974 crude Hill (1996, p.22), Table 2.2. 11 oil export prices had risen more than six-fold compared with that in 1971. The sharp price increase, coupled with the expansion of production, caused a dramatic rise in petroleum exports during the oil boom. Petroleum accounted for 70 percent of export earnings, 22 percent of the GDP and 55 percent of total government revenue (Woo, Glassburner, and Nasution [1994, p.54]). As an oil exporting country, petroleum and its products have remained important exports commodities, but their share has declined to less than 20 percent in the 1990s. This is partly because of a softened world oil market since the early 1980s and partly because of the acceleration of industrial exports. A series of structural adjustment policies in the 1 980s enabled Indonesia to get rid of its heavily oil dependent economy. Indonesian terms of trade had greatly improved during the oil boom, sustained mainly by the oil sector. On the other hand, the terms of trade for non-oil export sectors stagnated or even worsened during and after the oil boom (Figure 3 (2)). Absorption of oil revenues, though benefiting the government's revenue, raised structural problems, i. e. hardships in the non-booming sectors and a shrinkage in traditional exports." The major components of these non-oil export sectors were traditional sectors, such as rubber, palm oil and forestry products. The oil boom therefore affected the outer islands negatively, since they heavily relied on these sectors and the revenue from oil tax was directly transferred to the central government. This created all probability of economic and political turmoil to occur. To prevent, a substantial devaluation was implemented in "This referred to as the "Dutch disease" phenomenon. See Woo, Glassburner, and Nasution [1994, Chapter 8] for further discussion. 12 1978, which was only the beginning of successive devaluations which occurred in 1983 and 1986 (Figure 3 (3))12. Warr (1992, p.156) argued that Indonesia took a cautious exchange rate policy, which enabled it to absorb oil revenues into the domestic economy, and "seem to have been used in a manner to promote economic growth". At the same time, the central government transferred massive resources to regional governments as development expenditure in efforts to solve the structural problems. (3) Regional development and industrial structures Though the Indonesian economy at the national level shows rapid economic growth over the past three decades, there exist large inter-regional variations in the growth rate and their income level. In 1971 non-oil per capita GRDP (Gross Regional Domestic Product) in Jakarta was five times higher than those in the Nusa Tengarra region and nearly two times higher than those in the other regions of Java. Since then, most of the higher income regions have grown slowly at below-average growth rates, while 6 of 11 lower income regions have kept above the average economic growth for the past two decades (Figure 4). The only exception is Jakarta, where an even higher income was attained with the overall rapid growth. If we exclude Jakarta and East Kalimantan from the sample, we can observe a fairly strong negative correlation of -0.64 between per capita GRDP in 1971 and the average annual growth rate from 1971 to 1992. The coefficient of variation of the per capita GRDP has declined from 0.31 in 1971 to 0.24 in 1992. It 12 The Rupiah was devalued by 50 percent in November 1978, by 37 percent in March 1983 and again by 50 percent in October 1986. 13 suggests that a regional income difference has tended to converge during the past two decades, though 7 low income regions stagnated with below average growth rate and remained at very low income levels. There still exists large income disparities over the region, especially between the Jakarta metropolis and other regions. There also exist large variations in the degree of industrialization among the regions. An industrialization index, defined as the ratio of GRDP in industry to agriculture, has been calculated for 12 regions, where GRDP data are available in 1969. When we compare the index in 1969 with its average annual growth rate during the 1969 to 1992 period, a clear negative tendency is observed (Figure 5). Most less-industrialized regions showed high growth in the industrialization index, while more industrialized regions showed a slower growth rate. Actually, the coefficient of variation of the index in 1969 was 1.00, which declined to 0.59 in 1992. The degree of industrialization among the regions has converged during the past quarter century. Now let us examine regional differences in the economic structure. The contribution of the GRDP from economic activities is shown in Table 4. Though nearly 60 percent of total GDP is generated in Java, it is almost comparable with the share of its population. When we observe the relative contribution to the GDP by economic activities in each area, some areas reveal a large share of mining sectors, because of the uneven distribution of natural resources, such as oil, natural gas and forestry. The share of manufacturing varies from 10 to 30 percent over each region and the share of agriculture varies from 15 to 45 percent. However, we realize that no area can be categorized into a typical industrialized or agricultural area. Therefore, we can riot apply the simple dichotomy