This paper evaluates the proliferation of local governments concurrent with Indo-nesia's 2001 decentralisation. Largely static for decades under the New Order, the number of municipalities (kota) and districts (kabupaten) has increased by half, from 292 before decentralisation to 434 in 2003. Most of the increase is off-Java. This represents a fundamental change in Indonesia's subnational administrative, political and fiscal landscape. We present a new dataset that elucidates the characteristics of these new kota and kabupaten, and review political, fiscal and economic incentives for creating new jurisdictions. We find that geographic dispersion, political and ethnic diversity, natural resource wealth and scope for bureaucratic rent seeking all influence the likelihood of regional splits. Since jurisdictional changes will affect local governance and service delivery, we stress the importance of providing an effective institutional framework for the creation - or future amalgamation - of local governments as part of a strategic approach to consolidating Indonesia's decentralisation.

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for the many helpful discussions on the topic of the paper. We thank Fitria Fitriani for excellent research assistance.

How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? We examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. We distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, we find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, we illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. Our findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development.* This paper is part of a larger effort to understand the impact of spatial policy interventions on the regional distribution and performance of economic activities, particularly in lagging sub national regions. The research has been funded by a World Bank research program grant on "Urbanization and Quality of Life". We would like to thank the Indonesian Central Bureau of Statistics (BPS) for facilitating access to establishment level data, Alejandro Badel for excellent research assistance, and Ani Dasgupta and Neil McCulloch for useful discussions on regional development issues in Indonesia.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.