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The views presented in this paper are those of the author(s) and do not necessarily reflect those of the Asia Research Centre or Murdoch University.


Working Paper No. 85

Economic Change in East Java: Balanced

Development or Skewed Growth?
Heath McMichael
February 1998

© Copyright: No part of this publication may be reproduced in any form without permission.

Introduction: ‘Balanced Development’ in East Java

An understanding of the development process in Indonesia is enriched by an understanding of the dynamics of its provincial economies.1 The impact of macroeconomic indicators at the national level in Indonesia is frequently distorted at provincial level where factors such as local comparative advantage, the extraction of concessions from the centre and the quality of local government have a significant bearing on the pattern of development. Although regional development in Indonesia has mirrored the dramatic socio-economic transformation in most parts of the country since the 1960s, it has not been uniform, giving rise to significant variations between provincial economic growth rates and per capita GDP.

According to a major 1989 survey of regional development in Indonesia, regional variations in economic performance are accounted for by both ‘exogenous’ and ‘endogenous’ factors.2 Exogenous factors exerting an influence on provincial economies include movements in international commodity prices and the differential regional impact of national programs. Endogenous influences, on the other hand, include effective provincial bureaucracies and social cohesion brought about by equitable income distribution patterns. The impact of endogenous factors is most pronounced when combined with favourable initial conditions or external circumstances.

The interplay of endogenous and exogenous factors may be observed in one of Indonesia’s most important provinces, the Province of East Java. External influences on the East Java economy, for example, improved agricultural techniques and Indonesia’s generally stable macroeconomic environment have combined with a variety of local factors to create a markedly different pattern of development in East Java in comparison with industrialising economies elsewhere in East Asia. According to a landmark study published in 1993, in the absence of natural resources such as oil, timber or minerals, East Java has been able to capitalise on important endogenous strengths such as geographical diversity, a large population, and generally competent bureaucracy to sustain a ‘balanced’ pattern of growth and development since the 1960s.3 The study argues that the momentum for balanced development stemmed from the widespread adoption of ‘green revolution’ rice technology which stimulated increased production and higher farmer’s incomes. It also owed much to increasing central government expenditure in the Province, a broad industrial base, rising wages and purchasing power. East Java was able to capitalise on the advantages of having a bigger manufacturing sector than any other Province, well-established transport and irrigation networks and a rice-growing and cash crop sector responsive to rising demand.

In the light of economic changes taking place at the international, national and local level over the last ten years, however, the question arises whether the balanced development thesis can be sustained today. Is it possible to assume, for example, that East Java’s rapid economic growth and integration into the global economy have undermined the pattern of balanced development in the Province? Have the various endogenous and exogenous factors at work in East Java laid the foundation for a more ‘skewed’ pattern of growth in the 1990s?

This paper endeavours to show that the concept of balanced development remains valid as a tool for describing economic and social change in East Java. The paper begins with an examination of East Java’s present economic landscape focusing on developments in the Province’s infrastructure and trade and investment trends. East Java’s economic links with countries in the region, particularly Australia are then discussed. The contribution made by East Java’s administrators to the development process is considered and an analysis undertaken of some of the constraints on growth found in the Province. The paper concludes with a discussion of East Java’s role as a gateway to Eastern Indonesia and importance as a commercial partner for Australia.

East Java’s Economic Landscape

The East Java economy has continued to show strong growth through the 1990s (see tables one and two). With a population of 33 million in 1990, East Java has one of Indonesia’s highest provincial GDPs at around US$ 25 billion per annum and showed an increase of about 7.8 per cent in 1995 in real terms. The Province’s growth rate remained above the national average between 1990-1995. Some sectors, e.g. building and construction, maintained double-digit growth rates. Per capita income in East Java was just over US$ 800 in 1995 and at that rate, the Province’s income will double in just over nine years.

Like other parts of Java, East Java is moving from an agricultural to a manufacturing industry and service economy. Table three shows that agriculture’s contribution to provincial GDP dropped from 32 per cent in 1983 to only 20 per cent in 1995, while industry’s share of GDP rose from 16 to 25 per cent. However agriculture still employs roughly half of East Java’s workforce.

