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    The objective of this paper is to investigate what factors influence the growth of main Indonesian port cities. The analysis make use GLS to estimate the model using panel data from four major city in Indonesia (Surabaya, Jakarta, Makasar, and Medan) for period 1993-2001. This research found that growth in port cities in Indonesia determine by both manufacturer industries and the traffic of import goods.

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    The objective of this paper is to investigate what factors influence the growth of main Indonesian port cities. The analysis make use GLS to estimate the model using panel data from four major city in Indonesia (Surabaya, Jakarta, Makasar, and Medan) for period 1993-2001. This research found that growth in port cities in Indonesia determine by both manufacturer industries and the traffic of import goods.

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    © All Rights Reserved
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    10 views17 pages

    Economic Growth in Indonesian Port Cities

    Uploaded by

    Erlangga
    The objective of this paper is to investigate what factors influence the growth of main Indonesian port cities. The analysis make use GLS to estimate the model using panel data from four major city in Indonesia (Surabaya, Jakarta, Makasar, and Medan) for period 1993-2001. This research found that growth in port cities in Indonesia determine by both manufacturer industries and the traffic of import goods.

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    7 Economic growth of Indonesian port cities Eclangga A. Landiyanto & Arief H. Prasetyo 1. Introduction at port it uestion, The investigation of this question was important act only for Intellectual interest but aso for policy objective (Puja and Mor, 1996). In this paper, we analyze the Indonesia case, We analyze it because Indonesia is the biggest archipelago country with dominant role of pott cities. Based on Ray and Blankfeld Report (Ray and lankfeld, 2002), Indonesia have four main portcities. The firstoneis sated in North Sumatra, Second, Jakarta, the nation capital ia, Thitd is Surabaya, located in East Java. The last one is ‘Makasar, located in Ujung Pandang, These four cities are the biggest cities in Indonesia. The size of economic activity in those cities is quite high. Itindicated, the cole of por cites in Indonesia is very important Indonesian economy. The domination of those port cities strengthen. by Deichmann, Kaiser, Lall and Zallzi (2005) that said that over a longer time period, these factors may increase ot decrease in impostance. Initially, che conditions for the emergence of agglomeration economies might be due to natutal endowment that historically encouraged early settlement and economic activity: These 135 y 8 Boston and Baltimore as the busiest pore in America, of New York’s economic importance eno be acti facilites, In Indonesia, Java and particularly West Java’ Jabotabo region, has by far the highest concentration of manufacturing activity. Historically, Java’ voleanic soils supported high population century the port of Sunda Kelapzintoday’s had established itself as an important trade hub, This in torn, attracted the establishment of European trading posts and eventually the capital of the Republic of Indonesia, In the post-colonial petiod, Indonesia developed what some have called an economic system of “bureaucratic capitalism” where a high premium was on close access to members of the government. Large firms were often created by the state, by members ofthe government or military and their associates, orby ethnic Chinese businessmen. There was no prominent class of indigenous entrepreneurs, which might have created amore dispersed pattem of industrial development. These factors accelerated the agglomeration of economicactivity near the seat of powerin a highly centralized political system and resulted in the rapid growth of the ‘manufictaring ectorin the Jakarta region in the 1980s and eazly 1990s ‘By 1991 the manufacturing share of GDP in Indonesia exceeded that of agriculture and most of that was generated in western Java.Additional centers of manufacturing include Surabaya in Eastern Java ~ otiginally a Dutch center of naval industry. Two smaller ‘manufacturing centers, Medan in Sumatra and Ujuag, Pandang (Makassar) in southern Sulawesi, also owe their existence largely to their role a regional trading posts ‘Why those portcities became dominant? Accozding to Fujita ‘and Moti (1996), ports have important sole in the making of major 136 starting from the existing economic literatute, of dl and portin particular The third section exphins both dataand methods In methodological section, we start with identifyin thezetical co wwhich willbe analyzed w panel data regression. The fourth section present empirical results to corroborate whether the gro 1993-2001 is explained in this analysis in relation to the characteristics presented by these cities in 90's. The conclusion and the policy implication are presenced in the fifth section. 