INTRODUCTION

Since 2005, one of the most remarkable achievements in global peace making has occurred in the province of Aceh. The former rebel movement, the Free Aceh Movement (Gerakan Aceh Merdeka, GAM), has transformed itself into a largely civilian political movement that competes for power through elections. Political violence has declined dramatically, and most of the violence that does occur is not between Indonesian security forces and GAM supporters as it was during the conflict years. Most observers have ascribed the success of the peace process in part to the autonomy arrangements promised to GAM during the peace talks in Helsinki in 2005. GAM supporters describe these arrangements as ‘self-government’, while representatives of the Indonesian government typically use the term ‘special autonomy’. These arrangements were embodied in Law 11/2006 on the Governing of Aceh a little over a year after the Helsinki peace agreement was signed. It has provided the framework for organizing Aceh's governmental affairs ever since.

While observers are right in attributing the success of the peace process to the compromise reached in Helsinki, and subsequently formalized in Law 11/2006, it would be a mistake to think that the autonomy package represents a set of ingredients that could successfully be transplanted to other conflict zones with similar results, regardless of circumstances. In fact, most of the ingredients had been tried before in Aceh but had failed. Following the fall of the Suharto presidency in 1998, the Indonesian government made several efforts to resolve the Aceh conflict by way of special autonomy, including two laws passed in 1999 and 2001. Many of the elements in the 2006 law had in fact already been included in the 2001 law, but were rejected at the time by GAM leaders as being a poor substitute for independence. Moreover, as we shall see, in several ways the autonomy arrangements put into effect in Aceh have fallen short of GAM supporters’ expectations, and Jakarta retains decisive authority in various areas of Aceh's affairs.

What, then, has made the post-2005 special autonomy deal so successful? I argue that it boils down to a combination of two elements. First are the core political provisions in the Helsinki memorandum of understanding (MOU) and the 2006 law that have allowed GAM to transform itself into a political force and compete for power through elections.

INTRODUCTION

Over the past decade Indonesia has made significant progress in reducing poverty. According to official statistics produced by the national statistics agency (Badan Pusat Statistik, BPS), the poverty rate fell from 23.4 per cent in 1999 to 11.4 per cent in 2013. Viewed from any angle, this is a tremendous achievement. However, as demonstrated also by Amri Ilmma and Matthew Wai-Poi in Chapter 5 of this volume, Indonesia's success at the national level masks the existence of substantial regional differences. This chapter focuses on this regional heterogeneity in poverty indicators. It relates district performance in reducing poverty to characteristics of the decentralization program implemented in Indonesia since 2001.

We argue that the system of governance for managing Indonesia's ‘big bang’ decentralization lacks key institutional requirements, notably adequate performance measures and an effective framework of constraints, as reflected in the shortcomings in the system of controls for central government oversight of local governments (World Bank 2006). Moreover, the division of responsibilities between the different levels of government is unclear, clouding the lines of accountability required to improve service delivery. An additional challenge stems from the uniform implementation of decentralization regardless of regional differences. This is a problem in a country as diverse as Indonesia, where each region differs in local government capacity and available resources. All these factors have undoubtedly had an effect not only on the implementation of the national poverty reduction strategy, but also on the development of local poverty reduction initiatives.

A review of experiences in 19 countries conducted by the OECD Development Centre finds that decentralization has led to improvements in poverty reduction in only one-third of cases (Jütting, Corsi and Stockmayer 2005). The authors argue that lower middle-income countries that have literacy rates above 80 per cent, and whose political processes are relatively open, are more likely to experience decreases in poverty following the adoption of decentralization measures. Overall, they conclude that decentralization is more likely to have a positive impact on poverty if there is an adequate commitment by the central government to the decentralization process, if the actors involved have the requisite (financial and technical) capacity, and if checks and balances are established at the local level to prevent rent seeking and corruption.

OVERVIEW

Like many large countries, Indonesia has a geographically fragmented labour market. Physical and economic contrasts between and within the major islands govern patterns of employment, wages and unemployment. The labour market still bears the signs of a dualistic division, dating from colonial or even pre-colonial times, between densely populated, poorer Java–Bali and most of the more land-abundant Outer Islands. Rapid national economic growth based on both export-oriented development and resource booms altered that historical pattern during the Soeharto years. The process became more complicated in the post-Soeharto democratic reform era after Indonesia's radical decentralization. Manufacturing stagnated in Java, while in the Outer Islands better governance and the return of revenue to resource-rich provinces provided more opportunities in some regions than in others for human resource development and economic diversification.