East Java boasts a number of Indonesia’s leading state corporations, for instance the state-owned fertiliser and chemical producer, PT Petrokimia Gresik; the state cement corporation, PT Semen Gresik, which has completed a massive plant expansion for export near the port of Tuban on the north-west coast of East Java; and state plantations producing sugar, coffee, tobacco and cacao.

The Province’s international profile is beginning to emerge. There are now 35 international flights each week linking the East Java capital, Surabaya, to destinations such as Singapore, Hong Kong, Malaysia and China. A number of government-to-government links with other countries have been established in support of trade and investment relationships. East Java has sister province relationships with Australia (the State of Western Australia ), the United States (Surabaya-Seattle sister city) Japan and Korea. The United States and Japan maintain consulates-general in Surabaya in support of their respective relationships with East Java while offices of the Australian trade commission, Austrade, and the Western Australian Trade and Investment Office are located in Surabaya.

The Surabaya metropolitan area and the surrounding Gerbangkertosusila (GKS) development region are the jewels in East Java’s economic crown. Taking in Surabaya and the centres of Gresik, Bangkalan, Mojokerto, Sidoarjo and Lamongan, the GKS has a total population of 7.2 million people, of which 50 per cent are urban dwellers, and accounts for over 40 per cent of the province’s economic output. Between 1980 and 1990, the annual increase in population was approximately 1.75 per cent, higher than for East Java as a whole and indicating a trend in migration from rural to urban areas.

With a population of around 2.8 million people and a per capita income three times the provincial average, Surabaya is showing evidence of continuing strong growth. The dramatically-changing skyline in and around Surabaya is arresting, especially when viewed beside the city’s agrarian economic hinterland. One still sees in suburban Surabayan streets at night ox-drawn carts hauling their loads of bamboo scaffolding from one construction project to the next: a sight no longer common in Jakarta’s streets.

Surabaya is developing a consumer culture with shopping malls selling luxury goods and fast-food outlets catering to young people who seem to possess ample spending money. One indicator of growing consumerism is the success of Surabaya’s ‘Time Zone’ recreation centre which took receipts of around US$ 40,000 on a single Saturday not long after opening in late 1995. It is estimated that Surabaya incomes may be rising by as much as 20 per cent a year and at least 5 per cent of the city’s population earn more than A$ 50,000 a year. Surabaya has become the shopping centre for the rest of East Java: an estimated 18 million East Javanese bought goods in Surabaya in 1994. A further indication of growing affluence in Surabaya is the construction of private health care centres set up under joint ventures with Singaporean and Australian health care companies. Rather than flying to Singapore or Australia for treatment or elective surgery, Surabayans who can afford it prefer to obtain health care at local private clinics and boutique hospitals.

East Java is the home of major private sector enterprises some of which have grown to national prominence. One example is Maspion Industries which employs over 30,000 people in consumer goods and aluminium manufacturing and cigarette producer, PT Gudang Garam which, with sales per year of around US$ 2.5 billion, is Indonesia’s highest corporate tax-payer. Another significant corporation with its roots in East Java but which is looking to expand its operations nationally is the highly-diversified Sekar Group. Another example is Sekar Group which dominates the rapidly growing food procesing sector in East Java manufacturing chilled beef, fresh frozen prawns and cashews under the Finna label. To capitalise on increasingly sophisticated consumer tastes in Indonesia, Sekar is developing new food brands with domestic and foreign food suppliers which the company will distribute nationally through its rapidly expanding Fair Price supermarket chain.

The most successful private sector enterprises in East Java are essentially owned or controlled by Chinese business interests. While Chinese family businesses are the predominant players in the East Java economy, they are not the only ones: non-Chinese, ‘pribumi’ business interests also exist and thrive. An example of a successful pribumi corporation in East Java is the Jawa Pos Group, headed by the charismatic Dahlan Iskan. Jawa Pos has diversified from its origins as a Surabaya morning daily into publishing, property development and sports promotion. The company is well cashed-up and is actively seeking new fields for property investment in Indonesia’s eastern provinces. It enjoys a good relationship with the Governor of East Java who is keen to see pribumi businesses prosper in his Province.

Growth in the manufacturing sector is fueling growth in other sectors, especially property and finance. Major national property developers are active in East Java and are contributing to a buoyant building and construction sector in that Province. Examples include Dharmala Group, which is controlled by the Gondokusumo family and was originally based in Surabaya, and the Citra Group belonging to Ir Ciputra.4 East Java-based developers are also active in the Province, for example the builders of the Surabaya Sheraton, PT Pakuwon Jati and PT Sinar Galaxy, the developer of the largest shopping mall in eastern Indonesia.

