Measuring the Indonesian provinces competitiveness by using PCA technique

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1 Journal of Physics: Conference Series PAPER OPEN ACCESS Measuring the Indonesian rovinces cometitiveness by using PCA technique To cite this article: Ditha Runita and Rohmatul Fajriyah 2017 J. Phys.: Conf. Ser View the article online for udates and enhancements. This content was downloaded from IP address on 10/02/2018 at 11:39

2 Measuring the Indonesian rovinces cometitiveness by using PCA technique Ditha Runita 1 and Rohmatul Fajriyah 1 1 Deartment Statistics, Universitas Islam Indonesia, Yogyakarta, Indonesia rfajriyah@uii.ac.id Abstract. Indonesia is a country which has vast teritoty. It has 34 rovinces. Building local cometitiveness is critical to enhance the long-term national cometitiveness esecially for a country as diverse as Indonesia. A cometitive local government can attract and maintain successful firms and increase living standards for its inhabitants, because investment and skilled workers gravitate from uncometitive regions to more cometitive ones. Altough there are other methods to measuring cometitiveness, but here we have demonstrated a simle method using rincial comonent analysis (PCA). It can directly be alied to correlated, multivariate data. The analysis on Indonesian rovinces rovides 3 clusters based on the cometitiveness measurement and the clusters are Bad, Good and Best erform rovinces. 1. Introduction Indonesia is an archielagic island country in South East Asia. There are many rovinces under Indonesia s ausices. In 2017, Indonesia has 34 rovinces. Every rovince in Indonesia has a unique and distinctive charm. Morever Indonesia has a vast teritory, it s area is million km². Therefore it will be difficult for each rovince has similar develoment. To solve this roblem, the central government made a regional autonomy (Otonomi Daerah) olicy. The new olicy of decentralization and regional autonomy is outlined in Law No. 22, 1999 concerning Local Government 1 and Law No. 25, 1999 concerning The Fiscal Balance Between the Central Government and the Regions. Both these laws are based on five rinciles: 1) democracy, 2) community articiation and emowerment, 3) equity and justice, 4) recognition of the otential and diversity within regions and 5) the need to strengthen local legislatures. These five rinciles suort Indonesia s ush for reformasi, which continues to aim to eradicate the ractices of corrution, collusion, and neotism (known as KKN), within the government bureaucracy. One of the secific reasons behind the olicy of decentralization and regional autonomy is that a centralized government system cannot ossibly administer Indonesia s large oulation of over 203 million (BPS, 2001) and its diverse socio-cultural and religious background. Strong, cometent regional governments and greater autonomy are fundamental requirement for a country as diverse as Indonesia. The main aim of decentralization and regional autonomy is to bring the governments closer to their constituents so that government services can be delivered more effectively and efficiently. This is based on the assumtion that district and municial governments have a better understanding of the needs and asirations of their communities than the central government [1]. We can rank each rovince by using PCA and try to find the cluster of each rovinces. Therefore, it will build the local cometitiveness. Building local cometitiveness is critical to enhance the long-term national cometitiveness. A cometitive local government can attract and maintain successful firms and increase living standards for its inhabitants, because investment and skilled workers gravitate from uncometitive regions to more cometitive ones. Asia Cometitiveness Institute (ACI) defines cometitiveness through four different environments, each with their three sub-comonents, namely [2] : 1) Macroeconomic stability a. Regional Economic Vibrancy b. Oenness to Trade and Services c. Attractiveness to Foreign Investors Content from this work may be used under the terms of the Creative Commons Attribution 3.0 licence. Any further distribution of this work must maintain attribution to the author(s) and the title of the work, journal citation and DOI. Published under licence by Ltd 1

