Indonesias Fiscal Decentralization

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.

"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.

The process of decentralization in Indonesia was initiated after a long period of autocratic rule. Despite the political imperatives, there is a need to carefully sequence the fiscal decentralization to ensure that financing follows the assignment of functions. The functions should be commensurate with the capacity to provide public services. The paper argues for the proper sequencing to avoid jeopardizing macroeconomic stability or the effective delivery of public services.

Indonesia is the world's largest archipelagic state. In 2001 it embarked on a 'big bang' decentralization involving a major transfer of administrative, political and financial authority to its districts, now numbering more than 500. Together with the rapid transition from authoritarian to democratic rule in the late 1990s, this initiative has transformed the country's political, social and business life. While national government is the major area of contestation, power has shifted irreversibly away from the centre. How this significantly increased regional autonomy works will have a crucial bearing on the future of the Indonesian nation-state. This volume features contributions by over 40 writers with deep expertise on Indonesia. The book provides a timely, comprehensive and analytical assessment of the country's regional development dynamics in the post-decentralization environment. It explores historical, political and development patterns at the regional level; the relationship between decentralization and governance; local-level perspectives; migration, cities and connectivity; and the challenges confronting the peripheral regions of Aceh and Papua.

The aim of this study is to examine the association of fiscal decentralization in relation to government size in Indonesia. Literature theory of leviathan model argued that government behavior tends to maximize their revenue and expand their spending (government size). The constitutional way to hamper this behavior is limitation access of central government to revenue and giving revenue authorization to sub national government. Panel data of 33 provinces in Indonesia are deployed to examine the association of fiscal decentralization and government size. Proxies of fiscal decentralization are, local tax revenue, usher charge, decentralization revenue and government transfer. The empirical evidence in this study support previous study of leviathan hypothesis that fiscal decentralization tend to decrease government size.

"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.

The creation of the ASEAN Free Trade Area (AFTA) in 1992 and decentralization in 1999 mark the state restructuring in Indonesia. This book analyses the impact of state restructuring on regional economic development in Indonesia between 1993 and 2010. Regional economic analysis shows persistent and severe regional disparities throughout the period. Particularly, econometrics study found that decentralization has accelerated regional disparities whilst the AFTA effect is insignificant on regional economic growth. Furthermore, historical institutionalism analysis on two cities - the manufacturing industry in Batam and the creative economy in Bandung - shows that past and embedded local institutions provide the capacity to adapt and create new development paths. The book suggests the importance of local-specific policies that embrace local knowledge and institutions to develop regional specialization and competitive advantage. This book fills the gap in Indonesian literature that lacks studies on the integrated impact of decentralization and trade liberalization, both economically and politically.

In 1999, Indonesia embarked on a reform of regional governance that brings self-governance to rural districts and municipalities, i.e., the administrative and democratic capacity needed to apply basic services like healthcare, national legislation and environment policies. This edited volume is the first book, which not only deals with the 1999 legislation but also shows how the deficiencies and contradictions of this legislation reduced implementation between 2001 and 2004 to a try-out. The book also discusses the adaptations that were the focus of the debate on the revision of the 1999 legislation that resulted in the 2004 update legislation and the amendment of the 1945 Constitution. Anthropological case studies of five provinces complement and deepen the findings of the more general survey reports.

Since the collapse of Soeharto’s New Order regime in May 1998, Indonesia’s national, provincial, and district governments have engaged in an intense struggle over how authority and the power embedded in it, should be shared. How this ongoing struggle over authority in the forestry sector will ultimately play out is of considerable significance due to the important role that Indonesia’s forests play in supporting rural livelihoods, generating economic revenues, and providing environmental services. This book examines the process of forestry sector decentralization that has occurred in post-Soeharto Indonesia, and assesses the implications of more recent efforts by the national government to recentralize administrative authority over forest resources. It aims to describe the dynamics of decentralization in the forestry sector, to document major changes that occurred as district governments assumed a greater role in administering forest resources, and to assess what the ongoing struggle among Indonesia’s national, provincial, and district governments is likely to mean for forest sustainability, economic development at multiple levels, and rural livelihoods. Drawing from primary research conducted by numerous scientists both at CIFOR and its many Indonesian and international partner institutions since 2000, this book sketches the sectoral context for current governmental reforms by tracing forestry development and the changing structure of forest administration from Indonesia’s independence in 1945 to the fall of Soeharto’s New Order regime in 1998. The authors further examine the origins and scope of Indonesia’s decentralization laws in order to describe the legal-regulatory framework within which decentralization has been implemented both at the macro-level and specifically within the forestry sector. This book also analyses the decentralization of Indonesia’s fiscal system and describes the effects of the country’s new fiscal balancing arrangements on revenue flows from the forestry sector, and describes the dynamics of district-level timber regimes following the adoption of Indonesia’s decentralization laws. Finally, this book also examines the real and anticipated effects of decentralization on land tenure and livelihood security for communities living in and around forested areas, and summarizes major findings and options for possible interventions to strengthen the forestry reform efforts currently underway in Indonesia.