2. Theoretical Framework New Economic Geography supersede the current approach. ith agglomeration, there is often a gain 5 of predecessors, We therefore follow common usage in taking “new economic geography” refer to theories that follow the approach put forwa 1991 book (Krugman, 1991b) and, particularly his Jour Economy article (Krugman, 1991a). the contributions preceding and following thes influence is an empicical fact. A Web of S these two works received a combined total of their chapter of this Handbook that many of the ingredients ‘of New Economic Geography were developed many decades before 137 its antecedents in regional seience and location theory: Rather, they approached economic geography ‘with perspectives developed from “new trade” theory. Indeed, the concluding sectio: y of the model «and that they av te sams tastes and lechnologies. Thre i oom for -rontual gains from trade, because the combined market would. both greater warily of gocds and a greater scale same gains cond be obtained without trade howe ‘one region were omogate 1th othe. In this model, trade and grant in th labor force are essentially equivalent. If there are impeditent to ‘ade there wl ban incentive for worst ave lo the region wich already bas te larger labor force, This is clearest if we consider the extreme case ware no trade in goods is posible but labor ts perfectly ‘mobil. Thea th nore populous region will o_er otha greater real wage cand a greater variety of goods inducing ineigraton In equiibrin, all sworkrs wll baeconentatdin on region o the other. Wich regen nds up with te population depends on initial conditions; in th presence af increasing retaras histor matters.” Kragwan (1979), p.478. ‘This quote shows tha the main elements of the stoves formalized jn the 1990s economic geograpiy literature had already been anticipated by Krugman in the late 1970s. Kragman certainly did not originate all the ideas currently associated with NEG. However, the approach he popularized drew heavily on his own earlier work on teade patterns, Five essential ingredients distinguish NEG models from other approaches to understanding the geography of economic activity, We do not wish to imply that they were novel contributions of NEG or ude butrather that they are sefulindicatars for categorization ing retarns to scale (IRS) that ate internal to the fern, NEG le amount of overhead required for exch plant. assume any pure technological externalities that would lead directly to external scale economies. Evlengga Agustino Landiyanto & Aref Imperfect comy costs aze Lower t pecfect competition The outputs and ing 4 distances but only by incurting costs. These cos assumed to be proportional to the value of the goods traded. 5 ‘implies that firms will have an incentive tose tadistan 6 ation of demand. Expenditarc in each country depends upon the locations of firms. Two mechanisms for the ‘mobility of demand have been proposed, @ Mobile workers who consume where they work (Krugman, 1991 thatrequire the outputs of their sectoras intermediate inputs (Krugman and Venables, 1995). Ingredients 1-4 all appeared in the New Trade literature, and in particular gave tise to the home market effects identified in Krugman (1580). With these assumptions, agglomeration can arise but only through the magnification of inital country size asymmetries, The key innovation of NEG relative to New Trade is assumption 5, Without 5, symmetric initial conditions lead to symmetric outcomes. With all five assumptions, initial symmerry can be broken and agglomerations ‘can form through a process of circular causation. This is perhaps the basis for the Davis Blurb on the back of Fujita tall. (1999) that, “the work is an even more radical deperture from orthodoxy than the new trade theory of the 1980s.” TENEG comprises models with these five ingredients, what are the competing explanations of economic geography? Empirical ‘work testing NEG-based hypotheses benefits from the consideration of asetof plausible alternatives. Prominent alteroaives to NEG indlade 139 714 IRSA International Co larger numbers of skilled workers and ger numbers of employers of skilled ) describes a mechanism, Formal models ped slong those linesin Krugman (1991b) forinstance. Human capital externalities are central in Lucas’ (1988) theory of economic development. “Kaowiedge spillovers” of their covnterp knowledge, -roducers benefit from spatial proximity the same industry via flows of productive s of The Spatial Economy argued ‘hata vital part of P from their work would involve ‘empirical examination of the “ineriguing possibilities” raised by the new theory. They did not specify the form these examinations should take, nor has any consensus emerged on the empirical methods to be applied to NEG. jonship between Port and Cities Tn thispart we wll analyze using empirical ltecature that might explain the relationship of port and cities. A ‘uta and Moti, 1996) the cities formation is equally likely to tiated at inland and port location In this context, pot cities have the extra advantages of transport access, they more likely to grow dominantly than non-port cities, and eventually some non-port cites ray even be absorbed by port ienomenon can explain the telationship between port and cities location and open up our etspective about port cites, Aswe speaka while ago, portcites have en advantages cause by they strategic geography for trade that eventually generates their growth, Rodrigue (1999) described, pplogy of port cies can explain the sizeof portcities that determined by their port traffic (See Figure 140 into Arief Hera Preseyo ype of portcities.Itean also show us the relationship berween port traffic that we assume as the ed the ype of ‘can assume that port traflic ctor in explaining the development of cities. ‘Typology of port cities” Figure L Jean-paul rods Port Tratfic Small Medium, Large Q Coastal porttown Major port town Small sity ORR) Regional city City Size Medium 141 nl Confroee Port Function in general “public service” refers to servi needs of the user, and are Permanence