3 2) Government and institutional setting a. Govenment Policies and Fiscal Sustainability b. Instutions, Governance and Leadershi c. Cometition, Regulatory Standards and Rule of Law 3) Financial, business and manower conditions a. Financial Deeening and Business Efficiency b. Labour Market Flexibility c. Productivity Performance 4) Quality of life and infrastructure develoment a. Physical Infrastructure b. Technological Infrasturcture c. Standard of Living, Education and Social Stability Those environment give us an idea about the condition of rovinces. Two environments are secifically related to the economy and two other environment are more olitical, instituitional and social in character. Macroeconomic stability encomassing aggregate economic conditions. It will be easy to see how strong the otential of a rovince in attracting foreign investors from this environment. Financial, business and manower conditions reresent condition related to the micro-economy. They include an analysis on the erformance of firms as well as challenges that they face in running their comanies, also from this environment we will be able to describe the state of the oulation in that area, the availability of labor in order to see the otential of human resources in the area. Government institutional setting will rovide an overview of the rules, olicies of local governments in addressing the roblems in the region. And how resonsive the local government in solving a case. Thus the stability of the government will be seen in the area. As for the quality of life and infrastructure develoment can be used as a reference in view of the security of the area, the ower level of life in society, and the develoment of technology or infrastructure. 2. Literature Review/Related Works Malesky, in 2008 [3] with his research tim, make the research under the title The Vietnam Provincial Cometitiveness Index: Measuring Economic Governance for Private Sector Develoment Final Reort indicated in last year's reort, there is evidence that increasing inequality is beginning to aear across the country. To erforming rovinces excel at all asects of economic develoment, as shown in this reort in terms of economic governance, infrastructure, and ICT caability. This grou is ulling away from the rest of the country. At the same time, another grou that must struggle with weak initial conditions and oor infrastructure has not been able to develo the good governance ractices to comensate for their handica.these are steadily falling behind the erformance of their eers. The Provincial Cometitiveness Index in Vietnam measured by 10 sub indices they are: Privat Sector Develoment services, Transarancy, Labor training, Proactivity, Time cost of regulatory comliance, Legal institutions, SOE bias (cometition environment), informal charges, Land access and security, and Entry costs. In This research, Malesky diveded the rovinces in Vietnam using the rovincial cometitivness index into 6 classes. The classes are Excellent Province, High Province, Mid-High Province, Average Province, Mid-Low Province and las is Low Province. In 2013, Tan and Amri [4] in their research under the title Subnational Cometitiveness and National Performance: Analysis and Simulation for Indonesia said that the stable growth of Indonesia s economy over the ast eight years has rovided momentum for investment in the country. One of the aroaches taken by the central government is to allow healthy cometition between its rovinces. The Asia Cometitiveness Institute (ACI) resonds ositively to that olicy by ranking the cometitiveness of Indonesia s 33 rovinces and roviding simulation studies on how to imrove each rovince s cometitiveness. ACI takes a comrehensive aroach to the notion of rovincial cometitiveness, dissecting it from four major environments: macroeconomics, microeconomics, governance, and quality of life. Drawing on 91 indicators from formal sources as well as ACI s own surveys and interviews, the study aggregates the indicators into 12 sub-environments, reaggregates them into four environments, and finally reaggregates them again into an overall cometitiveness index. The conclusion highlights the high level of cometitiveness in rovinces where the country s major urban regions are situated, as well as those closest to Singaore as the regional trading hub. Provinces endowed with natural resources also have the oortunity to be cometitive, but not if they are wanting in 2

4 asects such as governance and quality of life. The study s findings invite further research on more secific toics such as labor market flexibility and regional cooeration. 3. Method The data set that we use for this research is downloaded from Indonesian statistics website, for the years 2014 and Non-Oil exorts data is downloaded from From both sources we have 29 variables which are belong to the 4 environments at ACI, namely: 1) Macroeconomic stability 1. Realization Of Investment In Domestic Investment (Project) Year Realization Of Investment In Domestic Investment By Province (Billion Ruiah) Year Gd Per Caita By Province Year Non-Oil Exort By Province Year Number Of Foreign Tourist By Province Year ) Government And Institutional Setting 6. Total Crime According To The Regional Police, Crime Rate Per Poulation By Regional Police Year Percentage Of Comletion Crime According To The Regional Police Year ) Financial, Business And Manower Conditions 9. Unemloyement Rate Year Labor Force Partication Rate Year Registered Job Seekers Years Job Vacancies List Year Placement/Fulfillment Of Labor Year ) Quality Of Life And Infrastructure Develoment 14. Poulation By Province Year Human Develoment Index (HDI) Year Food Poverty Line Year Gini Ratio Year Number Of Poor Year School Enrollment Rate (7-12 Years Old) Year School Enrollment Rate (13-15 Years Old) Year School Enrollment Rate (16-18 Years Old) Year School Enrollment Rate (19-24 Years Old) Year Number Of Universities Year Number Of Students Year Number Of Educational Personnel Year Percentage Of Households By Source Of Imroved Drinking Water Year Percentage Of Households By Lighting Source Of Electricity Year Percentage Of Households By Imroved Sanitation Year Percentage Of Poulation Having Health Comlaint Year 2015 Princial Comonent Analysis (PCA) is one of famous techniqeus for dimension reduction, feature extraction, and data visualization. In general, PCA is defined by a transformation of a high dimensional vector sace into a low dimensional sace [5]. Manage and Scariano [6] describe PCA as a nonarametric variable reduction technique well suited for correlated data and one objective of rincial comonent analysis is to reduce a set of correlated variables into fewer uncorrelated variables as linear combinations of the original ones. In general, the PCA rocedures can be exlained [7-9] exlain as follows. Suose we have a random vector X X 1 X 2 X = ( ) X 3

