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| Decentralization |
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Overview
When President Suharto took power in 1967, his New Order regime created a highly centralized system of government. Despite the fact that Indonesia contains more than 6,000 inhabited islands with over 300 local districts and ethnic groups, Suharto managed to maintain political and economic stability until the Asian financial crisis in 1997. His centralized system brought in large amounts of revenue for the government. In 1999 alone, fiscal revenues collected by the government made up 94% of general government revenue. Later, however, it became clear that this very centralization was a key factor behind the social unrest in the archipelago.
Many see the decentralization plan as the least painful option for Indonesia to save itself from disintegration. Giving greater autonomy for provinces such as Aceh and West Papua/Irian Jaya, both of which face intensifying separatist movements, could prevent further clashes between the secessionists and the Indonesian military.
Demand for greater regional autonomy and fiscal decentralization had existed since the 1970s, but the government blocked all autonomous movements. These demands only increased with the onset of the financial crisis and the end of the Suharto regime.
Due to mounting pressure, Parliament under President B.J. Habibie adopted two laws in April 1999 that aimed to shift functions and resources to regional and district levels: the Law on Regional Governance (22/1999)
and the Law on Fiscal Balance between the Central Government and the Regions (25/1999).
The Regional Governance Law focuses on administrative and political decentralization, mainly at the district and municipal levels. It declares that regional assemblies will elect city mayors. Elections at lower government levels are intended to increase accountability in government operations.
Legislation
The law also vaguely lays out a decentralization of expenditure responsibilities, handing many of the government's responsibilities regarding health care, education, agriculture, communications, industry, trade and other to district levels. However, due to a lack of clear responsibilities regarding expenditures, this part of the law needs to be developed further. The Fiscal Balance Law, Law 25/99, details the borrowing and sub-national financial information systems as well as the design of a grants system, which will be based on expenditure needs and revenue capacities.
The regulations came into force in January 2001.
The two laws created an important division of powers. Defense, foreign affairs, religion, the administration of justice and monetary and fiscal policy remained core duties of the central government, while public services such as education, health care and infrastructure now fell under regional control. A previously existing hierarchical relationship between the provinces was also eliminated.
Laws passed under the Wahid administration are currently being implemented by the Megawati government. Under the new laws, provinces now receive a significantly larger portion of the central government's revenues, including 15% of onshore oil revenues, 30% of onshore gas revenues, roughly 80% of mining and forestry revenues, 20% of local income-tax receipts and about 25% of a special fund of centrally collected revenue.
Challenges
Many warned against a hasty transition to decentralization. The timetable for implementing the new laws was extremely tight. Analysts at the World Bank and the International Monetary Fund suggested that the preparation of such a plan would have required at least two years to insure there would be no interruption of essential local public services. (see the joint IMF and World Bank paper "Indonesia: Decentralization - Opportunities and Risks.")
The first year of decentralization (2001) was marked by confusion. The lack of preparation for the transition has been a major obstacle and local governments have had to reform internal structure, train civil servants, and meet budgetary requirements without a detailed plan. Many provinces were unable to meet their expenses and attempted to increase revenues through local taxes and levies causing concern over the growing disparity between rich and poor provinces. Incomplete devolution of powers and fiscal accountability has also allowed space for corruption to flourish. Many observers say that local bureaucrats are already siphoning money from much needed reform projects. Ambiguity over the implementation of certain topics, such as land rights, transportation, communications, statistics, and family planning, is another cause for uncertainty at the local and provincial levels.
For more analysis of the laws, please see the following resources:
World Bank Report "Indonesia's Decentralization after Crisis"
Government Report "Redesigning Programs and Providing Capacity: Building Support for Good Local Governance"
Paper by Terence Hall "Striking a Delicate Balance"
Updated April 2002
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