of industrialized vs. agricultural, to the regions in Indonesia. For example, the 14 data of Java show the largest share of manufacturing and lowest share of agriculture among the islands. However, at the same time, Java has the largest agricultural sector, which contributes more than half of the agricultural GDP in Indonesia (Table 5). Java is an area where both major agricultural and industrialized sectors are existing side by side. If we examine these agricultural activities in detail, they reveal that the food sector is distributed evenly over the islands, though Kalimantan and Maluku have a large share of forestry and Sumatra has a relatively large estate tree crops' sector. As far as food crops, Java produces 65 percent of the total food crop production and Sumatra is the largest producing area of estate tree crops. However, we can not apply a stereotyped dichotomy likes food crops in Java vs. tree crops in the outer islands, because Java is also the second largest center producing of estate tree crop production 30 percent of the estate tree crops. Moreover, Java has the largest numbers of the small holders' tree crops sector, which accounts for 45 percent of these crops. In examining how industrial structures have contributed to regional income disparities, we can see regional concentration of economic activities in terms of GRDP measured for 1983 and 1990 (Table 6). A pseudo Gini coefficient is calculated for each economic activity (Rao [1969]). Here, Gj , the pseudo Gini coefficient of the i-th sector, indicates a concentration of the i-th sector over the region and 9, is the share of the GDP contributed by the i-th sector. Then, 9,G, indicates the relative contribution of the sector to the overall regional income disparity. Reflecting the highly uneven distribution of natural resources, the mining sector reveals the largest Gini coefficient and contributing largely to the regional income 15 disparity. Relatively large Gini coefficients in manufacturing, banking and tourism sectors indicate these sectors are concentrated in certain regions and another cause of the income disparity. On the other hand, the Gini coefficient in agriculture is very low and contributes little to regional income disparity, in spite of its large share in the regional economies. These results suggest that promotion of manufacturing, banking and tourism in low income regions could be a key factor for regional economic development in Indonesia. 4. Inter-regional resource transfer and developmrent policies (1) Government based resource transfer Since the late 1960s, the Indonesian government adopted the balanced budget principle. Though this principle is somewhat tricky, since fireign aid and borrowing are included to attain the nominal balance, it contributed to reduce inflation and maintain macro-economic stability (Hill [19961, Woo et al. [1994]). The size of government has risen sharply as oil prices rose rapidly during the oil boom. In 1967 the oil revenue occupied only 12 percent of the total revenue, which expanded sharply to around 60 percent throughout the mid-1970s and the 1980s (Table 7(a)). "The central government has had hitherto unimaginable resources..., [a]nd until the early 1980s, most of the government's revenue was raised painlessly, financed abroad by taxpayers and oil consumers (Hill [1996, p.43])". In recent years the share of oil revenue has dropped to less than 20 percent, which is almost comparable level with ithat in the late 1960s. However, we should note that the component of the non-oil revenue in recent years differs 16 much from that in the 1960s. Import duties were major source of the revenue in the late 1960s, while income tax occupies important share in the 1990s. Central government expenditures in Indonesia comprise routine (operational) and development (investment) expenditures. The routine expenditures include the personnel and material expenses of the central government, interest payments and subsidies to local governments' personnel expenses. Thus a major part of the routine expenditures consists of institutional supporting costs. By contrast, the development expenditure consists of various investment programs implemented by the central government and subsidies to local governments at various levels, such as villages, sub-districts and districts. The project aids are included in the development expenditures (Table 7(b)). In 1967 development expenditures accounted for only 20 percent, while routine expenditures occupied 80 percent of the total budget. Personnel expense to civil servants dominated the budget at that time. However, during the oil boom since the mid-1970s, with the expansion of fiscal revenue, the development expenditures substantially increased and the share reached to more than 50 percent. Though the share has declined to around 40 percent in the 1990s, the development expenditures are a major source of government based resource transfer to the regions in Indonesia. In Table 8 the components of development expenditures are summarized by economic sectors. In 1970 nearly a quarter of the development expenditure was directed to agriculture and investment in irrigation. It was reflected in the first Five Year Plan (Replita I), launched in 1969, which placed emphasis on investment in the basic infrastructure. In 1990, the expenditure to agriculture declined to 13 percent, while