DECENTRALIZATION IN

INDONESIA
Amrit Hassaram, Michael Lin & Avani Sunder
Agenda

 Background on Indonesia
 Drivers for Decentralization
 After Decentralization
 Conclusions
 Q&A
What is Decentralization?

 Decentralization Definition
Overview of Indonesia

 Archipelago of approximately
17,508 islands, 6000 islands
inhabited
 Population 240+ million (2009
est.), 60% in Java
 500+ ethnic groups, largest
Javanese (40.6%) and
Sundanese (15%)
 742 languages
 Several religions, largest Islam
(86.1%) and Christianity
(8.7%)

Source: CIA World Factbook

 Indonesian Colonial and Political History

1942: 1959:
Japanese Sukarno declares 1998:
1512: invasion and revision of 1945 Suharto resigns, VP
Portuguese reinstatement of Constitution to B.J. Habibie assumes 2001:
Colonization Sukarno, attempt return to presidency and Wahid resigns, VP
and Indonesian 1949: Indonesia centralized power begins new Megawati
introduction of independence officially gains through “Guided decentralization Sukarnoputri assumes
Christianity leader independence Democracy” initiatives presidency

Pre- 1670-1900: 1945: Indonesia 1956: Indonesia 1967: 1999: 2004:

Colonial Dutch establishes Law 1 establishes Law Sukarno steps Abdurrahman Susilo Bambang
Period: Colonization which sets up 32 which sets up down, Suharto’s Wahid elected Yudhoyono
Native unites Indonesia autonomous autonomous fiscal “New Order” President by wins first direct
populations, as Dutch East regions with responsibilities establishes Parliament and Presidential
early Hindu Indies decentralized among regions centralized, appointed election and
and Islamic administrative military-dominated members continues
Kingdoms duties government decentralization
programs

Source: BBC.com, The Making of the Big Bang and its Aftermath : A Political Economy Perspective
by Bert Hofman and Kai Kaiser (World Bank), Decentralization in Nation State Building of
Indonesia by Kazuhisa MATSUI (Institute of Developing Economies), Wikipedia.com
 Indonesian Economic History

Before Dutch “Netherlands Indies” Sukarno Suharto

Colonization 1670-1900 1942-1967 1967-1998
Local, scattered Cultivation system, fixed Low economic growth: Economic expansion: political
agricultural economies wages to plant export political instability, lack of stability due to strong military
crops: sugar, coffee, foreign capital and enforcement, inflow of western
Subsistence farming indigo, pepper, tea exchange rate problems capital, development of industrial
manufacturing sector
Local/regional trade Later colonial period Sukarno’s focus: self-
added tobacco, sufficiency, import Output: steel, aluminum, cement,
petroleum, copra, palm substitution food, textiles and cigarettes
oil, fiber and rubber
exports Oil & gas and wood (pulp/paper)
exports provided massive profits
Infrastructure
improvements in road, Financial systems lacked
railways, port systems transparency, legal systems had
and shipping lines major shortcomings and bureaucratic
corruption rampant
Gross Regional Domestic Product Comparison

 GRDP highest in metropolitan areas (Jakarta, Medan, Surabaya) and areas

rich in natural resources (East Kaimantan, Riau, Papu)
Disparities Amongst Regions

 Per capita regional GDP of Riau and East Kalimantan, two oil and gas producing
regions 20 times higher than that of Maluku or East Nusa Tenggara (NTT
 Some cities such as Denpasar, in Bali, and Bekasi, in West Java, poverty rates are below
three percent, while in Manokwari and Puncak Jaya, both in Papua, they are in excess of
50 percent
Source: World Bank 2007
Uneven Distribution of Resources and Economic Activity
Across Indonesia

 Java represents only 6 % of the country’s land area but accommodates

almost 60 % of the population.
 Java dominates the Indonesian economy producing 52 % of the GDP;
Sumatra produces 28 % of GDP and Kalimantan 11 %. Eastern Indonesia
(Sulawesi, Nusa Tenggara, Maluku and Papua) collectively account for only
10 % of GDP.
 Java dominates all sectors except for oil, gas and mining. Sumatra and
Kalimantan contribute 18 % and 22 %to this sector respectively.
 Eastern Indonesia is lagging behind in terms of the quantity of its
infrastructure as measured by access to electricity and telephones. In
Papua, Maluku and Nusa Tenggara, less than 10 % of households have
access to a telephone and less than 40 % of households have access to
electricity.
 Manufacturing is the dominant sector in western Indonesia whilst agriculture
is the dominant sector in eastern Indonesia.
GRDP Growth Rates Vary Regionally

 Relatively high growth in eastern Indonesia was triggered by growth in the

agricultural and mining sectors. During this time, the government tried to increase
foreign investment by expanding oil, gas and mining exploitation
 Positive correlation with growth and neighboring regions
 Higher growth rates also found in areas with better education, higher enrollment in
junior and secondary education
Drivers of Decentralization