The widely varying rates of poverty discussed by Ilmma and Wai- Poi (Chapter 5) and Sumarto, Vothknecht and Wijaya (Chapter 12) are reflected to a large extent in differences in labour productivity across island groups and provinces. Labour productivity in Jakarta and East Kalimantan is more than twice the national average, whereas in Gorontalo and East Nusa Tenggara it is less than half. Most people in the former two provinces work in the formal sector in services, mining and manufacturing. In contrast, high levels of poverty and low labour productivity in the latter two provinces are closely associated with a concentration of employment in agriculture and the informal sector.

At the same time some indicators, such as inter-regional migration, suggest quite high levels of integration for a country of Indonesia's size and spread. There are also signs of convergence in labour productivity among some provinces and regions, as poorer provinces shed agricultural workers.1 Remarkable similarities across the country in trends towards greater formalization and improvements in unemployment rates and wages also suggest a degree of integration in the national economy. This has meant that some of the worse-off provinces have not been left behind. Nevertheless, in other provinces, high rates of population growth, low levels of schooling and associated low levels of outmigration have kept much of the workforce trapped in low-productivity agriculture.

INTRODUCTION

There is a large literature on the relationship between the quality of governance – broadly defined – and long-run economic performance (North 1990; Acemoglu, Johnson and Robinson 2002). The general conclusion from this literature is that institutions, and the quality of their governance, matter for economic performance at the country level. There is also evidence to suggest that subnational governance is related to economic performance at the subnational level, although the evidence here is more mixed (Eckardt 2002; McCulloch and Malesky 2011). This chapter asks a different question: what are the drivers of the quality of subnational economic governance? The general assumption in the literature, and by policy makers, is that the quality of governance is a choice, that is, that ‘good’ leaders choose to have good governance and ‘bad’ ones choose otherwise. Leadership is clearly critical (von Luebke 2009; Patunru, von Luebke and McCulloch 2012), but there may also be structural factors, such as the size of the local economy, its location and its natural resource endowments, that influence the quality of governance by shifting the incentives faced by local leaders. We explore the influence of such factors in both Indonesia and Vietnam using quantitative data on the quality of subnational governance and the characteristics of subnational regions.

To preview our results, we find some interesting similarities in the determinants of subnational governance between the two countries, but also some marked differences. In particular, we find support for the idea that the complexity and size of modern cities reduce the quality of local governance. But we also find that being located outside Java appears to have a negative impact on the quality of governance in Indonesia, as does the size of the local economy, whereas neither location nor GDP appears to influence the quality of governance in Vietnam. We suggest that the structure of the political institutions in the two countries has provided a different set of incentives for local leaders, and that it is this that may be responsible for the differences in the determinants of subnational economic performance in Vietnam and Indonesia.

The chapter is structured as follows. Section 9.2 describes the structural drivers of subnational economic governance in Indonesia. Section 9.3 examines the drivers of changes in the quality of governance at the provincial level in Vietnam, exploiting both quantitative and qualitative evidence.

INTRODUCTION

This chapter examines regional development patterns in Indonesia since the 1970s. In earlier work (Hill, Resosudarmo and Vidyattama 2008; Vidyattama 2008) we concluded that, although inter-regional inequality was high, growth during the period 1975–2005 was spatially quite broadly distributed. A very gradual convergence in provincial per capita income levels was discernible according to the two most widely used economic indicators (discussed below), suggesting some catch-up among the poorest regions. The precise magnitudes depended on which concept of inequality and which income series were used. Few provinces performed consistently poorly and, apart from the special cases related to conflict, very few grew significantly more slowly than the national average. Greater Jakarta became ever more dominant during the period. Together with East Kalimantan, it continued to be the richest province from the 1980s. In general, the better-performing regions were those that were more connected to the global economy, through commodity exports, tourism or the modern industrial–service economy.

However, the unit of analysis in our earlier work was confined to the provinces, as the district (kabupaten/kota) dataset was still in its infancy, covering a relatively short time span of about a decade. Moreover, we were able to draw only limited inferences about the effects of decentralization, both because the analysis was conducted at the provincial level and because the regional accounts data were then available only through to 2005. The purpose of this chapter is to extend this research in two directions. First, we pay greater attention to the district as the unit of analysis, consistent with the longer and better data series now available, and with the fact that districts have been the focus of the decentralization measures legislated in 1999 and implemented since 2001. Second, as we now have data for the decade since decentralization commenced, we are able to examine the effects of these reforms on regional development outcomes.

The chapter is organized as follows. In section 4.2 we provide a broad overview of regional development dynamics, among the major island groupings and at the provincial level, extending and updating our earlier research. We also examine the correlations between economic and social indicators, and trends in inequality. Section 4.3 repeats this analysis at the district level, examining in particular whether the broad regional mosaic at the provincial level holds at the more disaggregated district level of analysis.

