INTRODUCTION

Regional economic development is influenced by many factors and primarily by interaction among regions through the exchange of goods, services and labour, as well as policy interactions at the regional, national and international levels. Shaffer (1993) argues that regional economic development is affected by interaction with other regions or countries due to limited resources, potential product availability, and the potential for leakage in each region. Meanwhile Blakely (1989) states four factors influencing regional economic development: employment opportunities in the region, with emphasis on the quality of labour; base of regional development, including the availability of sound economic institutions; location as an asset, based on the environmental quality; and finally, knowledge as a resource in the context of knowledge-based development. Therefore, the regional economic development process requires elements such as formation of new institutions that support regional economies, the development of potential and/or new alternative industries, increase in labour capacity to enhance product quality, search for avenues for market expansion, technology transfer, and an opening of new investment opportunities for businesspeople. Furthermore, amidst the globalization era, different regions may react differently towards mounting competition, which comes not only from other regions within Indonesia, but also from foreign markets. This situation persuades every region in Indonesia to improve its economic longevity.

In the era of regional autonomy and fiscal decentralization, the regional economy plays an important role in achieving and accelerating national economic development. Fiscal decentralization is a natural consequence of the policies that enhance greater autonomy in the local district. The basic principle which undergirds this mechanism is the idea that “money follows actions”. The delegation of government authority carries with it budgetary consequences in the form of increasing the central government fund that must be allocated to the regions, where the actions take place. Correspondingly, fiscal decentralization has increased regional governments’ authority in determining the pace and level of their regional economic development. At the same time, one of the best ways to increase regional economic development has been the entwinement of trade cooperation among various regions. This is expected to become a strong base for improving Indonesia's economy, as well as a healthy foundation for Indonesia to join the ASEAN Economic Community in 2015.

This chapter, consisting of four sections, discusses regional domestic trade in particular during the regional autonomy and fiscal decentralization era.