that to education increased to nearly 20 percent. Investments in road construction, categorized 17 into transportation and tourism, has maintained a relatively large share throughout the period. These figures indicate that a major part of the govermnent's recent development expenditure is directed to investment in the social infrastructure, such as roads and schools. how are these development expenditures allocated over the regions? In 1974, 63 percent of the development budget was allocated to Java and 21 percent to Sumatra. These figures are comparable with those of the population share (Table 9). Actually, per capita allocation of the development expenditure budget was Rp. 0.82 on the average, while that in Java and Sumatra was Rp. 0.80 and Rp. 0.90, respectively. The development budget at this time was allocated fairly evenly in terms of population. By contrast, since the 1980s, differences of per capita allocations expanded over the regions. In 1982, for example, Kalimantan received a 3.6 times higher budget than Java in terms of per capita basis. East Timor received more than s 4 times higher allocation than Java in 1990. Less densely populated regions in the outer islands tend to receive more of the budget partly because the development expenditures were allocated as a lump sum fund under Replita IV"3 and partly because the investments in health and education facilities tend to be larger in less densely populated regions (Asher and Booth [1992, pp.70-1]). To what extent development expenditures are allocated to give a priority to relatively poor regions will be examined in the next section. 3 Fourth Five-Year Development Plan from 1984/85 to 1988/89. 18 (2) Market based resource transfer Market based resource transfer from the traditional sector to the modem sector occurs through the market mechanism, whenever the rate of return of resources in the latter is higher than that of former (Teranishi [1997]). Net savings of traditional sector can be assumed to be invested in the modem sector through financial markets, if there is no spillover abroad. Unfortunately, little financial data are available in Indonesia which describe the resource flow from traditional to modem sectors. However, it is apparent that the domestic savings rate increased over time. Until the early 1970s, the savings rate reveals only around 5 to 7 percent, which increased to 23 percent in the 1970s and 26 percent in the 1980s (Woo et al. [1994], p.120). We have no data which describe the net savings accrue from the rural sector. The only available data are domestic and foreign investments at the approval stage. This data does not include banking and oil sectors and not all investments listed in the data are actually realized. While accepting these shortcomings, we can still sketch out a rough trend of the resource flows through private channels according to economic sectors and by regions. Around 1970, foreign investments were concentrated in mining and agriculture sectors, which accounted for 72 percent of the total approved investments (Table 10). On the other hand, more than half of the domestic investments were done in the manufacturing sector, while the investment to the mining sector was negligible, reflecting the domination of foreign companies in the mining sector. By contrast, in the early 1990 investment to agriculture decreased to a negligible level, while the investments to manufacturing and services, such as trade and the hotel industry, increased substantially. 19 Domestic investment has been directed to the manufacturing sector, of which the share reached more than 60 percent in the early 1990s. These changes reflect the series of structural reforms, irrmplemented in the 1980s. After a transitional period in the early 1980s, the non-oil manufacturing sectors have revealed a real industrial dynamism. Along with this the private sector has become the primary engine of industrial growth (Hill [1996, pp. 153-5]). (3) Drivingforcesfor industrialization Data on foreign and domestic investments discussed in the previous section are also available for each region. Since market based resource transfer induces industrialization as a form of private investments to the modem sector, if the degree of industrialization is positively correlated to private investments, we can postulate that market based resource transfer functions effectively as driving force for industrialization. In Indonesia, in order to see how private investments contribute to industrialization in comparison with government based resource transfer, an industrialization index, defined as the ratio of GRDP in industry to agriculture (See also Figure 5), is regressed by two types of variables, development expenditure (DE) and private investments (DI, FI). Development expenditure, measured as the cumulative sum of development expenditure for each region, represent government based resource transfer, while private investments, cumulative sum of domestic and foreign investments, represent market based resource transfer. Though the regional data used here include both traditional and modern sector investments, if the coefficient is positive and significant., we can infer that net resources are being transferred from the traditional to the modem sector through private market 20 channels promoting industrialization in Indonesia and acting as the driving force