Amid the constant flow of bad news about the excesses of the 2001 decentralization policy — after more than 170 regional leaders were implicated in corruption and thousands of bylaws on taxes and user charges hostile to investment and trade issued — encouraging developments have taken place in an increasing number of provinces and regencies.
Even though they still make up a small minority, accounting for less than 20 percent of the 33 provinces and 495 regencies and mayoralties across the country, many regional administrations have made significant improvements in governance by implementing best practices in the delivery of public services and the licensing of businesses.
The latest promising development was last Tuesday’s signing of a cooperation agreement by the East Java, Gorontalo (northern Sulawesi) and Maluku governors to expand their trade ties. They agreed to tap their respective comparative advantages through intensive exchanges of information and better transportation connectivity.
Even more encouraging is the strong commitment and full support of the three provincial chambers of commerce and industry to implement the cooperation agreement.
This development is further evidence of how more regional leaders have realized the vital importance of good governance and connectivity in expanding investment and trade to bolster regional economies.
The rationale for this is that private investment generates jobs, which in turn generate wages and fuel purchasing power for people to buy goods and services, propelling the wheels of the economy.
The successes of reform-minded regional leaders in attracting investment, despite an acute lack of natural resources in their territories, have demonstrated that business leaders consider the investment climate as much more important than natural endowments when deciding on where to establish their businesses.
Investors see policy variables, which include institutional capacity such as legal certainty, policy consistency and predictability, local regulations, labor supply and productivity and the structure and potential of local economy, as the key factors influencing their choice of business sites.
Take for example the Indonesian subsidiaries of the Singapore-based Wilmar International, which have been developing what would ultimately be a US$1 billion palm-oil based industry cluster in the coastal town of Gresik, near the East Java seaport of Tanjung Perak, which will manufacture cooking oil, soap, oleo-chemicals, biodiesel, aviation biofuel and an array of other palm-oil based products.
East Java does not have oil-palm estates, but Wilmar International, Indonesia’s largest palm-oil producer, decided to build its industry cluster at Gresik due to the good investment climate created by the local administration.
The strategic location of the Surabaya seaport of Tanjung Perak, as the gateway to two emerging major palm oil producing centers, Kalimantan and Sulawesi, and to the rest of Java where 60 percent of the country’s 240 million population lives, does add to that advantage.
But this location factor alone would be less meaningful without a conducive investment climate and a hospitable local government.
It is good transportation connectivity, combined with a favorable investment atmosphere, that make Gresik quite attractive to investors who want to tap the international and domestic market, notably in Java and the eastern region.
As more private investors establish businesses in Gresik and Surabaya, these two cities will soon develop to be a burgeoning hub for the Java economic corridor, one of the six regional economic corridors developed under the 2011-2025 Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI).
Such public-private partnerships as those implemented by the East Java, Gorontalo and Maluku provinces and by the Gresik administration will bolster inter-island connectivity to accelerate economic growth across the country.