As a nation of 245m people, spread over three time zones and around 17,000 islands, Indonesia has always been a country of great diversity — economically, politically, culturally and ethnically.

Since the return to democracy, this diversity has been increasingly recognised, with a policy of decentralisation handing more power to the regions. Redressing old imbalances between the centre and the outlying areas has taken on greater importance in recent times as well, with the government’s latest development plan based on six, geographically defined, economic corridors. Thus, Indonesia is very much a country of regions, with major implications for investors, both foreign and local, given this decentralised approach.

UNITY IN DIVERSITY: The Indonesian national motto is “Unity in Diversity”, this being the objective of a radical new approach to governance that was adopted after the downfall of Suharto in 1998.

Faced with demands from many provinces for greater autonomy — and indeed, separatist violence in some — the new government of President Bacharuddin Jusuf Habibie implemented a “Big Bang” decentralisation law in 2001. This transferred considerable political authority from the centre and the province to the district, the administrative level under the province. The rationale was that such a move would head off separatist demands, while also empowering local governments with the means to address local challenges. Indeed, a widespread criticism of both the Suharto and Sukarno regimes had been their concentration of power within the central government.

GROUPINGS & ADMINISTRATION: Indonesia’s current 34 provinces are often grouped into seven areas: Sumatra, Java, Kalimantan, Sulawesi, the Maluku Islands, Papua, and Bali and Nusa Tenggara. Each province breaks down into regencies ( kabupaten) and cities ( kota), depending on the demographic, geographic, and economic makeup of the area. In 1999, the number of these sub-provincial districts was around 300, with nearly 200 more being created between the passage of the decentralisation law and a moratorium on new ones declared in 2009. After three years with no changes, parliament agreed, in 2012, to create a new province, North Kalimantan, and 11 new districts.

Each province has its own governor, and Regional People’s Representatives Assembly, or parliament, with members, like the governor, elected for five-year terms. Certain provinces, however, are known as Special Regions and have a different administrative structure.

SPECIAL REGIONS: Aceh is one such Special Region and has a great deal more autonomy than other provinces. This includes local implementation of sharia law for Muslim citizens and a range of unique political parties. Central government decisions on matters related to Aceh must be approved by the local parliament.

The Yogyakarta Special Region, meanwhile, is headed by the Sultan of Yogyakarta, who is also the governor, while the Prince of Pakualaman is vice-governor. This is in recognition of the special historical status of the monarchy in the region, and comes from a new law passed in September 2012, defining the political arrangements within the Special Region. Sultan Hamengku Buwono X, the current ruler, was inaugurated for a five-year gubernatorial term in October 2012, with Prince Paku Alam IX as his deputy.

The third and fourth special regions are the two provinces of the island of New Guinea that are part of Indonesia — Papua and West Papua. These were given special autonomy status in 2001, and since 2005 Papua has had, in addition to the usual parliamentary assembly, the Papuan People’s Council, which brings together local tribal chiefs and administers customary law. In late 2012, as OBG was going to print, discussions were also under way to create a new South Papua province that would likely also enjoy special region status.

Finally, there is the Jakarta Special Capital Region, which is often referred to as Jabodetabekjur, after the first and last letters of the cities of Jakarta, Bogor, Depok, Tangerang, Bekasi and Cianjur, which it encompasses, or as DKI Jakarta. While a city, DKI Jakarta is structured as a province, with a governor, and is subdivided into six districts (five cities and one regency). Governors are directly elected, with Joko Widodo of the Indonesian Democratic Party-Struggle winning the ballot in 2012.

REGIONAL VARIATIONS: Looking across the seven major regions of Indonesia, wide variations can quickly be seen in the economic development. Indeed, redressing these imbalances is one of the fundamental goals of decentralisation, and of the government’s development master plans (see analysis).

In terms of share of the national economy, Statistics Indonesia (BPS) figures for the first quarter of 2012 show the Java region has the greatest slice, contributing 57.5% to GDP. Maluku and Papua together, in contrast, contributed just 2.2%. The only region that came close to Java was Sumatra, with 23.6%, while Kalimantan contributed 9.8% and Sulawesi 4.5%. Bali-Nusa Tenggara was responsible for the final 2.4%.

Economic growth is also quite uneven across the country. According to the latest BPS statistics, average GDP growth for Indonesia during the 2006-10 period was 5.62%. For Java, however, the figure was 6.02% and Sulawesi experienced growth of 7.61%. Bali province had GDP growth of 6.52% but the combination of the remaining Nusa Tenggara provinces and the Maluku and Papua regions had a combined total of only 4.30%. Notable provincial variations include West Papua, which had a growth rate of 10.64% compared to neighbouring Papua province at 1.18%. Aceh was the only province whose economy actually shrank, at -1.78%.

Partly, this discrepancy is due to the fact that investment is concentrated in the most economically dynamic regions. According to the Indonesian Investment Coordinating Board (BKPM), by the third quarter of 2012 around 53% of all investment was in Java — down on the 63% of 2011, yet still clearly dominant.

Poverty is also unevenly distributed across regions. BPS figures for 2011 show a national average, across urban and rural areas, of 12.49% of the population living beneath the official poverty line that year. Yet in Papua and West Papua, the figures were 31.98% and 31.92%, respectively. Other poverty black spots include West Nusa Tenggara, with 21.23%, East Nusa Tenggara, with 23%, and Aceh, with 19.57%. Jakarta, in contrast, had a figure of just 3.75%, and Bali, 4.2%.