for modernization. The estimation results are shown in Table 11 for the data set in 1983 and 1990. The 1983 data set represents the pre-structural adjustment period, while that of 1990 represents the post adjustment era. In both years, coefficients on private investments (DI & FI) are positive and highly significant at a 1 percent level (Regressions QI and Q3), suggesting the validity of the hypothesis. If we apply domestic and foreign investments separately as explanatory variables, the coefficients of domestic investments reveal positive and statistically significant results (Q2 and Q4). On the other hand, while foreign investments are positive and barely significant in 1983, they are not significant in 1990. One possible explanation of this result is that the foreign investments tend to directed to service sectors, such as tourism and marketing (See Table 10), and domestic investments play a major role in industrialization in the post-structural adjustment period in the 1 990s. By contrast, all coefficients of government based transfer are insignificant. The result seems to suggest that the government based transfer does not have a direct impact on industrialization. However, if regional income level (per capita GRDP) or ratio of poor households by per capita expenditures is used as an explanatory variable, instead of the industrialization index, both the government based and the market based resource transfers reveal positive for GRDP (Regressions Rl A and R2A) and negative for POVERTY, ratio of poor households (RiB and R2B). The coefficients in 1990 regressions are highly significant (Table 12). The result indicates that government based transfer contributes to arise in regional incomes and to alleviate poverty, while direct contribution to industrialization is not observed. The government based transfer seems to 21 place its emphasis on welfare implications, which favor relatively poor regions."4 In general, industrialization in a region raises the regional incor.e level. The market based transfer, which has strong impact on industrialization, also contributed to improve regional income level in 1990. Though weak poverty alleviation effects are observed, the insignificant coefficient in 1983 for GRDP may indicate the industrialization in the pre- adjustment period was too limited in terms of scale and coverage to reveal any overall impacts on income improvements throughout the regions. 5. Concluding remarks Regional dimension is a critical factor in analyzing economic development in the context of sectoral resource transfer, especially when studying a large country with great regional diversities, like Indonesia. Discussions based on national aggregate data often overshadow regional diversity and the internal mechanisms of regional or sectoral economic growth. Therefore, a regional approach is applied in this study, while recognizing the difficulties in accessing regional data. Another difficulty in analyzing sectoral resource transfer is related to the often used categorization of modem and traditional sectors. A dichotomous approach by economic sectors or regions often excludes miscellaneous but important economic activities, such as modem farming and traditional cottage industries, or modern industry in rural areas and agriculture in urban areas. This 14 Ravallion (1988, p.68) found the Inpres (Presidential Instructions) program fund, core of development expenditure, revealed a mild aversion to regional inequality in 1985/86. 22 problem is especially serious in peasant economies in Asia, where off-farm activities in rural areas are so pervasive. The above two caveats particularly applied to Indonesia, where regional diversities are great and miscellaneous economic activities are interwoven throughout the regions. The Indonesian economy as a whole has attained rapid and sustainable growth since the mid 1960s. Per capita GDP substantially increased the industrial structure and composition of the exports has changed significantly. Behind the miraculous economic growth in Indonesia since the mid-I 960s, tactical development policies, whether they were intended or not, were implemented in the 1970s and 1980s. Expanded fiscal revenue during the oil boom enabled the transfer of massive resources to outer islands where they were heavily relied on suffering non-oil export sectors. A strongly centralized government monopolized oil revenue, while massive resources were transferred through a government based channel which contributed to developing regional infrastructure, including human capital. When the oil market softened in the 1980s, a series of structural adjustment policies were implemented, which succeeded in establishing and developing non-oil industrial sectors. In the process of economic growth, market based resource transfer played a key role in modernizing the regional economies creating the driving force for industrialization. By contrast government based resource transfer, in the form of development expenditure, seems to have contributed more to the welfare-oriented dimension favoring the relatively poor regions in the outer islands. Economic growth in Indonesia was thus sustained by two driving forces, government and market based transfers, which functioned complementary to induce industrialization. Though the oil boom was a bonanza in terms 23 of fiscal revenue, it is a luxury which only oil exporting countries could enjoy. Therefore, we should note that it is not always a ticket to successful industrialization, as the tragic experiences by some other oil exporting economies, such as Mexico show in contrast with that of Indonesia. 