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2024 | Book

The Indonesian Economy and the Surrounding Regions in the 21st Century

Essays in Honor of Iwan Jaya Azis

Editors: Budy Prasetyo Resosudarmo, Yuri Mansury

Publisher: Springer Nature Singapore

Book Series : New Frontiers in Regional Science: Asian Perspectives


About this book

This book broadens the reader’s knowledge of several important issues having to do with the economy of Indonesia and its surrounding regions, to which Professor Iwan Jaya Azis has made significant contributions in the last 40 years. The book is divided into three parts, the first of which contains several chapters describing fundamental methods in regional economics, development economics, macroeconomics, and finance. These methods are crucial in understanding the political economy of Indonesia and the neighboring regions. Among the techniques discussed are social accounting matrix (SAM) analysis, computable general equilibrium (CGE) modeling, and agent-based modeling (ABM) approaches. The second part is on several important issues related to the Indonesian economy. The topics covered are urbanization, resource booms, manufacturing, and micro and small enterprises. The book’s third part deals with the economies of several countries in the neighboring Southeast Asian region, including the Philippines, Vietnam, and Thailand.

Table of Contents

Chapter 1. Iwan Jaya Azis: A Person, an Economist, and a Regional Scientist
This chapter provides an overview of Iwan Jaya Azis’ life and contributions, highlighting his roles as a teacher, an economist, and a regional scientist. Azis began his academic career in economics at the University of Indonesia (UI), joining the faculty immediately after graduation. Later, while studying in the graduate program in Regional Science at Cornell University, he focused on economic inequality among regions in Indonesia. When he returned to UI, Azis attained the position of the chair of the Department of Economics. There, he encouraged the adoption of formal modeling techniques, and his tenure overall was marked by changes in curricula that would align economics education at the University of Indonesia with global standards. Azis instilled a “publish or perish” ethos into the minds of Indonesian economists, initiating a new focus on publication in international journals. Through his work, Azis advanced regional science in Indonesia and made a lasting impact on those he mentored.
Budy P. Resosudarmo, Yuri Mansury

