Client & Partner: The World Bank,
East Java is one of the wealthiest provinces in Indonesia, with a GDP per capita of IDR. 14.5 million. It is occupied by 16 percent of Indonesia population and is highly urbanized. The economy grew on average 5.1 percent between 2001 and 2007, similar to the national average. East Java contributes to around 15 percent of Indonesia’s economy, second only to the contribution of Jakarta, the country’s capital. The economic structure of the region has been shifting from an agriculture-led economy to a manufacturing and services driven economy. The contribution of agriculture to the economy declined between 1990 and 2007, while manufacturing and service sector expanded from 42 percent to 57 percent within that period. Nevertheless, the agriculture sector remains important and employs about 40 percent of the East Java workforce. Despite being the second largest region in the country in term of population and size of the economy, and its relatively strong standing in terms of infrastructure and human capital, the region is failing to become a regional hub of growth and development. This is similarly the case with other regions with high population density (Medan, Makassar). Economic growth has been relatively stable in the past four years within the range of 5.8 to 6.1 percent. Investment levels are low in East Java, representing only 16 percent of GRDP compared with 25 percent for Indonesia as a whole. A large share of investment in Indonesia is highly concentrated in Jakarta and the surrounding areas (67 percent), while East Java represents only 3 percent.
The study attempts to understand better what is constraining higher growth and investment in East Java and through this provide support and input to the provincial and district governments to enhance regional economic performance. The study can also become an input for central government engagement on economic development in the region and part of broader plan on regional development. The findings could be useful not only for East Java, but also for other regions in Indonesia that are not performing their role as regional growth poles. A team of researchers from university or research institute in East Java will be mobilized to take lead in preparing the East Java Growth Diagnostic report.
The main objectives of the growth diagnostic are to (1) gain better understanding of the determinants and constraints to growth in the East Java Province, as one of the most dynamic and economically important regions in Indonesia; (2) enhance and transfer the capacity to Indonesian local university or research institutions to conduct East Java growth diagnostic and thus will build up capacity to conduct similar analysis in the future.
The study followed the growth diagnostic framework by Hausmann, Rodrik and Velasco (2005). Growth diagnostic provides a framework for identifying, among the many problems that might plague an economy and prevent its growth, which one(s) is(are) the most binding and thus should be the immediate focus of economic policy. This approach acknowledges that the private sector is a crucial engine for growth. A strong private sector can improve productivity and invest in traditional and non-traditional industries in the province, ultimately reshaping the productive sector towards a modern economy.
The assignment had the following activities: develop the research team, did data collection, did data analysis and report writing, participate in a workshop, and dissemination of report findings. There were five selected industrial districts in East Java which have more potential to act as economy center in the region). The qualitative data was collected over interviews with private sectors/firms, banks, and local governments. The quantitative data was collected on various economics and social indicators. Some data was provided by the World Bank team.