5 with oulation variance-covariance matrix σ 1 2 σ 12 σ 1 Consider the linear combinations: 2 var (X) σ = = 21 σ 2 σ 2 2 σ ( 1 σ 2 σ ) Y 1 = e 11 X 1 + e 12 X e 1 X Y 2 = e 21 X 1 + e 22 X e 2 X Y n = e 1 X 1 + e 2 X e X Each of these can be thought of as a linear regression, redicting Y i from X 1, X 2,..., X. There is no intercet, but e i1, e i2,...,e i can be viewed as regression coefficients. The Y i is a function of random data and it has a oulation variance e i e j is oulation covariance of Y i andy j The coefficients of e ij are var(y i ) = e ik e il σ kl = e i e i cov(y i, Y j ) = e ik e jl σ kl = e i e j e i = ( ) e i The i th rincial comonent is built by selecting e i1, e i2,...,e i such that maximizes the variance of the new comonent. e i1 e i2 var(y i ) = e ik e il σ kl = e i e i The maximization considers two things: the sums of squared coefficients add u to one and the new comonent will be uncorrelated with all the reviously defined comonents. e 1 e 1 = e 2 1j = 1 j=1 cov(y 1, Y i ) = e 1k e il σ kl = e 1 e i = 0 cov(y 2, Y i ) = e 2k e il σ kl = e 2 e i = 0 cov(y i 1, Y i ) = e i 1,k e il σ kl = e i 1 e i = 0 4

6 4. Results and Discussion The calculations for the average of each environment are shown as following: Infromations Macroeconomic Stability(MS) Table 1. Average of each ACI environments Government and Institutional Setting (GIS) Financial, Business and Manower Conditions (FBI) Quality of Life and Infrastructur Develoment (QL) Averages E E E E-16 Conclusions Lower Is The Best Higher Is Best Lower Is The Best Lower Is The Best Table 1 shows the average of each environments from ACI and the the scores for each rovinces. It is based on the standardized of original values of each variable for every environments. If the value of variable tends as higher is better then we multily the standardization with minus, and otherwise. Figure 1 Provinces erformance according to ACI environments Before alying PCA, the standarization is needed to be alied cause the variables have different scales. The rocesses of finding the rincial comonents by using the standardized variables are equivalent to finding the rincial comonents by using the correlation matrix instead of the covariance matrix. Furthermore, it is used to comute the eigen values and vectors. 5

7 Figure 2 PCA s Outut The outut of PCA, Figure 2, shows that the PC1 gives the highest roortion of variance, 31.08%, then it is used to rank the rovinces. Furthermore, its eigen vectors are in the Table 2. Table 2 Eigen Vectors No Variables Eigen Vectors No Variables Eigen Vectors 1 HDI Number Of Universities Food Poverty Line Number Of Students Gini Ratio Number Of Educational Personnel 4 Number Of Poor Household by Drinking Water Sources 5 School Enrollment Households by Electric Power Rate (7-12 yo) 6 School Enrollment Sources 21 Households by Imroved Rate (13-15 yo) 7 School Enrollment Sanitation 22 Total Crime Rate (16-18 yo) 8 School Enrollment Crime Rate Rate (19-24 yo) 9 Unemloyement Rate Percentage of Comletion Crime 10 Labor Force Particiant Health Comlaint Rate 11 Registered Job Seeker Poulation (Thousands) Job Vacancies List Non Oil Exrots Labor Fulfillment GDP Investment Realization Foreign Tourist (Project) 15 Investment Realization (billion) Table 2 gives the first rincial comonent as follows: Y 1 = e 1,1 X 1 + e 1,2 X e 1,29 X 29 6