These developers are responsible for large-scale satellite towns under construction in western Surabaya incorporating residential accommodation, golf courses, office blocks and shopping malls. The scale of these projects is vast by any standards: Citra Group’s Citra Raya estate alone is worth US$ 500 million and covers 2,000 ha. Some 2,400 residential units have been completed at Citra Raya and the target is 20,000 houses/apartments. The project envisages relocating the Surabaya Zoo from its original Wonokromo site to the Citra Raya site. The cost of individual apartments in the high-rise condominiums being built in these real estate projects is exorbitant with prices reaching as high as US$ 400,000 for a four bedroom apartment in Dharmala’s Graha Famili condominium towers. Such high prices seemingly reflect the developers’ belief in the strength of the market for prestige residential accomodation.

Surabaya has witnessed a quantum leap in the number and quality of its hotels. The city now boasts five 5-star hotels — the Hyatt, the Shangri-La, the Sheraton, the Mandarin5 and, since August 1996, the Westin. Since 1994, the number of 3-5 star-rated hotel rooms has increased by approximately 60 per cent, making it difficult for hotels to lift their occupancy rates above 60-70 per cent. Two 3-4 star hotels have recently opened, the Novotel and Ibis Hotels operated by PT Accor Asia-Pacific Indonesia, and more are currently in the planning stage, e.g. the Century Atlit in Jln Tunjungan and the Holiday Inn in Jln Basuki Rachmat. Completion of these new hotels has greatly expanded the supply of banquet and conference facilities and could assist Surabaya attract international conventions, although it still has a long way to travel before it can rival Jakarta and Bali in this regard.

Although Surabaya suffers from an over-supply of quality retail and office accommodation, high-rise residential condominium developments have mushroomed in various parts of the city, for example the Adistana towers in Jln Ngagel and the Paragon apartments in Jln Mayjen Sungkono. The boom in construction has led to a scarcity of premium quality bricks for prestige building projects as they are not manufactured locally. The shortage of expertise in prestige property asset managment in East Java (and elsewhere in Indonesia) is a further impediment to the long-term viability of the building and construction sector.

East Java enjoys cheaper and more widely available land than in other provinces in Java and this has resulted in a proliferation of golf course projects, especially in Surabaya. Major golf course developers in East Java include Sekar Group and cigarette manufacturer PT Sampoerna. Foreign golf course designers, including Peter Thompson from Australia, have been employed by these firms to establish ‘prestige’ links. However, according to one East Java developer, the Province golf course development may have already reached saturation point as there are, at best, only 300 regular players in Surabaya.

Deregulation of the Indonesian financial sector in the 1980s witnessed rapid growth in East Java’s finance and capital markets. There are 17 foreign banks with branches in Surabaya, including ABN-Amro, Standard and Chartered, Citibank and Hong Kong Bank. When it opened in 1989, the Surabaya Stock Exchange was Indonesia’s first privately owned exchange. While the Jakarta Stock Exchange is thirty times bigger, trading US$ 150 million a day compared to Surabaya’s US$ 5 million a day, the Surabaya exchange has entered cooperative ventures with overseas exchanges, including the Australian Stock Exchange, to improve its capabilities in long-distance trading.

Infrastructural Development

East Java has good infrastructure: roads are largely passable, phone calls are getting through more easily these days, and power outages are rare. However the Province’s economic growth is making increased demands on infrastructure. Whereas electrical power supply is now adequate, the same cannot be said of water and rail transportation networks.

A number of major infrastructure works are planned or underway in East Java (see table four). When completed in 1998, the Paiton coal-fired steam power plant on the mid-north coast of East Java will have a combined output of over 3,000 MW. It involves both state corporation and private sector interests, including one with a subsidiary of Queensland’s New Hope Mining, PT Adaro Coal. The Paiton project will enhance the trans-Java grid which is already partly served by a coal-fired power station in Sidoarjo, south of Surabaya and the gas turbine power complex in Gresik to the north west of Surabaya.

