Amid the world‘s worsening economic crisis, the Indonesian government needs to carefully plan the injection of scarce domestic capital. Lowering the minimum reserve requirement ratio of commercial banks is one possible option for boosting loan provisions for the real sector, including infrastructure and consumer-driven sectors.

Investments in ports, roads, railways, telecommunication and higher education would be a good way to lay the foundation for a favourable business environment.

The growth of regional economies has proved that a diversified, self-sufficient regional economy with the highest possible local content and distribution is more resistant to external shocks than large, mono-structured units, which produce mainly for export.

Mass-production has proven incapable of adjusting to changing environments and has come faced crises in most industrialized countries since the late 1970s.

The backbone of any well functioning economic region is vibrant small and medium sized enterprise and modern infrastructure, including access to the internet.

There are several alternatives the government could take to engineer economic growth.

Educational institutions including universities and vocational training centers can provide endogenous change.

In order to reduce risks however, endogenous development it is preferable to foster regional networks that provide innovation, know-how, capital and human. Ideally, this leads to the formation of production clusters that can efficiently respond and adjust to demand.

Regional centers of craftsmanship can function as the nucleus for such a development. By raising expenditures for research and development, through the promotion of spin-offs from universities for example, innovative environments, delivering new product ideas can be created.

The next step is to turn these ideas into manufactured goods in relatively low amounts, minimizing the risks (economies of scope).

The government can support the establishment of businesses through tax reductions, soft loans, and the provision of real estate and special tariffs for communal services such as waste disposal or water and sewerage.

Political and economic stability is a precondition for all of the above. Detailed assessments of the share of regional per capita income for consumption and how much is spent on imported goods can indicate possible fields of investments for Indonesian companies.

A general rule applies: The smaller the company, the more it should concentrate on niche segments of the market and deliver solutions with a high degree of services.

Strategic alliances can be of benefit to both partners by, for example, sharing expenditures for research and development or using each others distribution network. Marketing activities can be bundled and undertaken by co-operatives.

The foundation for a successful approach in vitalizing regional economies is sound regional management.  Important to note is that this process needs to be institutionalized through the creation of regional planning offices that can conduct program management for tasks that are to big for local government units, such as the construction of sewerage plants and water works.

Project managers should be given authority over the communal level.

The transfer of soft loans could also be done by the regional planning office, as well as the issuance of bonds for financing regional infrastructure. If these options of raising and channelling development funds are chosen, the possibility of placing a member of the Corruption Eradication Commission (KPK) in this new agency could be considered. They could alternatively be placed at each level of the administrative echelon that deals with large sums.

Political legitimization needs to be obtained from the involved communities and the planning office should have a strong mandate from the central planning office in order to co-ordinate and implement the identified projects.

In the interest of swift progress, central law should dominate local law. The regional planning office could also serve as the contact point for potential investors and co-operatives and function as a link between companies and communal administrations by integrating communal plans into a regional plan.  

In order to enforce the regional plan vis à vis the local government units, the allocation of funds from the central government needs to be more harmonious.

The writer is a geographer at the KfW Development Bank. The views expressed in this article are solely the author’s.

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