8 Y_1 = 0.166(HDI) (Poverty Line) 0.135(Gini Ratio) (Number of Poor) (School Enrollment Rate (7 12 yo)) (School Enrollment Rate (13 15 yo)) (School Enrollment Rate (16 18 yo)) (School Enrollment Rate (19 24 yo)) 0.051(Oen Unemloyement Rate) (Labor Force Particiant Rate) 0.273(Registered Job Seeker) 0.269(Job Vacancies List) 0.271(Labor Fulfillment) 0.295(Realization Investment (Project)) 0.291(Investment Realization (billion)) 0.306(Number Of Universities) 0.290(Number Of Students) 0.309(Number Of Educational Personnel) 0.150(Household by Drinking Water Sources) 0.170(Households by Electric Power Sources) 0.157(Households by Imroved Sanitation) (Total Crime) (Crime rate) (Percentage of Comletion Crime) (Health Comlaint) 0.288(Poulation (Thousands)) 0.169(Non Oil Exrots) 0.011(GDP) 0.072(Foreign Tourist) Therefore, the scores for each rovince are as in Table 3: Table 3 The scores and ranking based on PCA Provinces PC 1 score Standardized PC 1 score Ranking Aceh Sumatera Utara Sumatera Barat Riau Jambi Sumatera Selatan Bengkulu Lamung Ke. Bangka Belitung Ke.Riau DKI Jakarta Jawa Barat Jawa Tengah DI Yogyakarta Jawa Timur Banten Bali Nusa Tenggara Barat Nusa Tenggara Timur Kalimantan Barat Kalimantan Tengah Kalimantan Selatan Kalimantan Timur Kalimantan Utara

9 Provinces PC 1 Standardized Ranking score PC 1 score Sulawesi Utara Sulawesi Tengah Sulawesi Selatan Sulawesi Tenggara Gorontalo Sulawesi Barat Maluku Maluku Utara Paua Barat Paua Table 3 shows that Jawa Timur hass the first ranking and Paua is the last one. In 2012, Tan and Amri [4] has ranked the cometitivenss rovinces in Indonesia by using 2010 data. The results are the first ranking is DKI Jakarta and the second is Jawa Timur. It means since 2010, Jawa Timur has imroved itself and becomes the best rovince. The same condition is alied to other rovinces. For examles, in 2010 Nusa Tenggara Barat has a ranking 29 and in 2015 Nusa Tenggara Barat has a ranking 12. In Tan and Amri [4] results, DKI Jakarta have become the first ranking in 2000 and But in 2015 cometitiveness, DKI Jakarta has droed to number 4. The ranking of rovinces based on PCA is determined by the following rocedures. The scores that we got from PCA needs to be normalized. The PCA scores are divided into three areas, as in Figure 3 II I III = 33.33% = 66.67% Z= Z= 0.43 Figure 3 Three clusters for the rovinces scores In Figure 3, the first area reresents the best erform rovinces, the second one reresents the good erform rovinces and the third one reresents the bad erform rovinces. The scores for best erform rovinces are less than and or equal to -0.43, for good erform rovinces are between until 0.43 half right inclusive, and for bad erform rovinces are greater than The best, good and bad erform rovinces based on their scores are shown at Table 4. 8