The Madura Bridge Project aimed at linking a proposed industrial estate on the island of Madura, off Surabaya, with the mainland, has yet to commence, although proponents of the project claim to have secured a Japanese OECF loan to cover most of the project’s estimated $370 million cost. There are plans to build a pipeline connecting the Umbulan spring with Surabaya providing water for domestic and industrial uses. A number of domestic and overseas parties, including Australian firm Clough Engineering Ltd, were involved in tendering for the project in 1992-1994. It appears likely that a consortium between the Jaya and Bimantara Groups will be awarded the contract by the Department of Public Works in Jakarta but there is no indication when the project will commence.

An extensive network of toll roads will be built linking Probolinggo, Pasaruan, Malang and Mojokerto with Surabaya as part of the planned trans-Java toll road network (see map attached). Although foreign contractors have shown an interest in toll roads, it is believed Jakarta toll road operator PT Citra Marga Nusaphala Persada, belonging to the President’s daughter, will get the lion’s share of the work to build the Surabaya network. A physical constraint in constructing the eastern side of the toll ring road through the Kenjeran area to the east of the city is the large number of prawn ponds (tambak udang). The prevalence of prawn ponds in this area is also impeding the development of residential and recreational land-use leases on the eastern side of the city.

The upgrading of Juanda airport is another project that has been much discussed but is taking a long time to come to fruition. A Canadian engineering company is believed to have an interest but little is happening at present. A more promising development is the expansion of the existing gas pipeline supplying natural gas from the Kangean Islands off the north coast of East Java (Bali North project) to a gas turbine power station at Gresik. Gas is now connected to the main industrial estates around Surabaya and a spur line is being laid beside the highway to Malang. However ‘leakages’ of gas from the pipeline by unauthorised users will undermine the gas pipe’s effectiveness as a power source.

In the field of telecommunications, up to 750,000 new telephone lines are due to be added to the telephone network by 1999. According to one interlocutor in the East Java Government, it only takes 7 days to obtain a telephone connection in Surabaya without bribes. For the subscriber, payment of the telephone connection may be made by instalments to the Government’s domestic telephone instrumentality, PT Telkom.

The national government has a clearly ambitious plan to link Gilimanuk in Bali with Banyuwangi on the east coast of East Java by a bridge across the Bali Strait. On a visit to Malaysia in 1996, President Soeharto reportedly discussed the scheme with Malaysian Prime Minister Dr Mahathir in the context of discussions about an equally ambitious proposal to build a bridge connecting Sumatra with the west coast of Malaysia. Like the Madura bridge, however, implementation of the Bali Strait project will take considerable time.

Other private sector mega-projects in East Java illustrate the scale of infrastructure works coming on stream or in the pipeline. Prominent Indonesian entrepreneur, Hashim Djojohadikusomo of PT Batu Hitam Perkasa, is constructing a US$ 2 billion olefin and ethylene plant near Tuban on the Province’s north west coast. The plant will produce olefin and aromatic by-products for the plastics industry. Investment capital for the project will be partly sourced from Japan.

A US$ 500 million copper smelter project in Gresik near Surabaya, owned by the US copper and gold joint mining venture, PT Freeport Indonesia (25 per cent), and Mitsubishi Corporation of Japan (75 per cent), has been delayed through financing difficulties and construction has yet to begin. The multinational engineering and construction company, Asea Brown Boveri Ltd, has commenced expansion of its US$ 33 million boiler plant in Gresik to become ABB’s turbine and power generator equipment plant for the whole of Southeast Asia.

Trade and Investment Trends

While Indonesia has benefitted over the last thirty years from exploiting national comparative advantage through specialization and trade, so too has East Java. East Java’s exports continue to show healthy growth with 1995/6 figures produced by the Surabaya Branch of the Bank of Indonesia showing a 15 per cent average annual growth with exports valued at US$3.04 billion. Wood products (including teak furniture), sports shoes and frozen prawns together account for over US$1 billion in export earnings although the trend is away from apparel and sports shoes towards less labour intensive goods. Average annual growth of imports in 1995/1996 was a robust 20 per cent and imports were valued at US$3.05 billion, mainly in metals, machinery and chemicals. These imports reflect increased investment in chemicals and metals processing industries.