INTRODUCTION

The western part of the New Guinea islands is a unique part of Indonesia. Situated furthest from the nation's capital, Jakarta, it is Indonesia's most sparsely populated and geographically challenging region, and has some of the country's lowest socio-economic indicators. The combination of these difficult geographical and demographic conditions has meant that development in the region has always been challenging (Garnaut and Manning 1972, 1973; Manning and Rumbiak 1989).

Papua formally became part of Indonesia through a long and bitter process that took place between 1963 and 1969. At the time of annexation in 1969, the region was renamed West Irian (Irian Barat) and became a province of Indonesia, with Jayapura as its capital. In 1973, the name was again changed, to Irian Jaya. This controversial history led to the formation of movements among the local elites calling for Papua to become an independent state. Though relatively low level, sporadic and only intermittently violent, these independence movements have consistently challenged the legitimacy of Indonesian rule ever since (McGibbon 2006).

Over the ensuing decades, the Indonesian government attempted to weaken Papuan independence movements and accelerate development by allocating a higher level of funding per capita to Irian Jaya than to the other Indonesian provinces. Critics argued, however, that it was far less than the revenue generated by the region's natural resources. In particular, much of the revenue from the hugely profitable Freeport mine in Mimika district went straight to the central government, fuelling tensions between Jayapura and Jakarta (Resosudarmo et al. 2009a, 2009b).

The most critical time in the relationship between Jakarta and Jayapura was the period 1998–2001. The resignation of President Soeharto in mid-1998 and East Timor's successful demand for a referendum on independence intensified separatist hopes in Irian Jaya. When Abdurrahman Wahid became president at the end of 1999, he introduced a more accommodative and culturally sensitive approach to the question of ethnic conflict and separatist demands by changing the name of the province to Papua – the name by which parts of the main island were known before contact with the West (Sumule 2003; McGibbon 2004, 2006). To maintain good relations with the provincial elites, the president also endorsed the development of a draft bill on special autonomy for Papua.

INTRODUCTION

Nation-states launch decentralization programs in highly different historical contexts and for a wide variety of reasons (Eaton, Kaiser and Smoke 2010: 8–9). China and Vietnam, for example, have pursued moderate decentralization policies in order to respond to economic modernization pressures. Brazil, South Africa and Mexico introduced decentralization as part of their post-authoritarian transitions, while Cambodia, Rwanda and Uganda gave more power to the local level to heal post-conflict traumas. Most importantly, many developing countries use decentralization as a tool to improve government effectiveness, responsiveness and accountability (Asante and Ayee 2004: 3). Few states, however, implement decentralization as an urgent measure to prevent the disintegration of the state in the middle of a severe political crisis. Arguably, Indonesia in 1999 was such a state: many observers were concerned that, having emerged from 40 years of centralist authoritarianism, post-Suharto Indonesia could become the next Yugoslavia or Soviet Union. Fuelled by the secession of East Timor in 1999, anxiety spread within Indonesia that other parts of the archipelago could also demand independence. While most serious foreign scholars believed that a territorial break-up was unlikely (Cribb 1999; Emmerson 2000; Aspinall and Berger 2001), they nevertheless devoted much time to discussing such a probability. This, in turn, did little to reassure Indonesian policy makers.

Faced with the threat of territorial disintegration, the Indonesian elite turned to decentralization. First designed in 1999 and implemented since 2001, decentralization transformed Indonesia from one of the most centralist nations in the world into a polity with near-federal structures. As a result, the share of regional spending in total government expenditure increased from 17 per cent in 2000 to 40 per cent in 2009 (World Bank 2002, 2009: 65). This reform was implemented despite a number of well-documented risks inherent in decentralization. First, the empirical record of decentralization around the globe is ‘mixed at best in terms of realizing many of the stated objectives of reform’ (Eaton, Kaiser and Smoke 2010: xi), providing no ‘unambiguous proof of its desirability’ (Smoke 2003: 7). Second, ‘decentralization is likely to accentuate the already precarious imbalance within the state’ because it often favours already rich districts over poorer ones (Asante and Ayee 2004: 2). Third, decentralization frequently leads to wasteful spending on bureaucratic apparatuses (Mawhood 1993).

INTRODUCTION

Poverty in Indonesia has fallen markedly since 1976, although there have been significant differences in rates of reduction between regions. In the wake of the Asian financial crisis of 1997–98, and the accompanying financial, economic, social and political upheaval, Indonesia entered a new democratic period known as reformasi. Shortly afterwards, Indonesia implemented in a relatively short period one of the largest-scale decentralizations ever seen, bypassing the provincial level of government to transfer substantial power and resources to the districts. Since then, the economy has recovered and continues to perform strongly, with average annual growth in GDP of 5.6 per cent, a stable currency and inflation record, and continued reductions in poverty. This new economic expansion has been achieved in part by riding a (largely Chinese-driven) boom in global commodity prices.