24 References Arndt, H. W. (1972). "Regional Wage Differentials". Bulletin of Indonesian Economic Studies 8 (1) March, pp.89-92. . (1973). "Regional Income Estimates". Bulletin of Indonesian Economic Studies 9 (3) November, pp.87-102. . (1983). "Transmigration: Achievements, Problems and Prospects". Bulletin of Indonesian Economic Studies 19 (3) December, pp.50-73. Arndt, H. W. and R. M. Sundrum (1977). "Transmigration: Land Settlement or Regional Development?" Bulletin of Indonesian Economic Studies 13 (3) November, pp.72-90. Asher, Mukul G. and Anne Booth (1992). "Fiscal Policy". in Booth (1992) ed. Asian Development Bank (1993). Key Indicators of Developing Asian and Pacific Countries 1993. Oxford: Oxford University Press. Booth, Anne (1988). Agricultural Development in Indonesia. Allen & Unwin. Booth, Anne ed. (1992). The Oil Boom and After: Indonesian Economic Policy and Performance in the Soeharto Era. Oxford: Oxford university Press. Hill, Hal ed. (1991). Unity and Diversity: Regional Economic Development in Indonesia since 1970. Oxford: Oxford University Press. Hill, Hal ed. (1994). Indonesia's New Order: The Dynamics of Socio-economic Transformation. St. Leonards: Ullen & Unwin. 25 Hill, Hal (1996). Indonesian Economy Since 1966: Southeast Asia's Emerging Giant. Cambridge: Cambridge University Press. Hill, Hal and Anna Weidemann (1991). "Regional Developmrent in Indonesia: Patterns and Issues". in Hal Hill ed. Unity and diversity: Regional Economic Development in Indonesia since 1970. Oxford: Oxford University Press, pp.3-54. Ranis, Gustav, and Frances Stewart (1994). "Decentralization in Indonesia". Bulletin of Indonesian Economic Studies 30 (3) December, pp.41-72. Rao, V. M. (1969). "Two Decompositions of Concentration Ratio". Journal of Royal Statistical Association, Series A, Part 3, Vol. 132, pp. 418-25. Ravallion, Martin (1988). "Inpres and Inequality: A Distributional Perspective on the Centre's Regional Disbursements" Bulletin of Indonesian Economic Studies, Vol. 24 (3), pp.53-71. Ricklefs, M.C. (1993). A History of Modern Indonesia since c. 1300. 2nd edition. London: MacMillan. Teranishi, Juro (1997). "Sectoral Resource Transfer, Conflict, and Macro-stability in Economic Development: A Comparative Analysis". in Masahiko Aoki; Hyung-Ki Kim; and Masahiro Okuno-Fujiwara eds. The Role of Government in East Asian Economic Development, Comparative Institutional Analysis, Oxford: Clarenden Press. 26 Woo, Wing Thye; Bruce Glassburner; and Anwar Nasution (1994). Macroeconomic Policies, Crises, and Long-Term Growth in Indonesia, 1965-90. Washington, D.C.: World Bank. World Bank (1994). Indonesia: Sustaining Development. World Bank Country Study. Washington, D.C.: World Bank. World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy. Oxford: Oxford university Press. 27 Table 1. Demographic factors in Indonesia by region. (a) Population density and percentage distribution of the population, 1930 - 1990. Area Population Density (population per sq. km) and distribution of the population in parentheses (%) (sq.km) (%) 1930 1961 1990 Java 132,186 8.9 316 (69) 477 (65) 813 (60) Sumatra 473,481 24.7 17 (14) 33 (16) 77 (20) Kalimantan 539,460 28.1 4 (4) 8 (4) 17 (5) Sulawesi 189,216 9.9 22 (7) 37 (7) 66 (7) Other Islands 584,974 30.5 7 (7) 12 (7) 14 (8) Total 1,919,317 100.0 32 (100) 51 (100) 93 (100) Note: Total population: 60,593,000 (1930); 97,085,000 (1961); 179,248,000 (1990). (b ) Distribution of urban and rural population, 1961 -1990. Share of urban population Population growth rates 1980-90 (%) (% /year) 1961 1980 1990 Total Urban Rural Java 15.6 25.1 35.7 1.66 5.28 0.13 Sumatra 19.6 25.5 2.67 5.42 1.88 Kalimantan 13.4 21.5 27.5 3.09 5.69 2.26 Sulawesi 15.9 22.1 1.87 5.26 1.09 Other Islands 12.2 18.3 2.18 6.39 1.45 Total 22.3 30.9 1.98 5.37 0.79 (c ) Migration between regions, 1966 - 71, 1985 - 90 . 000 people 1966-71 1985-90 Outflow Inflow Net Outflow Inflow Net outflow outflow Java 516 396 119 963 716 248 Sumatra 512 570 -58 Kalimantan 396 516 -119 156 293 -137 Sulawesi 140 175 -35 Other Islands 162 180 -17 Sources: Nugroho (1969) Indonesia: Facts and Figures, p.63. World Bank (1994). BPS, Statistical Yearbook of Indonesia 1993. (c ) 1966-71: Arndt and Sundrum (1977), Table 1. 28 Table 2. Percentage of population by language used at home in Indonesia, 1980. Language Percent of Major home regions population Javanese 40.1 East & Central Java, Yokyakarta Sundanese 15.2 West Java Madurese 4.8 Madura Minangkabau 2.5 West Sumatra Batak 2.1 North Sumatra Balinese 2.0 Bali Chinese 2.0 mostly in big cities Buginese 1.9 Sulawesi Banjarese 1.3 South Sumatra Other 17.9 Indonesian 12.0 Source: 1980 Census. Table 3 Percentage distribution of GDP by Sector in Indonesia, 1960 - 1995. 