 Types of Decentralization:
 Deconcentration –subnational governments act as agents of the central
government ministries
 Delegation – subnational governments rather than branches of central
government are responsible for delivering certain services, subject to some
supervision by the central government
 Devolution – most complete form of decentralization. Independent or
semiindependent and, typically, elected subnational governments are
responsible for delivering a set of public services and for imposing fees and
taxes to finance those services. Subnational governments have considerable
flexibility in selecting the mix and level of services they provide
 Decentralization is a process that has been driven in East Asia by two major factors:
 Structural factors – significant and continuous periods of economic growth and
urbanization, broadly suggesting a relationship
 Political factors – more proximate and powerful drivers of the process,
democratization appears sometimes to have been an important trigger
Drivers of Decentralization in Indonesia

 Decentralization had been nominally implemented since Law 5 of 1974, which

prescribed gradual decentralization, but this law was largely ignored and central
government maintained tight control
 Political and fiscal crises arising from the Asian Financial Crisis were the dominant
factors in driving devolution
 The sudden collapse of Soeharto’s regime in 1997 fueled demand for
legitimate, local representation
 There was a need to minimize the probability of provincial separatism in the
fragile post-Soeharto era produced a system that favored subprovincial
governments
 Central political elites have also sought to prevent the emergence of regional
provincial rivals by pushing authority and resources down to less powerful city
and district levels of government
Components of Decentralization

 Political – give citizens or their elected representatives more power in

public decision-making
 Administrative – redistribute authority, responsibility and financial
resources for providing public services among different levels of
government
 Fiscal – shifting some responsibilities for expenditures and/or revenues to
lower levels of government
 Service Delivery - transfers decision-making powers over Education,
Health, Infrastructure, etc. to local governments
Indonesia – The Big Bang

 Indonesia is considered a fast starter in decentralization, have rapidly introduced

major structural, institutional, and fiscal reforms in response to a sudden and far-
reaching political stimulus
 Introduced basic elements of a decentralization framework, subnational democratic
elections, and substantial resource sharing swiftly. Considerable follow-up policy
and legislative work to create a fully coherent and functional system remains
 Two Important Laws:
 Law 22/1999 – Regional Governance
Transfers functions, personnel, and assets from the central government
 Law 25/1999 – Fiscal Balance between the Central and Regional Governments
Outlined flow of financing between central and regional governments
 Central government remains responsible for security and defense, foreign policy,
monetary and fiscal matters, justice, and religious affairs
 Law 22/1999 – Regional Governance

 Abolishes hierarchical relationship between

the province and the districts
 Expanded role of local elected assemblies
(DPRDs)
 Increased transparency in government, and
encouraged partnership with civil society
 Transfer of responsibility of many functions to
the kabupaten and kota
 Created regional civil services, granting
regional governments authority to structure
their organizations to their own
preferences
 Before and after decentralization (Law 22)

Before After
President
(appoints Governor upon DPRD proposal)

President
Home Affairs (confirms Governor, Bupati, Walikota
after DPRD election)
(Main Channel of Communication) Line Ministries

Home Affairs
DPRD Propinsi Governor Supervision (Art 114 Law 22/1999) Line Ministries
Head of Autonomous Region (Daerah TK-I or Directives
Propinsi) and Head of Territory (Wilayah)
appoints Bupati on behalf of President after DPRD Propinsi
DPRD proposal elects Governor Guidance on DPRD Kabupaten or
Minimum standards Kota elects Bupati, Walikota
Technical Agency of Regional information Line Ministry Offices at Provincial
Level (Kantor Wilayahs or Kanwils)
Government (Dinas) Governor Minimum Bupati/Walikota
guidance Head of Autonomous Region Standards Head of Autonomous Region
(Daerah Propinsi) and (Kabupaten or Kota)
deconcentrated central Supervision (on
DPRD Kabupaten Government behalf of central
or Kota Bupati/Walikota
Government
Head of Autonomous Directtives
(Daerah TK-II, Region
Kabupaten or Kota)
and Head of Territory (Wilayah)
Technical Agency of Regional Technical Agency of local
Government (Dinas) Government (Dinas)
information Line Ministry Offices at
Technical Agency of Regional District/City Level (Kantor
Government Departemen or Kandep)
guidance
Law 25/1999 – Fiscal Balance

 Abolished two leading transfers from central to subnational levels, the Subsidi
Daerah Otonomi (SDO) for paying local public servants and routine expenditures
and the block Inpres grants intended to fund development projects
 These are replaced by a General Allocation Fund which is to be at least 25 percent
of domestic revenue
 Ninety percent of this fund goes to kabupaten and kota and ten percent to
provinces distributed to individual subnational territories according to a special
formula.
 Provides regions with the incentive to raise their own revenues (local taxes, local
charges and fees, revenue from local enterprises), and reduce cost of service
delivery
 Requires the regions to regularly report financial information to the center, allowing
the center to monitor general government finances, and anticipate risks early on
Fiscal Decentralization - Revenue