The figures also show though that percentages of people on low incomes have been steadily falling at both the national and local level. In 2010 the national total was 13.33%, while in 2009 it was 14.15%. Meanwhile, in Papua for example, the rate fell from 37.53% in 2009. Thus, the country’s economic growth is filtering through — yet for many, this process needs rapid acceleration.

The government has therefore embarked on a series of development programmes aimed at improving regional economic growth. The latest of these, running from 2011-25, is the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI). The overarching strategy of regional economic development also underscores many of the major initiatives of the BKPM, such as the recent Regional Champions programme (see analysis).

EAST-WEST: In 2012 particular focus was directed to the differences in economic development between eastern and western Indonesia, with the channel between Bali and Lombok being not only a geographical division, but also largely an economic one.

Harry Sutanto, president-director of port operator Pelindo IV, told OBG, “Logistics costs in eastern Indonesia are higher than in the west, primarily due to an imbalance in trade. The majority of containers leaving eastern Indonesia are empty. Government incentives must be implemented to encourage private investment and development in the region”.

In October 2012 President Susilo Bambang Yudhoyono visited East Nusa Tenggara, a province comprising over 500 islands. Some 90% of the regional development budget is financed by the central government, with 20 out of 21 districts in the province officially defined as “poor”. The president used the visit to highlight the need for investment in the east, adding that 48% of the 2012 infrastructure budget of Rp194trn ($19.4bn) would go to projects in eastern Indonesia.

REDRESSING THE BALANCE: These provinces and regions are also likely to benefit from expansion in education and health. Thus, the least developed areas should also see an influx of government funding on social and hard infrastructure over the next few years.

Further investments in hard infrastructure will help balance east and west. “Java is very congested, but the region will always receive investment because supporting infrastructure already exists. Shipping costs to the east are more costly, building materials are more expensive because they must be imported and fewer workers are available. Without incentives to invest in east Indonesia, the region will be left behind,” Sutanto said, REGION BY REGION:The MP3EI identifies six economic corridors and the various strengths of each. Two of Indonesia’s poorest regions are combined into the Papua–Kepulauan Maluku Economic Corridor, and major infrastructure investments are already under way.

Papua province has the giant Grasberg Mine, the world’s largest gold and third-largest copper mine, with mineral extraction thus a natural focus for this corridor. In addition, the region has good food and fisheries resources, along with energy in the form of potential hydroelectric power. Key to agricultural development is the Merauke Integrated Food and Energy Estate, which introduces industrial techniques to a traditional region and aims to diversify the crops being produced.

The Bali-Nusa Tenggara Economic Corridor, meanwhile, is to focus on tourism and food industries. Regarding the former, the strategy is to gradually boost Bali’s role as a gateway to other islands, including Komodo, the Gilis and Lombok, and Yogyakarta and East Java. At the same time, the northern part of Bali, will be further developed with high environmental safeguards.

Regarding food industries, local strengths are primarily in fisheries and animal husbandry. The plan sees investment in processing as a way of advancing up the value chain and boosting incomes. Nagekeo, East Flores and Kupang will be districts of special focus.

The Sulawesi Economic Corridor places emphasis on mining, food and fishery industries, plantations, and oil and gas. On the agriculture and plantations side, cocoa is a major crop, with the region producing 63% of national output. The plan seeks to assist cocoa farmers with research and development, cultivation of better strains and increased processing of cocoa into higher-value-added products. According to the MP3EI, Sulawesi also has the largest fisheries output of any Indonesian region, by volume, with this too an investment focus.

ON BORNEO: Next door in the Kalimantan Corridor, a vast range of industries are set for promotion. These are in the mining, energy and plantations sectors, already big across the island of Borneo. In energy, oil and gas production will be promoted by infrastructure improvements and regulatory changes that will encourage the establishment of more production sharing contracts.

Investment in human resources is also a priority — as indeed it is throughout the six corridors. Coal is also a major resource in Kalimantan, with the MP3EI targeting legislative changes to improve land use, permit issuance and environmental concerns. Tax incentive plans are being formulated to encourage major investment. Palm oil production will also be boosted, via similar regulatory initiatives, while a steel industry is to be encouraged as a way of adding value to a region that already produces iron ore and coal. Bauxite is another major local resource, as is timber.

Meanwhile, under the plan, the Java Corridor will focus on food and beverages, textiles, transportation equipment, shipping, ICT, defence equipment and the greater Jakarta area. The island’s three provinces and two special regions are already seeing major transport infrastructure developments (see Transport and East Java chapters). Another recent stand out has been the success of the Yogyakarta region, which Bank Indonesia recently cited as a model for regional development.

Finally, the Sumatra Corridor will, like Kalimantan, be focused on natural resources. Palm oil, rubber, coal, shipping, steel, and the Sunda Straits National Strategic Area are identified in the MP3EI, with the latter a sub-regional, yet inter-regional project. This includes what could be an iconic bridge, linking Sumatra and Java.

OUTLOOK: As a nation of regions, Indonesia’s decentralisation agenda recognised a fundamental national characteristic that had long been suppressed by previous authoritarian governments.

By embracing the diversity of the country, the door was opened to the resolution of many damaging political disputes. Now, that political agenda has given rise to an economic one, as efforts to spread wealth around the nation are driven both by the regions and by the central government. Finding a way to harmonise these two sources of development will be the key to future successes, with this challenge being the focus of many of the republic’s brightest minds. Meanwhile, private sector investment, both domestic and foreign, will follow the progress of this balancing act with greater and greater attention. The potential opportunities are huge.