The East Java Government’s general approach to investment attraction is to expand the Province’s industrial base and encourage value-added industries particularly those that add value to export commodities such as processed fruit (e.g. canned mangoes). Priority areas for investment include seafood processing, horticulture, production of animal feed and timber processing. Leather goods and apparel and exploitation of the Province’s mineral deposits, for example, bentonite, are also important.

Despite East Java’s reputation for independence, most major investment and planning decisions are taken in Jakarta where the majority of corporate headquarters and central government planning agencies are located. This is especially true for East Java’s infrastructure projects which are controlled by government ministries in the capital.

According to the East Java Investment Coordinating Board, foreign investment over the period 1967-1996 was valued at around US$ 24 billion. This compares with a figure of US$ 158 billion worth of cumulative foreign investment for the whole of Indonesia over the same period. Foreign investment approvals remain steady with about US$ 500 million approved in 1995. Under the present Repelita (1993-1998), investment in East Java from public and private sources is expected to reach US$ 75 billion in the ratio 20:80%, mainly in manufacturing.

East Java’s principal foreign investors are Taiwan, Japan, Singapore, Hong Kong, South Korea, the United States and the Netherlands. New foreign manufacturing joint ventures favour setting up their operations in one of East Java’s new privately-owned industrial estates, such as Dharmala Group’s Ngoro Industrial Park (NIP-see map attached). NIP is now 60 per cent subscribed with joint ventures from Taiwan, Hong Kong and Singapore producing light manufactured goods, such as paper clips, name tags and canned mangoes, for re-export.

The climate for foreign investment in East Java is likely to be stable for the forseeable future. Although labour disputes have become more common as workers seek to obtain higher wages and better conditions in East Java’s factories, the impact of labour unrest in East Java is kept in check by the Indonesian security apparatus which retains tight control of the Province.6 In 1996 the minimum daily wage in East Java reached Rp 4,500 (about $A 3) reflecting strong demand for unskilled and semi-skilled labour. The East Java office of the Department of Manpower monitors local companies and foreign joint ventures to see that the minimum wage is met and companies are now required to provide a meal allowance to workers. During an industrial dispute in Sidoarjo, south of Surabaya, in 1996, one of East Java’s largest employers, the home appliance manufacturer PT Maspion, avoided trouble by broadening its wage structure to include food and travel allowances for all its employees.

East Java-Australia Trade and Investment Links

Bilateral trade between Australia and Indonesia is burgeoning. In 1995-1996, the value of Australia’s exports to Indonesia was A$ 2.77 billion, a 31 % increase over the figures in the previous year. Indonesian exports to Australia over the same period amounted to A$ 1.52 billion. Although the unreliability of data for trade flows at provincial level in Indonesia makes it difficult to make judgements about the growth of Australia’s trade with East Java, East Java Government figures reveal that Australia ranks amongst the ten biggest exporters to East Java. The main exports are commodities, with soft grain wheat suitable for Bogasari Flour Mill’s noodle production being a significant item. Australia currently occupies seventh position as a destination for East Java exports which are worth US$ 110.5 million. Main export items to Australia are paper, plastic bags, writing pads, kitchen ware and cement tiles.

Air freight rates for exports from Australia are sustained by passenger services and inbound freight rates and are generally low. This fact, combined with Australia’s proximity to Indonesia relative to other suppliers make it a competitive supplier of both low and high value perishable items, including fresh fruit and vegetables. Increased exports by air to Surabaya are likely to result from the expansion of air services between Australia and East Java. The Australian airline Ansett has already commenced a service linking Australia’s east coast cities with Surabaya via Darwin and Bali.

In terms of investment, Australia ranks ninth as a foreign investor in East Java with US$ 1.89 billion invested in 15 approved projects in East Java, mainly in the construction sector. Amongst those projects that have been realised are joint ventures involving Boral and CSR Ltd, producing export-quality plasterboard and readymix concrete respectively. A joint venture between local developer PT Ready Indah and NSW company Healthcare of Australia will construct a A$ 25 million prestige hospital for high-income earners due to be completed by 1997. East Java investment in Australia is concentrated overwhelmingly in residential and some retail property, especially in Western Australia.