As Hill, Resosudarmo and Vidyattama (2008: 408) note, ‘Development dynamics are a long-term phenomenon, involving decades rather than years’. It is now over a decade since Indonesia recovered from the crisis, implemented its decentralization reforms and embarked on a period of renewed economic expansion, meaning that only now has sufficient time elapsed for us to take a look at long-run patterns of regional poverty in Indonesia, with a detailed examination of the decentralization period. We update the provincial analysis to cover the two decades from 1993 to 2012, while also offering some initial analysis on district-level poverty performance since decentralization.

We ask two main questions. First, what are the patterns of regional poverty in the periods immediately before and after reformasi? Have trends in poverty reduction remained much the same, or did the crisis, reformasi and decentralization mark a structural break in patterns of provincial poverty reduction? Second, has decentralization led to faster poverty reduction, as many had hoped? Have the winners and losers with respect to poverty among the districts remained the same, or changed? And what role has the fragmentation of districts – the process of districts splitting to form new ones, known in Indonesia as pemekaran – played in poverty reduction and district development?

Section 5.2 provides an overview of poverty at the national level since 1976, along with a brief summary of the literature on regional poverty in Indonesia. Section 5.3 examines provincial poverty trends during three periods: 1993–96, 1996–2003 and 2003–12.

INTRODUCTION

It is now over a decade since Indonesia embarked on massive administrative and political decentralization, including in the land-based natural resource sector. The arguments for the decentralization of natural resources hinge on the assumptions that ‘locals know best’ and that reducing the distance between decision makers and ordinary citizens will result in policies that better address local needs and circumstances. The dynamics of decentralization in the natural resource sector, especially the forest sector, during the early post-reform years have been widely documented. Despite a lack of capacity, local governments scrambled to take the new opportunities to exploit the forests in their regions, resulting in distinct and undesirable patterns of governance – in particular, the indiscriminate allocation of timber licences, the benefits of which accrued disproportionately to local elites, and a failure to reinvest the proceeds in the forests. Inconsistencies in the legal framework led to incoherency in the workings of government institutions, and to a struggle between the different tiers of government for authority over natural resources. The critical elements of a national system of checks and balances, and downward and upward accountability of local governments, were missing or weak.

What has happened since those early years of decentralization? Has there been a change in direction over the past decade? What have been the effects of decentralization in the forest and land-based sectors? Can recent initiatives in these sectors improve the management of Indonesia's forest estate (kawasan hutan)? Focusing on the governance of forest lands, this chapter examines whether decentralization has fundamentally changed the ways in which the fragile ecologies of Indonesia's Outer Islands are managed.

We focus on forests and forest lands for at least three reasons. First, from a conservation perspective, Indonesia's forests house an invaluable wealth of biodiversity, much of it found nowhere else and some of it yet to be fully explored.

Second, the country's forest lands remain an important economic resource. It is true that, with the exception of the pulp and paper industry, the readily measurable economic returns from timber and wood products have declined, particularly when compared with the rising shares in national GDP of other natural resource-based sectors.

INTRODUCTION

The rural hinterlands of Medan in North Sumatra and Pontianak in West Kalimantan are known for growing lots of oranges. You can find oranges from those areas in supermarkets in Jakarta and Surabaya, although their market share is limited because of strong competition from countries such as China. The main reason for this is that trade logistics costs in Indonesia are high – so high that it is cheaper to ship oranges to Jakarta from China (and even the United States) than from Medan and Pontianak. The cost of shipping a container from China to Jakarta is about $400, but as much as $600 from Pontianak. A study by the World Bank (2010) found that 70 per cent of the difference in the prices of staple agricultural commodities across the Indonesian archipelago was explained by a region's degree of remoteness. Essentially this reflects the poor state of logistics, especially the low quality of transport infrastructure. The distance from the large industrial estates in Cikarang in West Java to the port of Tanjung Priok in Jakarta, and from the industrial estates in Pasir Gudang to the port of Tanjung Pelepas in Malaysia, is more or less the same: about 55 kilometres. However, there is a substantial difference in the cost of transporting containers from these areas to the ports. In Indonesia, it costs about $750 to transport a container from Cikarang to Tanjung Priok, but in Malaysia it costs only $450 to transport a container from Pasir Gudang to Tanjung Pelepas.

The Indonesian government recognizes the importance of efficient transport networks to promote inclusive economic development. As a huge archipelago, the country depends on efficient, affordable and reliable shipping services to glue the nation together. Seeing itself more and more as a ‘maritime economy’, Indonesia has prepared both a Shipping Law and a Port Master Plan in recent years. The importance of toll roads and highways to bring down land transport costs has also been recognized. For example, when the toll road between Surabaya and Jakarta is finished, it is estimated that travel time between the two cities will fall from 18 to eight hours.

In recent years, the issue of logistics has attracted increased attention.