1960 1970 1980 1990 1995 Agriculture, forestry and fishery 53.9 47.2 24.8 21.5 17.2 Mining and quarrying 3.7 5.2 25.7 13.4 8.5 Manufacturing 8.4 9.3 11.6 19.9 24.3 Electricity, gas and water supply 0.3 0.4 0.5 0.6 1.1 Construction 2.0 3.0 5.6 5.5 7.7 Trade, hotel and restaurant 14.3 18.5 14.1 16.9 16.4 Transport and communication 3.7 2.9 4.3 5.6 6.8 Banking 1.0 1.0 1.7 4.2 9.0 Other services 12.7 12.5 11.7 12.3 9.1 GDP total: % 100.0 100.0 100.0 100.0 100.0 Billion Rp.a) 390 3340 45446 195597 445401 Sources: BPS, Statistical Pocketbook of Indonesia, various issues. BPS, Almanak Indonesia 1968, Vol.2 for 1960. Bank Indonesia, Report for the financial year 1995/96. Note: a) At current market price 29 Table 4 Contribution of gross regional product by industrial sector by region, 1992 (%). Share of Agriculture Mining and Manufac- Trade and Govem- Other Total GRDP quarrying turing sen'ices ment % (1) (2) (3) (4) (5) Sumatra 23.8 23.0 25.9 19.9 23.1 5.2 3.0 t00 Java (a) 59.3 19.5 2.7 31.8 29.9 6.7 6.6 100 Kalimantan 9.2 15.8 23.5 32.2 21.8 4.1 2.7 100 Nusatenggara 1.6 45.6 1.1 9.2 25.4 15.3 3.5 100 Sulawesi 4.2 41.2 3.8 12.4 26.8 11.3 4.7 100 Maluku 0.8 31.7 6.0 23.5 26.4 9.8 2.6 100 Irian Jaya 1.2 16.4 55.6 6.8 10.3 9.2 1.6 100 INDONESIA 100 19.5 11.5 28.5 27.8 6.7 6.0 100 Source: BPS 1989-94 Produk Domestik Regional Bruto Propinsi propinsi di Indonesia Menurut Lapangan Usaha. Notes: (a) Include Bali. (1) Agriculture, forestry and fisheries, (2) Mining and quarrying. (3) Manufacturing; electricity, gas and water; construction. (4) Trade, restaurants and hotels; transport and communications; bank and finance. (5) Government. Table 5 Contribution of the agricultural sectors on GRDP by region, 1992. (a) Percentage distribution of the agricultural sectors by region (%).. Share of Food Estate Small Livestock Fisheries Forestry Total Agricultural crops tree crops holder GRDP tree crops Sumatra 25.6 42.3 12.2 16.2 11.0 11.6 6.7 100 Java (a) 54.0 67.1 2.9 10.0 12.0 6.3 1.7 100 Kalimantan 6.8 33.3 1.4 11.9 5.6 18.0 29.8 100 Nusa tenggara 3.A 59.7 3.4 7.3 18.0 9.0 1.5 100 Sulawesi 7.2 53.1 0.2 17.8 9.0 17.2 1.4 100 Maluku 1.2 21.4 0.0 18.9 2.6 26.2 30.9 100 Irian Jaya 0.9 62.6 0.0 3.2 5.1 21.7 7.4 100 INDONESIA 100 56.8 4.9 12.3 11.2 9.7 5.1 100 (b) Percentage distribution of GDP originated from the agricultural sectors by region (%). Agricultural Food Estate Small Livestock Fisheries Forestry Total GRDP crops tree crops holder (bill. Rp.) tree crops GRDP (INDONESIA) (bill. Rp.) 29,773 2,612 6,446 5,857 5,125 2,783 52,597 by agr. sector Sumatra 13,604 19.3 63.5 34.2 25.5 30.8 32.8 25.9 Java (a) 28,709 64.7 31.9 44.5 58.8 35.3 17.5 54.6 Kalimantan 3,608 4.0 1.9 6.7 3.4 12.7 38.6 6.9 Nusa tenggara 1,819 3.6 2.4 2.0 5.6 3.2 1.0 3.4 Sulawesi 3,805 6.8 0.3 10.5 5.9 12.8 1.9 7.1 Maluku 615 0.4 0.0 1.8 0.3 3.1 6.8 1.2 Irian Jaya 502 1.1 0.0 0.2 0.4 2.1 1.3 1.0 INDONESIA (%) 100 100 100 100 100 100 100 Source: See Table 5.1. 30 Table 6. Regional concentration of the economic activities measured by GRDP in Indonesia, 1983 and 1990. 1983 1990 Agriculture, forestry and fishery 0.23 0.04 0.009 0.22 0.02 0.005 Mining & quarrying 0.19 0.80 0.157 0.13 0.75 0.098 Manufacturing 0.14 0.41 0.058 0.19 0.33 0.064 Electricity, gas and water supply 0.01 0.45 0.004 0.01 0.39 0.005 Construction 0.05 0.22 0.010 0.05 0.23 0.011 Trade, restaurant and hotel 0.16 0.24 0.039 0.18 0.22 0.040 Transport and communication 0.06 0.29 0.018 0.06 0.27 0.016 Banking 0.03 0.54 0.015 0.04 0.49 0.019 Real Estate 0.02 0.13 0.003 0.02 0.18 0.003 Government 0.07 0.05 0.004 0.07 0.04 0.002 Other services 0.03 0.30 0.010 0.03 0.36 0.012 All (G) 0.327 0.276 Sources: BPS, Gross Regional Domestic Product of Provinces in Indonesia by Industrial Origin, 1987- 1992; Note: Concentration ratio G = E,~ , where 0,, is the GRDP share of the i th sector, and G1 is the pseudo Gini coefficient of the i th sector, is calculated from GRDP by sector of 27 provinces. 31 Table 7 The composition of government finance in Indonesia, 1967 - 1995, %. (a) Govemment Revenues 1967 1970 1975 1980 1985 1990 1995 Domestic revenues: (%) Oil revenue 12.4 28.8 55.7 62.9 57.9 44.8 19.6 Non-oil revenue 87.6 71.2 44.3 37.1 42.1 55.2 75.0 Income taxa) 12.0 15.3 12.8 8.4 12.0 17.1 27.1 Sales taxesb) 21.1 23.0 12.9 8.8 17.0 23.7 29.1 Import duties') 45.7 27.8 10.5 7.4 3.4 6.4 4.6 Land tax 0.0 0.0 1.5 0.9 1.2 2.1 2.5 Othersd) 8.8 5.1 6.5 4.1 8.5 6.0 17.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 billion Rp. 60 345 2,242 10,227 19,253 39,546 56,709 (b) Government Expenditures 1967 1970 1975 1980 1985 1990 1995 Routine expenditure: (%) Central government expendituree) 62.0 45.1 35.5 34.5 26.6 25.0 36.7 Interest payments 6.1 5.6 2.9 6.7 14.4 25.1 10.7 Subsidies to local governments 11.9 12.3 10.4 8.3 10.8 8.6 11.9 (personnel expenditure) Total (A) 80.0 62.9 48.8 49.5 51.9 60.7 59.6 Development expenditure: Central government) 17.4 18.8 20.4 29.0 21.6 11.5 14.1 Subsidies to local governments 2.7 7.1 8.6 6.9 6.5 6.1 3.6 BIMAS (Subsidy to fertilizer) 0.0 2.1 4.9 2.4 2.4 0.5 0.3 Project Aid 0.0 9.1 17.3 12.2 18.6 17.2 16.0 Total (B) 20.0 37.1 51.2 50.5 47.2 39.3 40.4 Totalg) (A) +(B) 100.0 100.0 100.0 100C.0 100.0 100.0 100.0 billion Rp. 87.6 457.9 2730.3 11716 23046 49450 69897 Sources: Bank Indonesia, Report of Bank Indonesia, various issues. Notes: a) Income tax, corporate tax, withholding tax and tax on interest and royalities. b) Value added tax on goods and services, tax on the sales of luxury goods and excise tax. c) Includes export duties, which is negligible since 1985. d) Includes non-tax recipts. e) Includes personnel and material expenditures, and interest payments. f) Includes government's direct expenditures and national defense and security. g) Includes Rp. 2 trillion