Indonesia's trade and price interventions: Pro-Java and pro-urban

In 1987 and 1995 Indonesia's price and trade polities (intervention regime) increased the income of Java's urban centres and reduced that of people li ving in rural Java and the other islands. This happened because the regime protected manufacturing activities, most of them located in Jakarta, Bandun g and Surabaya, and taxed primary sector based activities, located outside urban Java. It protected some primary sector based activities directly but the entire intervention regime, with manufacturing protection included, tax ed them. As a result, regions deriving income from primary sector based act ivities lost. Indonesia's intervention regime is regressive: it transfers i ncome from poorer to richer regions. This regime and its effects on regiona l incomes continue. Governments have designed programs to raise the income of Eastern Indonesia, but have omitted the most effective instrument: openi ng the economy to international competition. A serious attempt to reduce re gional income disparities should begin by eliminating barriers to internati onal trade.