The Indonesian Economy

Chapter 2. Impacts of Monetary Policy on Consumer Demand of High- and Low-Income Groups in Indonesia
The research reported in this paper examines how changes in liquidity (or flows of financial services from monetary assets) affect commodity prices, levels of consumer expenditures on commodities, and the abilities of consumers in high- and low-income groups in Indonesia to adjust shares of expenditures to optimize their welfare (utility). A dynamic system of demand equations for each income group is specified on the basis of Cooper and McLaren’s (1992) Modified Price-Independent Generalized Logarithmic (MPIGLOG) demand system and Anderson and Blundell’s (1983) disequilibrium adjustment mechanism. A bloc of dynamic price equations is also specified, based on the principle of excess demand adjustment. In the model, income groups adjust their shares of aggregate expenditures on food, housing, and other items to partial-equilibrium levels, given commodity prices and the groups’ respective allocations of aggregate expenditures. Changes in the rate of growth of the supply of base money, determined by Bank Indonesia policy, influence changes in prices and income groups’ commodity expenditure levels, hence, levels of welfare derived from the consumption of commodities. The continuous-time model is estimated with annual time-series data on expenditures, prices, and financial aggregates by a non-linear quasi-Newton-maximum-likelihood procedure. The estimation results suggest that the demand systems for the two income groups studied in Indonesia are different but that adjustments in prices and consumption expenditures of both income groups have been affected by monetary policy. Counterfactual simulations of variations in monetary policy suggest that changes in the historical rate of growth of the money supply would have had discernibly sizable effects, that income groups would have been affected differently, and that increasing rates of growth of money would not have necessarily led to increasing prices for all commodities.
Gunawan Wicaksono, Kieran P. Donaghy, Clifford R. Wymer
Chapter 3. Rapid Urbanization: The Challenges and Opportunities for Planning in Indonesian Cities
Within the rapidly urbanizing Southeast Asia region, Indonesia’s largest cities are among those experiencing the highest rates of growth. The Jakarta Megapolitan Region, now exceeding 30 million inhabitants, has spawned four of Indonesia’s most populous cities in its periphery over the past three decades. Data presented, dealing with demographic and spatial expansion of Jakarta megacity, supports the conclusion that it is the periphery and not the center city where urbanization is occurring. This process has been fueled by the real estate development machine with significant support from public transportation investments, but with costs borne through widespread displacement of peri-urban settlements and conversion of agricultural lands to urban uses, all contributing to an acknowledged increase in inequality in Indonesian cities. This places increased pressure on national and local governments to provide infrastructure to support post-suburbanization, including continued expansion of transportation facilities, but especially to generate affordable housing to accommodate the growing population drawn to the economic opportunities in expanding cities. Current investments are not keeping up with the needs of these urbanizing regions. Moreover, evidence from Indonesian researchers suggests that the day-to-day planning and implementation in support of peri-urbanization is guided by the private development sector objectives rather than through public controls and meeting the needs of incoming residents. With the attention of national government now focused on planning a new capital city in East Kalimantan, the necessary engagement of the public sector to counter the dominance of the private sector in guiding Indonesia’s rapid urbanization is not likely to be sufficient.
Christopher Silver
Chapter 4. Small- and Medium-Size Linkages with Large Firms: Revisiting Studies on Indonesian Manufacturing
Under President Jokowi, small and medium firms in manufacturing have been emphasized for their role in enhancing equality and quality of life, as detailed in the Nawacita economic platform. The administration’s approach, rooted in Law no. 27/2007, promotes broad-based economic growth with significant focus on intersectoral relationships, recognizing small and medium enterprises as crucial to the manufacturing “value chain.” Plans involve strengthening the value chain through diversification and vertical integration. Infrastructure, notably the trans-Java toll road, connects these firms to urban markets. Amidst global disruptions like COVID-19, the focus has been on creating an enabling environment for businesses, with programs like MEKAR and KUR assisting them. The 2022 PEN budget heavily favors small firms. The paper revisits Kuncoro’s 2014 research, exploring the relationship between small-medium and large firms in Indonesia using 2014–2019 data.
Ari Kuncoro
Chapter 5. Indonesia and the Resource Curse: Economic and Environmental Dimensions
Natural resources—blessing or curse? Indonesia provides an excellent case study for an examination of this question. It is a major commodity exporter; the fourth most populous country in the world; and the world’s largest archipelagic state with huge mineral, forest, and maritime resources. Indonesia also has three distinctive features that are particularly relevant for such a study. First, with the exception of the Asian financial and pandemic crises, it has had at least moderately strong economic performance for the past half century. This distinguishes it from the majority of resource-rich developing countries, and therefore there are lessons to be learnt from its management of these boom-and-bust episodes, particularly the latter. Second, Indonesia has experienced two rather different resource booms: the first based mainly on oil and gas in the 1970s and the second based primarily on coal, palm oil, and gas over the years 2005–2011. The economic, social, and environmental impacts of these two booms have differed significantly. Third, the country experienced major regime change in 1998–1999, from the centralized, authoritarian Soeharto regime 1966–1998, which presided over the first boom, to the subsequent democratic, decentralized regime during the second boom. The very different political and institutional arrangements had important implications for the management of the boom and its distributional impacts. We examine these issues in comparative context, employing as reference points two very large natural resource exporters, Brazil and Nigeria, and Malaysia, a smaller, more dynamic East Asian comparator.