of Development budget reserve for 1990/91 year. 32 Table 8 Central government development expenditures by economic sector, billion Rp. (%), 1970/71 - 1990/91. Financial year 1970 /71 1980 /81 1990 /91 Agriculture and irrigation 40.4 (23.8) 929 (15.7) 2308 (13.2) Mining and energy 16.5 (9.7) 507 (8.6) 1874 (10.7) Industry 7.6 (4.5) 415 (7.0) 547 (3.1) Transportationandtourism 35.8 (21.1) 780 (13.2) 3744 (21.5) Other economic activitiesa) 1.0 (0.6) 137 (2.3) 293 (1.7) Regional developmentb) 37.6 (22.2) 1019 (17.2) 2812 (16.1) Health and social welfarec) 9.4 (5.5) 409 (6.9) 1400 (8.0) Education and cultured) 8.0 (4.7) 1020 (17.2) 3228 (18.5) Central government') 13.3 (7.8) 700 (11.8) 1246 (7.1) Total' 169.6 (100) 5916 (100) 17452 (100) Sources: Bank Indonesia, Report of Bank Indonesia, various issues. Notes: a) Include information, trade and cooperatives. b) Includes rural and urban development, development of business enterprises and national resources and environment. c) Includes housing settlement. d) Includes religion, manpower and transmigration. e) Central government's direct expenditures and national defense and security. f) Includes Rp. 2 trillion of Development budget reserve for 1990/91 year. 33 Table 9 Distribution of central govemment's development expenditures by islands, 1974/75 - 1989/90. 1974 /75 1982 /83 1989 /90 million Rp. (�O) 00ORp./ million Rp. (%) 00ORp./ million Rp. (%) 00ORp./ person person person Sumatra 22,650 (21) 0.94 108,195 (23) 3.60 227,444 (21) 6.29 Java & Bali 68,100 (63) 0.80 216,789 (47) 2.21 571,737 (53) 5.21 Kalimantan 9,265 (9) 1.55 59,115 (13) 8.12 93,833 (9) 10.40 Nusa Tenggara 3,148 (3) 0.63 15,968 (3) 2.77 33,341 (3) 5.05 Sulawesi 4,819 (4) 0.49 43,685 (9) 3.99 88,082 (8) 7.08 Maluku 10,226 (2) 6.74 23,430 (2) 12.74 Irian Jaya 7,712 (2) 6.01 22,142 (2) 13.64 East Timor 15,940 (1) 21.53 INDONESIA 107,982 (100) 0.82 461,690 (100) 2.92 1,075,943 (100) 6.00 Sources: BPS, Statistical Yearbook of Indonesia, various issues. 34 Table 10 Private foreign and domestic investment in Indonesia by economic sector, 1968 and 1993. (I) Foreign investment (million U.S. $, billion U.S.$ for 1991-93.) 1968-70 1991-93 Agriculture/forestry/fishery 407 (30.4) 418 (1.5) Mining/quarrying 559 (41.8) 2313 (8.5) Manufacturing 294 (22.0) 13051 (47.9) Construction 10 (0.8) 165 (0.6) Trade/hotel 37 (2.8) 6026 (22.1) Transport/communication 5 (0.4) 267 (1.0) Real estate, etc. 14 (1.1) 1718 (6.3) Other services 12 (0.9) 1005 (3.7) Total 1338 (100.0) 27236 (100.0) (2) Domestic investment (billion Rp.) 1969-70 1991-93 Agriculture/forestry/fishery 41 (26.5) 10518 (9.6) Mining/quarrying I (0.9) 488 (0.4) Manufacturing 86 (56.4) 69576 (63.3) Construction 0 (0.0) 677 (0.6) Trade/hotel 11 (7.0) 10188 (9.3) Transport/communication 13 (8.3) 5594 (5.1) Real estate, etc. I (0.9) 9643 (8.8) Other services 0 (0.0) 3188 (2.9) Total 153 (100.0) 109877 (100.0) Sources: BPS, Financial Statistics 1966-1971/72 (for 1968-70); BPS, Statistical Yearbook of Indonesia, various issues. Notes: Newly approved investment projects are simply summed up for three years, and two years for domestic investment in 1969-70. The data excludes oil and banking sectors. Percentage distribution is shown in parentheses. 35 Table 11 Industrialization through government and market based resource transfer in Indonesia: Regression analysis, 1983 and 1990. Government Market based itransfer based transfer Constant. DE DI&FI DI Fl Adj.R2 S.E. 1983: Ql 0.231 -1.239 3.201** 0.289 0.417 (0.139) (0.972) (1.118) Q2 0.210 -1.074 - 2.790* 4.420 0.267 0.424 (0.145) (1.021) (1.317) (2.286) 1990: Q3 0.224 -0.712 0.450** 0.522 0.467 (0.195) (0.574) (0.083) Q4 0.226 -0.693 - 0.500** 0.339 0.503 0.476 (0.199) (0.589) (0.173) (0.348) Sources: Data represent 26 provinces, excluding Jakarta for 1990 and 25 provinces, excluding Jakarta and East Timor for 1983. Notes: Dependent variable is the ratio of industry and agriculture in GRDP share. Independent variables (shown as per 1000 population): DE: Sum of development expenditures by the Central government, 1975-82 (for 1983), 1986-89 (for 1990). DI&FI: Sum of DI and Fl DI: Sum of approved domestic investments 1968-1983 (for I983); 1968-1990 (for 1990) Fl: Sum of approved foreign investments, 1967-1983 (for 1983); 1967-1990 (for 1990) Standard error of coefficient is shown in the parentheses and ** ,* and t represent 1%, 5% and 10% of significance level, respectively. 36 Table 12 Regional income growth through government and market based resource transfer in Indonesia: Regression analysis, 1983 and 1990. Reg. Dependent Government Market based No. variable based Constant. DE DI&FI Adj.R2 S.E. 1983: RIA GRDP 0.509 l.409' 1.482 0.647 0.341 (0.107) (0.778) (0.902) RIB POVERTY 0.731 -0.144 -0.696' 0.577 0.108 (0.040) (0.293) (0.339) 1990: R2A GRDP 0.314 0.963** 0.267** 0.579 0.367 (0.128) (0.321) (0.065) R2B POVERTY 0.837 -0.278** -0.103** 0.581 0.108 (0.038) (0.092) (0.023) Sources: Data represent 27 provinces. East Timor is excluded from 1983 data set. Notes: Dependent variables: GRDP: Index of per capita non-oil GRDP at current price of 1983 and 1990. All Indonesia sets equal to 1. POVERTY: Ratio of poor households, whose per capita monthly expenditures were below national average in 1984 for the regression R2A and in 1990 for R2B. Independent variables (shown as per 1000 population): DE: Cumulative sum of development expenditures transferred by the central government, 1975-82 (for 1983), 1986-89 (for 1990). DI&FI: Sumn of approved domestic and foreign investments, 1967-1983 (for 1983); 1967-1990 (for 1990) Standard error of coefficient is shown in the parentheses and ** ,* and t represent 1%, 5% and 10% of significance level, respectively. 