The Role of the Bureaucracy

The ‘Balanced Development’ study makes the point that East Java’s successes in social and economic policy is at least in part attributable to a professional bureaucracy and the perceived legitimacy of the provincial administration.7 In economic policy terms, the key institution is the provincial planning agency, BAPPEDA, headed by Ir Oemar Moehtadi. As BAPPEDA’s Vice Chairman and later Chairman under the former pro-business Governor of the Province, Soelarso, Moehtadi guided the establishment of East Java’s international linkages, including the Western Australia-East Java relationship. Since the present Governor, Basofi Sudirman, came to power in 1993, Moehtadi has had an even more influential role to play in economic policy-making, given Basofi’s preoccupation with East Java’s political agenda.

Another provincial administrator with a wealth of experience in economic and fiscal management is former Governor Soelarso’s long-time assistant and current head of the East Java Development Bank, Ir Moh. Zuhdi. Under Soelarso, Zuhdi played a prominent role in negotiations with central government agencies on major infrastructural projects in East Java, for instance the Umbulan pipe project. While East Java’s reputation in the field of economic management has been built on the shoulders of career public servants such as Moehtadi and Zuhdi, it remains to be seen whether their imminent retirement leaves a gap of experience and professionalism that the next generation of administrators will find difficult to bridge.

Another provincial agency with an important planning function is the East Java Regional Investment Coordinating Board (BKPMD). Changes announced as part of the Indonesian Government’s deregulatory packages of 1993-1994 covering investment procedures has given the BKPMD a more central role in the issuing of land use permits for joint venture operations. The head of the BKPMD is Drs Bambang Koesbandono.8

With an annual budget of US$ 6 billion, the Surabaya Municipal Authorities (Pemerintah Kotamadya DATI II) are responsible for urban planning and management issues, including approvals for property and infrastructure projects in the city. Amongst notable performers at this level of administration are Ir Alisjahbana in BAPPEDA Tingkat II and the head of the Public Works Service, Ir Benyamin Hilly. Both men have had experience of the international environment: the former through his postgraduate studies in urban planning in the Netherlands and the latter through his involvement in setting up the Surabaya-Seattle Sister City Relationship. Hilly is currently working with Djohan Silas and the Surabaya Institute of Technology to set up a Masters of Urban Planning degree course with the Royal Melbourne Institute of Technology.

Government cooperation at sub-provincial (regency)-level in East Java is important in attempts to address public transportation, water supply, drainage and environment management issues. An example of effective cooperation between two regency administrations is that between the municipality of Surabaya and Sidoarjo Regency which share the revenue from jointly operating the Bungurasih land transport terminal in the south of Surabaya

Constraints to Growth

Against this pattern of rapid economic growth there are a number of natural and man-made constraints which keep the Province’s rate of growth in check. East Java’s greatest single physical handicap is the lack of adequate and reliable supplies of clean water for industrial and residential use. The water shortage is particularly critical at the end of the long dry season in East Java. Excessive utilisation of bore water from underground aquifers is leading to salination of Surabaya’s water table

Under the Indonesian Government’s PROKASIH clean rivers program, East Java was selected in the early 1990s as a model for the implementation of stringent regulations aimed at reducing the level of pollutants being discharged into the Province’s rivers. Firms producing substantial amounts of industrial effluent are required to install waste water treatment mechanisms. Many utilities producing effluent, however, are reluctant to invest in expensive pollution control devices. For instance, Surabaya’s public hospital system, which discharges biological effluent directly into the Brantas River, has too small a budget to pay for sophisticated waste water treatment mechanisms. An Australian Government-funded project, costing A$ 25 million and now in its third year, is attempting to upgrade East Java’s pollution monitoring apparatus through institution-strengthening and human resource development. The project is proceeding with the full cooperation of the Indonesian Environment Agency (BAPPEDAL).

Endemic flooding in parts of East Java is a further physical impediment to growth. The Jasa Tirta Water Management Authority, which manages East Java’s main waterway, the Brantas River, and its tributaries, was established in the 1960s in response to the need to engage in flood mitigation and irrigation works.

Although green-fields development sites have traditionally been plentiful in East Java, the increasing difficulty of acquiring land is a major constraint on new investment in the Province. Land acquisition is a complex and expensive undertaking for private and public sector developers alike. According to the National Planning Agency, BAPPENAS, there are more than 600 regulations which relate to urban management at the level of the Regency in Indonesia. Many developers in East Java (and elsewhere in Indonesia) claim to own the rights to land before actually acquiring them.