refers to services tobe Equal provision argues against discrimination of individuals but not Of situations (ADB, 2000) S CE = TH Syonatny Dienst see “Figure 2.Jeat Many pore cities i transportation and trade. Rodrigue model (Rodirige,1999) (gare 2), The model can explain the Of ports, We can see that there were two kind of port. The first one 142 Erlang Agustina Landiyanto & Aref Herw he snain port. The second one is regional port. The ma ction s asa centre that served regional port and other acti Port cities as growth pole In reallife, however, we often find that cities arise near rivers and coasts. It seems that many of these cities developed as transportation hubs or markets for interregional trade, since these locations provided better access to other regions. Thus, the geographical features of locations (differences in transportation costs relative to, he locations of ) discusses how Figure 3. Terminal as Growth pole 143 strengthened by Rodrigue (1999) who described that a terminal 4s port cities has important roles to their rural surrounding, ‘The advantages of transportation make the region located neaz the port cities to have a strong dependency on that port city because, not every citiyhas a transport access. This dependency creates an agglomeration of economic activity. The agglomeration of economic activity can generates trade and eventually, gaining growth. 3. Methodology ‘The objective of this paper is to investigate what factors influence the growth of main Indonesian port cities Ia this section, ‘we provide an estimation fiamework We assume that a firm evaluates potential profits at alternative locations ateach time period, and would ‘consider the growth of the port cities rise because of the role ofits port and location, In this patt of paper we try to explain the relationship between the growth of port cities and factor that cause by agglomeration such 1 manufacturer and the flow of goods in port that represent the economic activity at port (port traffic). From a theoretical literature that has been explain from the previous chapter we can form two ‘models that based on a regression models. “The growth in cities can be viewed as the GDRP of the cities. GDRP described the flow of goods and service in value at regions. ‘Manufactures industries can be viewed as the total of manufacturer labor in use at city, Because isto naif to see it using the mumber of industries that located inthe city to repteseat relationship with city growth. ‘Port traffic viewed as the flow of goods at cities port. Whether 144, Enlenges 4 yf Heorw Preseyo export or imports required service from port So, for this variable wwe can akan equator: 1B, =EX, +My ) LB denote as the flow of goods at post in ci in region fand time £ Md ime : and time 4. X ove as Import From the literature we can for first model to explain economic growth in cities caused by industrial agglomeration and the flow of ‘goods. As apriority we believe that all dependent variable all positively related to dependent variable. The model: Yig= Og + @y THM ig + Bic + Up Q In equation (2) Y,, denotes as the GDRP (PDRB) in city fat time # the not Less importa in the regression is LB, denote as the flow of goods at po and time From the first model we could see the capability of manufacturer and the flow of good for explaining economic growth in port cities ‘withthe empizical result and from itwe ean se the phenomenon about cconomic growth in portcities that cause by the strategic location in accessing transportation under the frame work of Agglomeration and New Economic geography. In light of these considerations, our approach to explain growth in port cities in this study is to estimate pane! data using the generalized least square (GLS). Panel data give more informative data, ‘more variability, less co linearity among the variable, more degrees of freedom and more efficiency. Beside that panel data allow us to construct and test mote complicated behavioral model than purely cross-section or time — series date (Baltegi,2002 ). We use the GLS approach because the LS technique pays less attention to residual associated with high- variance observation (by assigning them alow weight inthe weighted sum of square residuals it minimize). Notice that the OLS estimating, line gives 2 better fit to the data then the true relationship 145 information is annvval data. City data are: Surabaya, Jakarta, Makasaz, re cross section identifiers in panel data ime series data setin analysis is 1993-2001 4, Empirical Result In Indonesia, there are many cities that developed according to the characteristic of the cities. Because of it, cies in Indonesia have ‘many differences in several aspects. Big cities such as Jakarca, Medan, Makasar, and Surabaya that have geographical advantages (Watet access) may have a big concentration of economic activities in their :egion. Other regions that have another advantages and disadvantages ‘may develop according to the needs of the region. Some regions that have many advantages will develop more gradvally than other zegion that doesn’t have many advantages, Based oa Deichmann, Kaiser, all (2005) Spatial concentration of economic activiey occurs yecause some regions have characteristics that attract moze firms to be established there tian in other regions. Big cities such as Jakarta, Medan, Makasar, Surabaya have some characteristic that attract ‘many economic activity because in that cities have an advantages such ‘water access that can be a convenient place for trade. ‘Based on Richard Blankfeld (2002) research on Indonesian port described that, there