37 Figure 1 Map of Indonesia Kalimantan Suawesi 1 0 e, 2 , ,e, �1a7G r Ach8 a g18 C IrianJaya 15 5 "~~~~~ 25~- 8) 9 Jakarta Ball 20U Maluku Regions' code 1 Aceh 8 Lampung 15 Central Kalimantan 22 Bali 2 North Sumatra 9 D.K.I.Jakarta 16 South Kalimantan 23 West Nusa Tenggara 3 West Sumatra 10 West Java 17 East Kalimantan 24 East Nusa Tenggara 4 Riau 11 Central Java 18 North Sulawesi 25 Maluku 5 Jambi 12 Yogyakarta 19 Central Sulawesi 26 Irian Jaya 6 South Sumatra 13 East Java 20 South Sulawesi 27 East Timor 7 Bengkulu 14 West Kalimantan 21 Southeast Sulawesi 38 Figure 2 Locational, sectoral and technological classifications of an economy. Industry Rural Moder indusrialization Mdr Se~\Ot 1lza 3urban Ag culture industry Agnculture~ I Modem Scientific 'Hydroponic/ A L agriculture L greenhouse agriculture iRural 0 , ,cottage Urban o ~~~~~industry C.) _____ ~~~~~~~~informal H ' ' / a Qindustrial L 1 sector Peasant/ tradjUona agriculture } U _ _ )household Rural Location Urban gardens Source: This figure was shown by Peter Timmer at the World Bank workshop held in 5-6 May 1997. Note: An explanatory note was slightly changed to adapt the main text. 39 Figure 3 Exports, terms of trade and exchange rate in Indonesia 1961-1994 % (1) Composition of exports 100 90 Indiustrial products _ and others 80 70 60 50 Petroleum and 10 prodtpetroleum products 40 30 *Agricultura_ rdu cts 20 _and fishery_ 1960 1965 1970 1975 1980 1985 1990 4.5 (2) Terms of trade 4 Legend 3l5 - -Non-petroleun _ ........ Petroleum 3 -All 2.5 _, 2 - 1971=1.00 1.5 - 0.5 1960 1965 1970 1975 1980 1985 1990 2500 (3) Exchange rate (Rp./US Dollars) 2000 1500 1000 500 0 1960 1965 1970 1975 1980 1985 1990 Source: BPS, Pocket and Statistical Yearbook of Indonesia, various issues. 40 Figure 4 Regional income disparities and economic growth, 1969 - 1992. 250 v'17 O 160 20 High income 5 * Low growth cn ~~~~~~~~4 0 140 - High income 18 High growth 9 120 15 . 25 V16 21 * 14 '26 100 ...............6...1...... ... .... V..... 0- 8A1 .' *U 101' S C- 80 12 *20 o ~ Low income :*i ESumatra LOW growth S Java & Bai Lwgot ' 60 - Kalimantan 23 a) *Suthers 24* Low income *4Othes * . High growth 40 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 Real annual growth rate of per capita GRDP, 1971-92 (%, non-oil) Region 1 Aceh 8 Lampung 15 Central Kalimantan 22 Bali 2 North Sumatra 9 Jakarta 16 South Kalimantan 23 West Nusa Tenggara 3 West Sumatra 10 West Java 17 East Kalimantan 24 East Nusa Tengarra 4 Riau 11 Central Java 18 North Sulawesi 25 Maluku 5 Jambi 12 Yogyakarta 19 Central Sulawesi 26 Irian Jaya 6 South Sumatra 13 East Java 20 South Sulawesi 7 Bengkulu 14 West Kalimantan 21 South-east Sulawesi Sources: BPS, Statistical Yearbook of Indonesia, various issues. 41 Figure 5 Regional industrialization in Indonesia, 1969 - 1992 6 E 0.3 14 0 3 X 1110 *8 0.1 16 24 25 * ~~~~~3 *4 0 -2 0 2 4 6 8 10 12 14 16 18 Average annual growth rate of Si/Sa (1969-92, %) Sources: Arndt (1973), BPS (1995) Statistical Yearbook of Indonesia 1994. Note: See Figure 4 for Regions' code. An industrialization index (Si/Sa) is defined as the ratio of the GRDP share of industry and agriculture. 42 Policy Research Working Paper Series Contact Title Author Date for paper WPS1856 Surviving Success: Po!icy Reform Susmita Dasgupta November 1997 S. Dasgupta and the Future of Industrial Hua Wang 32679 Pollution in China David Wheeler WPS1857 Leasing to Support Small Businesses Joselito Gallardo December 1997 R. Garner and Microenterprises 37664 WPS1858 Banking on the Poor? Branch Martin Ravallion December 1997 P. Sader Placement and Nonfarm Rural Quentin Wodon 33932 Development in Bangladesh WPS1859 Lessons from Sao Paulo's Jorge Rebelo December 1997 A. Turner Metropolitan Busway Concessions Pedro Benvenuto 30933 Program WPS1860 The Health Effects of Air Pollution Maureen L. Cropper December 1997 A. Maranon in Delhi, India Nathalie B. Simon 39074 Anna Alberini P. K. Sharma WPS1861 Infrastructure Project Finance and Mansoor Dailami December 1997 M. 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Fallon Weak Links in the Chain Jeffrey Hammer 38009 Lant Pritchett WPS1875 How Deposit Insurance Affects Robert Cull January 1998 P. Sintim-Aboagye Financial Depth (A Cross-Country 37644 Analysis) WPS1876 Industrial Pollution in Economic Hemamala Hettige January 1998 D. Wheeler Development (Kuznets Revisited) Muthukumara Mani 33401 David Wheeler WPS1877 What Improves Environmental Susmita Dasgupta January 1998 D. Wheeler Performance? Evidence from Hemamala Hettige 33401 Mexican Industry David Wheeler WPS1878 Searching for Sustainable R. Marisol Ravicz February 1998 M. Ravicz Microfinance: a Review of Five 85582 Indonesian Initiatives WPS1 879 Relative prices and Inflation in Przemyslaw Wozniak February 1998 L. Barbone Poland, 1989-97: The Special Role 32556 of Administered Price Increases WPS1880 Foreign Aid and Rent-Seeking Jakob Svensson February 1998 R. Martin 39065 WPS1881 The Asian Miracle and Modern Richard R. Nelson February 1998 S. Jonnakuty Growth Theory Howard Pack 37902