Consistent with the original resource curse literature, although the paper focuses primarily on the economic dimensions, a twenty-first-century perspective would give more attention to environmental aspects and particularly the energy transition to a low-carbon economy. In this respect, Indonesia is still in the early stages of such a transition and in the sustainable maintenance of its forest, maritime, and other natural resources.
Hal Hill, Donny Pasaribu
Chapter 6. Climate Change Policies in Indonesia: Challenges and Economic Consequences
This chapter reviews the development of climate change policies in Indonesia from the mid-2000s to the early 2020s. In the first part, we discuss Indonesia’s involvement in climate change initiatives at the global level that include ratification of the 2015 Paris Agreement and subsequent publication of a Nationally Determined Contribution (NDC) to reduce emissions through domestic efforts by 2030 from 29 to 41%. We aim to shed light both on complications with respect to implementation of these policies and reasons why they did not develop quite as planned. The next part of the chapter consists of simulations to model what would be the economic consequences if Indonesia progressed with its 2022 NDC and other key climate change policies. We highlight lessons based on Indonesia’s experience that could help other developing countries to put in place better climate change policies. Our lessons include an assessment of what could be done towards the dual objective of eradicating poverty and tackling the risks of climate change.
Arianto A. Patunru, Budy P. Resosudarmo
Chapter 7. The Status and Trend of Indonesian Provinces’ Sustainability: A Genuine Savings Approach
Indonesia is known as one of the countries in the world blessed with abundant natural resources. For this reason, it is imperative to have a sustainable development indicator that shows whether development in Indonesia is on a sustainable path or not. This study aims to assess the pattern of development of the provinces in Indonesia concerning aspects of sustainable development using genuine savings indicators for 2005 and 2016. Genuine savings is the true rate of savings after considering the depletion of natural resources and damage caused by pollution. The findings show that Indonesia’s sustainable development profile improved from 2005 to 2016 periods. This improvement is indicated by the increase in genuine savings value during that period. Almost all the Indonesian provinces contributed to this improvement. Exceptions are for Papua, East Kalimantan, and South Kalimantan. The sustainability of these three provinces is relatively vulnerable as they rank low in terms of the ratio of genuine savings to GRDP. The analysis calls for the need to diversify economic activity not too dependent on the extractive and pollutive sectors as well as increasing productivity so that for each unit of the liquidation of natural assets, we can generate welfare as much as possible.
Armida Salsiah Alisjahbana, Viktor Pirmana, Arief Anshory Yusuf
Chapter 8. Economic Impact of the 2018 Asian Games in Indonesia
Indonesia hosted the Asian Games in 2018, the second time after its hosting in 1962. This multisport event was considered successful and has positively impacted the Indonesian economy in the short and long terms. People’s participation in the event was a key factor in creating multiplier effects for such an event in the Indonesian economy. The objective of this study is to analyze the economic impact of hosting the 2018 Asian Games on the Indonesian economy using the IndoTERM–Computable General Equilibrium (CGE) Model combined with mobile positioning data to estimate its impact on economic growth as well as to track people’s movements and origins in real time and at each venue. Moreover, the socioeconomic impact of the 2018 Asian Games was also analyzed through in-depth interviews and surveys of the participating social enterprise, particularly its employees and surrounding community. The findings suggest that the 2018 Asian Games has had a positive impact on the Indonesian economy. In particular, the GDP of Indonesia can be lifted by as much as 0.05% from the baseline in 2018 due to the event. Furthermore, the impact of the Asian Games on the economies of host provinces is higher than at the national level, particularly in South Sumatra and DKI Jakarta, where most of the games were located. DKI Jakarta and South Sumatra’s GDPs were lifted by 0.22 and 0.54%. Furthermore, the mobile positioning data can track the top three Asian Games visitors by country of origin during the period of the games, which were China, Japan, and Korea. Around 79,000 foreign visitors and two million domestic visitors came to the Asian Games event. Foreign visitors visited the sports venues more frequently during their visit period than domestic visitors. In addition, the 2018 Asian Games increased social enterprise sales and helped increase its brand presence and recognition. The employees, most of whom are women, confirmed that the firm brings benefits in many aspects, such as economy, nutrition, health, education, and women’s empowerment. They also mentioned that the firm provides rewards to employees in the form of scholarships for children and nutritional food support. This will then help reduce poverty and improve the health status of the local community. Therefore, the 2018 Asian Games also indirectly brought socioeconomic impact to increase the community’s livelihood.
Bambang Brodjonegoro, Amalia Adininggar Widyasanti, Firman Hidayat, Rasi Tamadhika Fajar Ramadhan