are four main port cities that served other regional port in Indonesia. That port is separated by four IPC (indonesian post company) IPC 1 is headquartered in Medan and has responsibilty for the commercial ports of the three provinces of Aceh, North Sumatra and Riau. The corporation has 22 ports. The Riau port of Batam, just to the south of Singapore, is not included. among the corporation ports. Jn 1991, the public port corporations were changed from a public corporation to state-owned company. IPC Tis headquartered at Tanjung Priok, the port of Jakarca. The coxporation has responsibility for commescial seaports of eight provinces, namely, West Java, West Kalimantan, West Sumatra, Bengkoly, Jambi, South Sumatra, Lampung, and Bangka Belicung. IPC Tihs recently assumed control ofthe ports in Batam. IPC IIL is 146 Exige Agutino Lanlianto & Avi io 1g Perak, The corporation Central Java, Bal generates agglon of goods in ports. In such way, we can see that factor t good enough ro determine the economic growth of major portcities in Indonesia riabl ‘Dependent Independent_|_PDRB ‘Constanta 165.4) 472403] 0.01 3.84071 1.48174 0.1479] | o.i47182] 9.65494 0 0.85313] ‘Durbin Watson 1.523746| % == Significant “able 1. Regression result wring GLS method 147 port cities. The most importance of all, the mode! can make us see that the growth in por cities determine by both manufacturer industries and the traffic of goods in port. For manufecruring industries in small intermediate goods, and the less I ‘markets. Countses with higher transport to attract foreign investment in export act Partially, manufacturer industries are not significa the industrial agglomeration is optimum, The rol not particulacin manufacturing activity but provide service and trade activity, so could develop industrial performance of hintetland. Ina dispersion theory, we can see the agglomeration of industries make the demand of land increase gradually. The increasing of land use demand for industries generates the price of land and eventually the compensating using land near agglomeration location is not logic any Ft costs may be an important barrier to sportant effect on income. The natute of services provided by shipping companies forces them to be tcansnational companies serving more than one country. In general, these companies have access to international capital markets and they are able to hire workers fom all over the world, although under some restrictions sometimes (Clark, el, 2004). “Findings from the economic geography literature and empirics (Redding and Venables, 2004; Limao and Venables, 2001) indicate significant gains to be exploited from reducing transport costs by investing in cross-border transport infrastructure and associated zegional integration like ports. Practice in cross-border economic ‘cooperation uso indicates benefits from regional transport facilitation inci the elimination of non-physical bersers such as standandization ‘of customs procedure. On the other hand, both theoretical and ‘empicical literatures indicate asymmettc incidence of the benefits of regional integration (reducing barrier inter-tegion) among developing ‘economies ot among cities, necessitating mutually acceptable coordination and/or compensation arrangements 148 Lnonger Agustina Landivanto & Ari Here Prcetyo Fujimura (2004) argu port, via thei impact on trad ‘of economic growth. Many emy teansportinfrastructure, such as to affect cities’ long-run rate tudies point to the positive 1e openness of the economy and. the viemous cycle of increased trad, economic growth and investments in export-oriented manuféct stries that are in comparative advantage “According to Bairoch, (1985), the mere existence of cities may be viewed as universal phenomenon that’s Importance slowly Dut steadily increase during the centuries proceeding sudden urban growth that appeared during the nineteenth century (Fujita and Thiese, 2002). Still about cites, Base on Geyer (2002), Cities in paricularhave ‘wo important roles to their surrounding. Aa urban center such as cities serves asa center of its rural surrounding and asa mediator of interaction of the world outside. This statement may considera city have a strong influence, force of power on their rural surrounding, Fujita and Thiese said that there ate two opposing types of forces, “Thats, Agglomeration or cniripetal forces and dispersion or centifigalfores. (On Fajita and Thiese statement, we can generalize it on the two important roles of cities, Cities serve as a centre and as 2 mediator of interaction of the world outside because of the agglomeration forces “Agglomeration forces genesate from certain aspect lke Fujita have ssid in his book Economics of agglomeration that trade theory (o be the branch of economics that has paid most attention to the spatial dimension. The reason of this condition influence by the mobility of commodities shipped as well as ch of factors who is affecting the location of ind of demands an eventually the pattern of trade, conclude thet, spatial advantage of cities can influence economic sctvity that generates trade. ‘Masudi Djojodipuro (1992) makes a statement that Major city usually interest industrial location and because ofita major cities easily generates agglomeration. The gathering of the industries can makes external economies. In other words’ we can say that is agglomeration economies. This economization happen because many external factor can be consumed by industries in that cities; Such as 149 (RSA tetretiona C fortrade (Export sattactindusres

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