East Java growth diagnostic : identifying the constraints to inclusive growth in Indonesia's second-largest province

60959 East Java Growth Diagnostic February 2011 Identifying the Constraints to Inclusive Growth in Indonesia's Second-Largest Province THE WORLD BANK OFFICE JAKARTA Indonesia Stock Exchange Building, Tower II/12-13th Fl. Jln. Jenderal Sudirman, Kav. 52-53 Jakarta - 12190 Phone: (+6221) 5299 3000 Fax: (+6221) 5299 3111 THE WORLD BANK The World Bank 1818 H Street N.W Washington, D.C. 20433 USA Phone: (202) 458-1876 Fax: (202) 522-1557/1560 Email: feedback@worldbank.org Website: www.worldbank.org Printed in February 2011 Cover and chapters photos are: Copyright @ Maulina Cahyaningrum for the middle photo on the front cover; REDI for the photos on Chapter 1, Chapter 2, Chapter 3 and Chapter 5; upper and lower right photos on the front cover and Chapter 4 are from the collection of World Bank Photo Library. All rights reserved. East Java Growth Diagnostic: Identifying the Constraints to Inclusive Growth in Indonesia's Second Largest Province is a product of staff of the World Bank. The findings, interpretation, and conclusion expressed herein do not necessarily the views of the Board of Executive Directors of the World Bank or the Government they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomination, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement of acceptance of such boundaries.  East Java Growth Diagnostic Identifying the Constraints to Inclusive Growth in Indonesia's Second-Largest Province  Preface II EAST JAVA GROWTH DIAGNOSTIC Acknowledgements This report was prepared by a team from the World Bank led by Cut Dian Agustina, together with Ahmad Zaki Fahmi and Harry Hasan Masyrafah. Excellent research and data analysis assistances were provided by Indira Maulani Hapsari and Sukmawah Yuningsih. The team would like to acknowledge and appreciate the important contributions of Regional Economic Development Institute (REDI), a research institution located in Surabaya, which is also World Bank's local partner in preparing the report. REDI team that was led by Indra Fauzi and Ilmiawan Auwalin together with the team members consist of Winifred L. Wirkus, Rumayya, Abdul Mongid, Bondan Satriawan, Rifai Afin, and Wahyu Wibowo has prepared the background report of East Java Growth Diagnostic, conducted data collection and qualitative survey to private sectors and bank institutions, as well as assisted in organizing workshops to accommodate input and feedback from stakeholders and public. The larger team contributing to the preparation of this report consisted of Fahmi Wibawa who provided operational support, Rizki Atina and Sandra Buana Sari that provided logistical support, Bastian Zaini for GIS maps support, and Ryan Sanjaya for additional data support. Special thanks to Diane Zhang for editing the report and Maulina Cahyaningrum for helping with the formatting and production of the report. Valuable comments and feedback were received from Amin Subekti, Enrique Blanco Armas, Gregorius D.V. Pattinasa- rany, Diane Zhang, Shubham Chaudhury, and William Wallace, all from the World Bank, and Soebagyo from the Faculty of Economics, University of Airlangga. The work also benefited immensely from a firm-level survey undertaken by KPPOD and The Asia Founda- tion in 2007. Particular thanks for Romawaty Sinaga and Erman Rahman from the Asia Foundation who has generously agreed to share the survey data to us and providing some clarification on the data issues. The team also grateful for the insights and valuable input received from the one-to-one consultation and discussion with local governments and private institutions particularly to Dr. Ir. H. Sambari Halim Radianto (Bupati of Gresik), Drs. H. Moh. Qosim, M.Si (Vice Bupati of Gresik) and other government officials in Kab. Gresik, Ir. Tri Rismaharini, MT (Mayor of Surabaya) and staffs, Wibisono (Bank of Indonesia, Surabaya) and staff, Dr. Ir. Jamhadi, MBA (Kadin Surabaya), Dr. Sigit Sardjono, M.Ec (Kadin Surabaya) and other KADIN members, Djarwo Surjanto (PT Pelindo III), Drs. H. Sangkala (Port Administration of Tanjung Perak) and staffs, Hoedy Pramono Moedjiardjo (PLN East Java) and staffs, Yoke C. Katon (SIER), Joko Triono (SIER), M. Kunto Abirowo (SIER), Drs. Anton Subagiyanto, MBA (APINDO), Ariyanto (APINDO), Gunawan (APINDO), and Reswanda (SME representative). Appreciation was also extended to the participants in the public consultation workshop for the valuable comments and feedback provided to the team. We would also like to express our special gratitude to the Governor of East Java, Dr. H. Soekarwo, M.Hum, and his staffs in the Bappeprov East Java for the consistent support provided to the team since the prepara- tion, implementation, and finalization of the report. Special thanks to Dr. Ir. Zainal Abidin, MM (Head of Bap- peprov East Java), Ir. Budi Setiawan, MMT, ME (Head of Economic Administration Bureau in Setda East Java), Ir. Jumadi, MMT (Head of Economic Unit in Bappeprov), and Ir. Hadi Prasetyo, ME (Assistant II for Economy and Development) for the guidance and input provided to the team. Last but not least, the team thanks Amin Subekti (Senior Economist) and Shubham Chaudhury (Lead Economist) for the overall guidance and supervision throughout the process. Financial support was pro- vided by Multi-Donor Diagnostic Facility on Shared Growth (DFSG) as part of the Poverty Reduction and Economic Management (PREM) unit program on Achieving Shared Growth. EAST JAVA GROWTH DIAGNOSTIC III  Glossary of Terms ADB Asian Development Bank APINDO Indonesia Business Association (Asosiasi Pengusaha Indonesia) AUSAID The Australian Government Overseas Aid BI Indonesia's Central Bank (Bank Indonesia) BKPM Investment Coordinating Board (Badan Koordinasi Penanaman Modal) BOR Berth Occupancy Ratio BOS School Operational Assistance (Bantuan Operasional Sekolah) BPN State Land Agency (Badan Pertanahan Nasional) BPR Micro Credit Bank (Bank Perkreditan Rakyat) BPS Central Bureau of Statistics (Badan Pusat Statistik) BPWS Board of Suramadu Development Area (Badan Pengembangan Wilayah Suramadu) CPI Corruption Perception Index FDT Food, Drink, and Tobacco GDP Gross Domestic Product Gerdu-Taskin Integrated Movement Priority Poverty Alleviation Program (Gerakan Terpadu Pengentasan Kemiskinan) GFC Global Financial Crisis GRDP Gross Regional Domestic Product HRV Hausmann, Rodrik and Velasco IDB Inter-American Development Bank IFC International Finance Corporation ILO International Labor Organization IMB Business Registration and Construction Permits (Izin Mendirikan Bangunan) IPP Independent Power Producer ISO International Organization for Standardization Jamkesmas Health Insurance for the Poor (Jaminan Kesehatan Masyarakat) KIM The Maspion Industrial Estates (Kawasan Industri Maspion) KPPOD Regional Autonomy Watch Committee (Komite Pemantauan Pelaksanaan Otonomi Daerah) KUS Computers for Schools (Komputer Untuk Sekolah) LDR Loan to Deposit Ratio LNG Liquefied Natural Gas LPEM FEUI Institute of Economic and Social Research - Faculty of Economic Universitas of Indonesia (Lembaga Penyelidikan Ekonomi dan Masyarakat