 Types of Revenue
 Regional Own Revenues, consisting of tax and non-tax revenues;

 Intergovernmental transfers, consisting of the shared taxes, revenues, the

general allocation grant (DAU) and the special allocation grant (DAK);
 Loans and other forms of local borrowing;
Fiscal Decentralization - Regional Own Revenue growth is good
But share of total spending is not ideal

Quad Desc

I High Share of won

revenue / spending.
High growth
II High Share of own
revenue / spending
.
Low growth
III Low Share of own
revenue / spending
High growth
IV Low Share of own
revenue / spending
Low growth
Fiscal Decentralization - Intergovernmental transfers on Sub
National Revenues

 Most funding sources still dependent on central government

 Revenues still quite centralized
Fiscal Decentralization - Sub National Spending in State Budget

 Furthermore, the dependency on the central government has increased since the
start of decentralization. It can be seen from Table III.1 that the national spending
for the sub-national levels increased during the five years implementation of the
decentralization era
Problems and possible solutions

 Greater sub national taxation autonomy

 High reliance on transfers from central
 No incentive for local government to generate more local
revenues since important taxes controlled by central
 Increase efficiency and accountability of local government
operations. Make taxes correlate to let residents choose service
level they want
 Increase accountability – institute output oriented
national minimum standards
 Improved co-ordination between local and central
 Snapshot of Healthcare

Availability
• Continuation of maternal and child health services previously provided by the central government.
• However service availability suffers from limited funding and personnel in most places.

Accessibility/Affordability
• Accessibility remains uneven - efforts underway to bring services closer to the people especially in remote areas.
• Varied affordability levels - local governments use various pricing strategies to recover costs while trying to maintain
affordability.

Equality
• Disparate implementation of special programs and initiatives for the poor, for women, and for citizens in remote
areas.
• Some local governments provide mobile health care centres as means to reach remote areas, but some populations
remain unserved.

Participation and Stakeholder Involvement

• Many structures and mechanisms that provide avenues for citizen participation, including by women - some
are still in the developmental stage.
 Snapshot of Education

Availability
• The nine-year compulsory education program has been implemented.
• However, there are not enough teachers, many are not well qualified, and facilities are inadequate. These problems
are particularly severe in rural and remote areas.

Accessibility/Affordability
• Miscellaneous fees are considered too high for many families, and while elementary schools are generally
geographically accessible, junior high schools are not.
• Some local governments have undertaken initiatives to resolve accessibility/ affordability issues.

Equality
• Awareness of scholarship opportunities for the poor is generally high. S
• Some local governments also provide non-traditional schools and programs for the poor, residents of remote areas,
and students with special educational needs.

Participation and Stakeholder Involvement

• Education Boards and School Committees are established, but there is little formal public involvement in policy and
program development. In some areas, businesses participate through scholarships or other initiatives
Resistance to decentralization

 Belief that local governments do not have the right

manpower with skills to govern
 Concern over the proper use of funds. i.e corruption.
The tight controls put into place have not worked
 Growth could be very uneven throughout the country
with full local autonomy i.e region with abundance of
natural resources will be richer and hence develop
quicker
 Perceived fragility of national unity. Perception that
decentralization will spur inter regional conflict and hurt
economic development
Perception of public services a few years after decentralization
CONCLUSION
MISC SLIDES
Fiscal Decentralization - Random

 No authority over major tax bases.

Kabupaten/Kota allowed to create own taxes
through local laws with approval from central
 Intergovernmental transfers has been significantly
restructured and expanded. Regional governments
now gain greater access to substantial amounts of
natural resource revenues than before and, in
addition, receive a share of the personal income
tax. Increase over 200% in just a few years
Thirteen Challenges Facing Indonesia
from speech by Susilo Bambang Yudhoyono , 1/25/2010

1 Strengthen Pancasila, Indonesia’s founding principles established by Sukarno

2 Proliferation of administrative regions to improve social welfare

3 Determine optimal free trade policy and participation in ASEAN-China Free Trade Agreement (ACFTA)

4 Stabilize commodity prices

5 Begin preparation for 2014 elections

6 Update1945 Constitution to better reflect the will of the people

7 Improve local election processes

8 End mafia practices in Judiciary

9 Improve national school final exams process

10 Improve judicial review process by explaining Constitutional Court rulings in public

11 Build credible judiciary system and increase quality of judges

12 Drive financial accountability of all state institutions through reporting and auditing

13 Improve checks and balances among state institutions to prevent abuse of power