10 Table 4 Members of each PCA clusters BEST PERFORM PROVINCES GOOD PERFORM PROVINCES BAD PERFORM PROVINCES Jawa Timur DI Yogyakarta Aceh Ke. Bangka Belitung Jawa Barat Sumatera Utara Kalimantan Selatan Kalimantan Barat Jawa Tengah Bali Sulawesi Utara Kalimantan Tengah DKI Jakarta Kalimantan Sumatera Barat Sulawesi Tengah Timur Banten Riau Jambi Maluku Sulawesi Selatan Nusa Tenggara Sulawesi Tenggara Bengkulu Barat Ke. Riau Lamung Nusa Tenggara Timur Sumatera Selatan Gorontalo Sulawesi Barat Paua Barat Kalimantan Utara Maluku Utara Paua Table 4 shows the members of every cluster using PCA. The best erform rovinces has 7 members, good erform rovinces contains 16 members and for bad erform rovinces has 12 members. If we comare the average of each ACI environment in Table 2 and the scores of each rovinces, then a. from the best erform rovinces, there are some rovinces that worst than the average score. For examle, in Financial, Bussiness and Manower environment, there are two rovinces have lower scores than its average, DKI Jakarta and Banten. For Macroeconomy stability environment Sulawesi Selatan has lower score than its average. In two others environments, each member of the Best erform rovinces have better scores than the average. b. from the good erform rovinces, with 16 members. In Macroeconomic stability environment there are 5 rovinces have scores better than the average, namely DI Yogyakarta, Sumatera Utara, Ke. Riau, Sulawesi Utara and Jambi. In Govenment and Institutional Setting environment, there are two rovinces have scores lower than the average, namely Nusa Tenggara Barat and Lamung. In Financial, Bussiness and Manower Condition environment, there are 4 rovinces have better scores than its average, namely DI Yogyakarta, Bali, Nusa Tenggara Barat and Kalimantan Selatan. For Quality of Life and Infrastructure develoment envronment, there are six rovinces have lower scores than its average. They are Sumatera Selatan, Kalimantan Selatan, Jambi, Sulawesi Tenggara, Lamung and Gorontalo c. from the last cluster is Bad erform Provinces which has 12 members, in Macroeconomic stability envronment, it is only Kalimantan Barat has a core better than its average. In Government and institutional setting environment, there are two Provinces which have lower scores than its average. They are Maluku Utara and Maluku. In Financial, bussiness and manower condition environment, four Provinces, Ke. Bangka Belitung, Paua Barat, Maluku Utara and Maluku, have lower scores than its average. And for the last environment, Quality of life and inftrastructure develoment, only Maluku Utara has a better score than its average. 9

11 5. Conclusion and Remarks Measuring the cometitiveness of every rovinces in Indonesia is a challenging task. The result from cometitiveness can be used to make some government s rules to make the rovinces in Indonesia better. This results can also be used by some investors to decide where they can invest their money acording to its cometitiveness. In this aer we show that the rincial comonent analysis can be used to ranking the rovinces cometitiveness based on 29 variables, where Jawa Timur is the best erform rovinces (the most cometitive) and Paua is the least cometitive. Further investigation could be alied to measure the rovinces cometitiveness simultaneously and thoroughly by adding more information through some additional variables as in the ACI ([2] and [4]). References [1] Usman, Syaiku 2002 Regional Autonomy in Indonesia: Field Exeriences and Emerging Challenges (Jakarta: The Semeru Research Institute) [2] Tan, Khee G 2014 Assessing cometitiveness of ASEAN-10 economies Int.J. Economics and Business Research 8 [3] Malesky, Edmund 2008 The Vietnam Provincial Cometitiveness Index: Measuring Economic Governance for Private Sector Develoment Final Reort Vietnam Cometitiveness Initiative Policy Paer 13 [4] Tan, Khee G and Mulya Amri 2013 Subnational Cometitivenss and National Performance: Analysis and Simulation for Indonesia JCC: The Business and Economics Research Journal 6 [5] Jang, Sujin 2014 Basics and Examles of Princial Comonent Analysis (PCA) htts:// [6] Manage, Ananda B and Scariano, Stehen M 2013 An Introduction Alication of Princial Comonents to Cricket Data Journal of Statitics Education 21 [7] PennState Eberly College of Science. Lesson 11: Princial Comonent Analysis Procedure. htts://onlinecourses.science.su.edu/stat505/node/51. [8] Sharma, Subhash 1996 Alied Multivariate Techniques (Canada: John Wiley & Sons) [9] Timm, Neil H 2002 Alied Multivariate Analysis (New York: Sringer) 10