Southeast Asian Economies and the Region

Chapter 9. Indonesia and Vietnam in Global Supply Chains and the Age of COVID: A Tale of Two Countries
Indonesia’s economic performance since 2000 has been respectable. It has not succeeded, however, at joining global value chains (GVC). Vietnam, on the other hand, is a key link in GVCs for electronics, textiles, and other sectors. This chapter recounts the experiences of Indonesia and Vietnam at attracting foreign direct investment, exporting, and coping with the COVID-19 pandemic. It considers why Indonesia has been less successful than Vietnam at joining GVCs. It then concludes with several recommendations for how Indonesia could attract FDI and avoid scarring from the pandemic.
Willem Thorbecke, Atsuyuki Kato
Chapter 10. Education and Expenditure Inequality in Indonesia and the Philippines: A Comparative Analysis in an Urban and Rural Dual Framework
Using nationwide household surveys, this study investigates the roles of education in expenditure inequality in two archipelagic Asian countries: Indonesia and the Philippines. Since disparity between urban and rural areas is one of the main determinants of expenditure inequality and there is a large difference in educational endowments between urban and rural areas, an analysis is conducted in an urban-rural framework. Both countries achieved a notable reduction in expenditure inequality in the 2010s. In Indonesia, the reductions of disparity between education groups and tertiary education group’s within-group inequality in urban areas were the main contributors to the reduction of overall expenditure inequality. In the Philippines, the reductions of expenditure disparities between urban and rural areas and between education groups were the main contributors to the reduction of overall expenditure inequality. In 2018, Indonesia and the Philippines had the same level of expenditure inequality. However, compared to developed countries, their expenditure inequalities are still very high. In Indonesia, expenditure inequality among those with secondary education is the major determinant of overall expenditure inequality. Thus, reducing the secondary group’s within-group inequality is necessary. At the same time, the tertiary group’s within-group inequality should be decreased in urban areas. In the Philippines, expenditure inequality among those with tertiary education is the major determinant of overall expenditure inequality. Thus, reducing the tertiary group’s within-group inequality is imperative. At the same time, the disparity between education groups should be decreased in both urban and rural areas.
Takahiro Akita, Sachiko Miyata
Chapter 11. Impact Analysis of the Economic Eastern Corridor on the Thai Economy: An Application of Multi-Regional Input–Output Model and Dynamic Computable General Equilibrium Model
To facilitate the multi-sectoral investment, the Thai government has initiated a new development project titled Eastern Economic Corridor (EEC), located in the eastern provinces, namely Chachoengsao, Rayong, and Chonburi. This project accommodates the construction of a new high-speed train and the extensions of existing seaports, highways, and airports. Also, investment promotion has been implemented, offering the tax incentive and other benefits to the targeted industries. This study aimed to quantitatively examine the economic impacts of the EEC project by utilizing two methods. First, the multi-regional input–output table (MRIO) and multiplier analysis were applied to investigate the cross-province and cross-region impacts. Second, based on the national Social Accounting Matrix (SAM), the dynamic Computable General Equilibrium (CGE) model was utilized for examining the inter-temporal effects. The result obtained from MRIO showed that investment expansion in the EEC area could induce cross-regional spillover, accounting for approximately 30% of GDP. The dynamic CGE model demonstrated that if the planned investments were continuously implemented, the GDP would consistently increase, resulting in an average household income rise of around 31% in 2034 compared to the base case. This study highlights the complementary use of two models to evaluate the multidimensional impacts of the EEC development project, including short-term spatial spillovers and long-term national effects.
Nattapong Puttanapong, Kanit Sangsubhan
Chapter 12. Climate Change, Food Security, and Trade: Navigating Through Multiple Crises
The world is afflicted by multiple crises—the debilitating effects of climate change, continuing impacts of the COVID-19 pandemic and global supply-chain disruptions, soaring food prices, the war in Ukraine, and rising geopolitical tensions. A chief concern is what all these crises mean for food security, especially in the developing world, because progress had already stalled in achieving the sustainable development goals (SDGs) of ensuring year-round access to safe, nutritious, and sufficient food for all people and of eradicating all forms of malnutrition. This chapter discusses how trade will have to play an increasingly important role in delivering food from areas with excess supply to areas with shortages. Yet policy measures that disrupt trade in food and agricultural inputs undermine crisis response efforts and long-run adaptation to climate change. These measures take the biggest toll on the poorest and most vulnerable populations.
Paul Brenton, Vicky Chemutai, Mari Pangestu

