Evaluating Fiscal Equalization In Indonesia

"This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries. "--World Bank web site.

This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.

This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent - on the order of US$ 3.9 billion - of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.

"This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesia's evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesia's recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAU's horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US$ 3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries. "--World Bank web site.

"With the implementation of Laws 22/1999 and 25/1999 on January 1st, 2001, Indonesia has transformed itself from one of the most centralized states to one of the most decentralized one[s]. Despite substantial concerns about the likely difficulties in implementing the decentralization laws, it seemed the process so far has not suffered any major setback. This paper attempts to make a preliminary assessment of fiscal implications of the decentralization process. In particular, it examines (a) impacts on central government budget, (b) regional governments' dependence on central government fiscal transfer to deliver services, and (c) success or failure of the transfer mechanism to address regional disparity in terms of social developments and fiscal capacity. The paper also examines the adequacy of the existing institutional mechanism for dealing with center-region and inter-regions fiscal relation"--P. 5.

Indonesia is currently facing some severe challenges, both in political affairs and in economic management. One of these challenges is the recently enacted decentralization program, now well underway, which promises to have some wide-ranging consequences. This edited volume presents original papers, written by a select group of widely recognized and distinguished scholars, that take a hard, objective look at the many effects of decentralization on economic and political issues in Indonesia. There are many questions about this program: how will it be implemented, is there capacity at the local level to implement its reforms, is there sufficient local political accountability to make it work, and how will the decentralization affect the broader program of economic growth and stabilization? Topics covered include: the historical and political dimensions of decentralization, its macroeconomic effects, its effects on poverty alleviation, the assignment of expenditure and revenue functions across levels of government, the design of transfers, the role of natural resource taxation and the effects of local government borrowing. An authoritative, comprehensive collection, Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia will be of interest to economists and policy makers as well as students of public finance, development, and Asian economics.

In this book, experts from across the globe highlight the state of knowledge in intergovernmental transfer design. The essays collected in the volume represent creative new thinking about challenging policy issues and offer useful options for policy makers. The book offers academics and practitioners a thorough, thematic assessment of unresolved issues in the design of equalization grants.

The design of intergovernmental fiscal transfers has a strong bearing on efficiency and equity of public service provision and accountable local governance. This book provides a comprehensive one-stop window/source of materials to guide practitioners and scholars on design and worldwide practices in intergovernmental fiscal transfers and their implications for efficiency, and equity in public services provision as well as accountable governance.

This publication assesses India’s fiscal federalism framework and presents recommendations to strengthen the country’s fiscal framework that include a combination of unconditional, specific purpose and performance-based transfers. A mechanism for allocating performance-based grants to Indian states is proposed based on improvements in governance index. The publication also contributes to a deeper understanding of decentralization reforms across Asian countries. It synthesizes learnings from the experiences of Australia, Indonesia, Japan, the People’s Republic of China and the Republic of Korea on the design of intergovernmental fiscal transfer systems and the use of performance-based transfers for promoting subnational governance and outcomes in social sectors such as education and health.