The requirement for domestic and foreign investors in East Java to submit a BAPPEDAL-approved environmental impact assessment (AMDAL) on new factory sites is a further constraint. In Australia, planners and engineers would be involved, but in Indonesia what is required is adherence to a set of guidelines without very much specific matter relating to the particular project.

The fiscal relationship between Jakarta and the provinces has a significant bearing on regional development in Indonesia but has received little attention in the literature on the subject.9 In East Java, the shortage of local government revenue is a major constraint on growth and acts as a handicap to effective urban planning. By way of illustration, the Regency of Sidoarjo, to the south of Surabaya, finds it increasingly difficult to pay for the central government’s program of decentralised services. With a population of 1.17 million people, Sidoarjo is growing faster than any other Regency in East Java. Urbanisation is proceeding apace on account of the good access provided by the Surabaya-Gempol toll road and the development of a significant industrial base in the Regency, based on plastics production and household goods. According to the East Java Government, however, Sidoarjo does not generate enough income to pay for public sector salaries and services which must be subsidised by funding from both central and provincial government coffers according to complex budgeting procedures. In an attempt to generate additional revenue, the Regency has been forced to increase land taxes, a measure highly unpopular with local rate payers and industry alike.10

A shortage of local government funding also affects the low-cost urban housing sector. In East Java’s urban areas, the high cost of land makes traditional single storey housing projects for low-income earners prohibitively expensive. Although property developers are bound by government regulations to provide high, middle and low-income housing in the ratio 1:3:6, affordable housing projects have tended to be located on the margins of cities such as Surabaya where land is cheaper.

Conclusion: East Java as the Gateway to Eastern Indonesia

The foregoing analysis of East Java illustrates the influence of exogenous and endogenous factors at work on a significant regional economy in Indonesia. External trade, domestic and foreign investment and government planning regulations combine with the Province’s expanding infrastructural base, improved transport and communications networks and a competent bureaucracy to sustain a rapid pace of economic growth and social change. As East Java deepens its integration with the global economy, the pattern of development in the Province remains essentially balanced with no sector of the economy falling behind dramatically in its contribution to GDP. The majority of East Java’s population appear to share in the prosperity brought by economic growth, although differences between rural and urban incomes suggest some assymetry in the way the benefits of growth are distributed within the Province. The model of ‘balanced development’ remains a useful concept for explaining East Java’s growth and development in both a national (Indonesian) and regional (Southeast Asian) context.

Australia’s economic interests in East Java will continue to grow. Through its pre-eminent trade hub in Surabaya, East Java provides a gateway to Eastern Indonesia, linking the country’s economically isolated eastern provinces with its industrial heartland on Java. East Java’s links to Eastern Indonesia are well defined. For example, PT Freeport Indonesia supplies its massive gold and copper-mining operations in Irian Jaya from Surabaya and the billion dollar Newmont/Fleur Daniel gold mine in Sumbawa, is also likely to obtain fresh produce and other supplies from East Java. East Java’s links to the east are likely to strengthen as Indonesia gives increased attention to the development of its eastern provinces.

Indonesia undoubtedly views development of the eastern provinces as a high priority. The Indonesian Government is proving to be an energetic supporter of the proposed Australia-Indonesia Development Area (AIDA) between Eastern Indonesia and Australia.11 The decision to establish AIDA, announced at the Australia-Indonesia Ministerial Forum in Jakarta on 24-25 October 1996, marks a commitment by Indonesia to strengthen the network of existing Indonesia-Australia sub-regional partnerships, such as that between East Java and Western Australia.12

Both as a gateway to Eastern Indonesia and as a significant economic entity in its own right, East Java offers Australian companies many attractive commercial opportunities. The goodwill generated towards Australia through education links and regular exchanges of personnel under the Western Australia-East Java MOU help to cultivate a positive environment for Australian companies seeking to do business with East Javanese enterprises or invest in the Province. The building of business partnerships, however, is not a one-way street. The strength of the economic relationship between East Java and Australia will depend on the extent to which East Java’s business sector is able to find opportunities in the Australian market. Far-sighted Australian firms and government agencies will give careful thought to East Java’s development aspirations and the legitimate commercial interests of its business community.


Dick, H., et al (eds) (1993) Balanced Development: East Java in the New Order, Oxford University Press.