Methods of Regional Economic Analysis

Chapter 13. I Won’t Get Caught: An Agent-Based Model of Corruption with Incomplete Information
Corruption remains one of the biggest challenges facing Indonesia. Rampant bribery leads to the misallocation of resources, unfairly privileging those in power and hindering economic development. Existing studies tend to focus on top-down strategies involving prevention and law enforcement in the larger context of building national integrity. In a budding democracy such as Indonesia, however, the creation of an anti-corruption agency will not be sufficient to combat persistent official malpractice. In this chapter, I propose an agent-based model that combines optimizing behavior with imperfect information to highlight the decentralized mechanisms implicit in the culture of bribery. The model’s bottom-up approach demonstrates how choices at the microlevel give rise to the macrolevel dynamics. Numerical simulations show that aggregate corruption levels diverge from a steady state into permanent oscillations when arrest probability crosses a critical threshold. Consistent with the economic theory of crime, a negative correlation exists between the chance of arrest and the occurrence of embezzlement in situations where the risk of getting caught is minimal. Thus, a higher likelihood of detection lowers aggregate corruption. However, when the chance of arrest exceeds a critical point, the corrupt population alternates between the state where everyone denounces bribery and the state where everyone participates in corruption. The policy implications of the nonlinear relationship between arrest probability and crime are discussed.
Yuri Mansury
Chapter 14. Analyses of University-Partnered Economic Development Initiatives and Minimum-Wage Policies Under Different Assumptions of Competition and Scale Economies
In this chapter we present general equilibrium analyses of economic development initiatives and minimum-wage policies that may be undertaken by a spatially dispersed, multiple-campus university in conjunction with a state government. The computable general equilibrium (CGE) model we employ in its two variants includes Cornell University as a sector (institution) unto itself (apart from other institutions of higher education in the state) and characterizes interactions between four regions of New York State—Tompkins County, counties adjacent to Tompkins County, the New York metropolitan area, and the rest of New York State—and areas external to the state. We compare projected policy outcomes for different assumptions about competition and scale economies.
Jati Waluyo, Javier Perez Burgos, Yuri Mansury, Hee Hwa Min, Kieran Donaghy
Chapter 15. Lessons Learned from Managing Transportation Demand for Suburban Areas of Washington, DC: Implications for Rapidly Growing Cities of the World
The central question that confronts transportation policy in cities around the world is: Can congestion ever be completely eradicated? This chapter endeavors to address this question and explore potential solutions to transportation challenges by drawing upon data from one of the most congested regions in the United States, the Washington DC metropolitan area. An analysis of historical and contemporary socioeconomic data pertaining to the DC metropolitan area reveals that transportation issues cannot be effectively resolved in isolation, without considering the broader economic activities of the community. It highlights that a certain level of congestion is deemed acceptable as a consequence of the allocation of limited resources and that the ultimate objective of transportation is to cultivate high-quality, environmentally sustainable, and safe communities where people aspire to reside—not to entirely eliminate congestion. In line with this perspective, the foundational principles for addressing transportation problems revolve around the sustainable development of the entire community. This chapter identifies and discusses policies related to technology and land use as essential components of long-term strategies for traffic management.
Tschangho John Kim
Chapter 16. A Complex Systems Approach to Uneven Development in Asia: Political Economy and Mathematical Models
My main purpose is to explore a somewhat novel complex systems approach to uneven development in a rigorous manner. One salient application is a fairly comprehensive strategy for development as freedom in Asia with tactical differences in different regions flowing out of uneven development, and a nuanced path dependence. Accordingly, I try to find a way to integrate useful markets with the key characteristics of the Enabling Developmental State for the Twenty-First Century to model a growing ecologically sustainable economy with equity in terms of capabilities. Proceeding from a critical capabilities perspective that is fully grounded in social reality of deepening but uneven structural and ecological crises of the global system, we discover that such a perspective leads to the need to include among the characteristics of the Enabling Developmental State for the Twenty-First Century its capacity to build an ecologically sustainable egalitarian development strategy. In addition, democracy must be deepened over time. For Asia, a community of different Asian regions following their own rhythm to reach their own dynamic trajectories toward development as freedom will be possible if they cooperate regionally on the basis of equal sovereignty and mutual respect. One precondition is to pragmatically unite for a common but tactically flexible economic strategy. Tactically, the developmentalists have to be flexible because different Asian countries are at different stages of development and there are many region and country-specific spatiotemporal features that need to be taken into account. There is no single set of tactical blueprints for all in a world of uneven development. The complex systems developmental models in the Appendixes can handle regional uneven development. The model has its basis in part on my empirical work on economy-wide modeling of South Korea, Taiwan, and the BRICS.
Haider A. Khan
The Indonesian Economy and the Surrounding Regions in the 21st Century
Budy Prasetyo Resosudarmo
Yuri Mansury
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Springer Nature Singapore
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