8 - Fiscal Decentralization and Its Impact on Regional Economic Development and Fiscal Sustainability

Summary

INTRODUCTION

During the time leading up to the second general elections of 2004, the issue of decentralization and regional autonomy had not been widely considered as a critical issue in nation-building, and hence failed to become a major issue in platform-building by the major political parties. There could be many causes for this development. First, the process might have been considered as quite successful. At least, there was no real chaos occurring as a result of the decentralization process. Second, regardless of the effects of the process itself, Indonesians have adjusted well to the new situation and therefore, everything related to decentralization becomes routine activity. Third, for electoral reasons the political parties could have been more attracted to other more popular issues than the decentralization issues, like corruption, law enforcement, and the economic recovery process. In the absence of media attention, decentralization was not yet very visible to many Indonesians. Fourth, and most importantly, there might be a tendency that central government and political elites at the centre and in the regions have either slowed down the decentralization process or, which would be even more extreme, have gone back to the centralization system of the past. There might be many causes to explain the relative inconspicuousness of the decentralization process, but the fact remains that only a few parties were interested to raise the decentralization issues as one of their campaign themes.

After three years of decentralization, it was still difficult to judge if the process was successful or not. The international community deemed the process as “still on the right track”, asserting that the Indonesians were able to manage the massive and drastic decentralization, and minimize the negative effects. The central government felt that it had managed the drastic change quite well but at the same time admitted that it still worried about the future and that much would have to be done in order to keep the decentralization on the right path, including the revision of Law No. 22/1999 and Law No. 25/1999.

The local governments, however, were less satisfied than the central one. They were still suspicious that the central government was not fully supporting the process and should the process be considered a failure, there would be a recentralization process. On the other hand, they admitted that they had experienced a “freedom” that had not existed during the previous centralist era.