Hill, H. (1996) The Indonesian Economy Since 1966, Cambridge University Press.

Hill, H. (ed) (1989) Unity and Diversity: Regional Economic Development in Indonesia since 1970, Oxford University Press.

McCawley, P. (1994) ‘State and Provinces: New Linkages between Australia and Indonesia’, paper presented at the Australia Today Indonesia ‘94 Bilateral Relationship Conference, Surabaya, 5 July.

Table 1. East Java in National Perspective




EJ Share

Note: Exports are non-oil and gas; t stands for metric tons; petroleum is in millions of barrels per day, 1994

Source: Central Bureau of Statistics; Investment Coordinting Board; East Java Traffic Control Office;

Bank of Indonesia

Table 2. Signs of Growing Activity





Note: All figures in millions unless otherwise specified; Electricity is billions of kilowatt hours produced by PLN, the national electric company (many factories produce their own electricity in-house); t stands for metric tons; export figures are Chamber of Commerce estimates.

Source: Jasa Marga Toll Road Corporation; East Java Transportation Department; East Java

Chamber of Commerce; East Java Statistics Office

Table 3. Changing Economic Structure and Economic Growth

Contribution to GDP (%)

Economic Growth (%)











Note: EJ is East Java, Ind. Is Indonesia.

Source: Central Bureau of Statistics; Surabaya

Table 4. Major East Java Infrastructure Projects


Description (est. date complete)

Est. Value (US$millions)

Notes: (a) all 2x2 lanes. (b) Bechtel Corp. of US is reported to be interested. (c) Bridge project has been delayed since early 1990s; Japanese OECF loan is still uncertain. (d) lengthen runway, build new facilities; Canadian company Bracknell is expected to do work. (e) double length of container pier to 1 000m; Citra Labtorogung is prime contractor. (f) Paiton Swasta I and II are both 30-year build-own-operate projects, both to produce 1230 megawats of electricity; Paiton Swasta I is owned by Mission Energy Company (40%), General Electric Capital Corp. (12.5%), Mitsui and Company, Ltd. (32.5%) and PT Batu Hitam Perkasa (15%); Paiton Swasta II is reported to be owned by Siemens Company (50%), PowerGen (35%), and Bumipertiwi Tatapradipta (15%). (g) 500 megawatt gas-fired plant; Enron Corp. of US is involved. (h) Umbulan Springs is a 4 000 litre per second freshwater source; the pipeline project has already been delayed several years due to financing difficulties. (I) 750 000 new telephone lines slated to be added by 1999.

Source: East Java Planning Board, various press reports


Hill, The Indonesian Economy Since 1966, Cambridge University Press, 1996, p 216.

2 Hill (ed), Unity and Diversity: Regional Economic Development in Indonesia since 1970, OUP, 1989, pp 52-53.

3 Dick et al (eds), Balanced Development: East Java in the New Order, Oxford University Press, 1993.

4 The pre-nominal ‘Ir’ denotes the possession of an engineering degree.

5 Sekar Group own the Mandarin which cost US$ 60 million to build.

6 Disturbances in Situbondo on the north coast of East Java in October 1996 highlighted the security apparatus' decisive response to incidences of socio-economic and religious unrest and revealed the Government's determination not to let tensions between Muslim groups and Chinese traders get out of hand in the lead-up to the May 1997 general election in Indonesia.

7 Dick et al (eds), op. cit. pp 15-18.

8 The pre-nominal ‘Drs’ denotes the possession of a graduate degree.

9 Hill (ed), op. cit., pp 47-48.

10 Conversation with East Java Vice Governor Soeprapto, Vice Governor’s Office, 18 September 1996.

11 Peter Hartcher, ‘Australian Dollars in Soeharto’s Eastern Quest’, The Australian Financial Review, 11 March 1997.

12 For a useful analysis of the role of sub-regional links between Australia and Indonssia, see Peter McCawley, ‘States and Provinces: New Linkages between Australia and Indonesia’, paper presented at the Australia Today Indonesia ‘94 Bilateral Relationship Conference, Surabaya, 5 July 1994. The relationship between Western Australian and East Java is governed by a Memorandum of Understanding signed in 1990 which provides for increased trade, investment and cultural exchanges with East Java.

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