6 - Decentralization, Regulatory Reform, and the Business Climate

Summary

INTRODUCTION

This chapter examines the many regulatory problems in local government in Indonesia and proposes simple models for regulatory reform. From the outset, it is important to stress that decentralization is not the major cause of regulatory problems in the regions. Many of the problems discussed in this chapter represent nothing new and have been documented elsewhere. For example, SMERU Research Institute (1999) and others identified a range of local government imposed tariff and non-tariff barriers in internal trade in the mid-late 1990s. The World Bank (1994) discussed the inappropriate use and pricing of user-charges in local government in the early 1990s. Goodpaster and Ray (2000) outlined the discriminative and anti-competitive nature of many local government regulations just prior to the commencement of the autonomy process.

Decentralization nevertheless does present new challenges and pressures. For example, under pressure to raise own-source revenues, local governments have turned to using a number of trade-distorting taxes and charges that were commonly found in the regions in the early-mid 1990s, but later banned through deregulation measures in 1997/98. Also under decentralization, new legislation on local taxes and charges (UU 34/2000) has lead to sub-optimal arrangements governing the supervision of local regulations. As a result distorting local taxes and charges are being implemented without effective review of their regulatory impact.

Monitoring and addressing the many regulatory problems in local government and policy-making has been an important focus for the USAID Partnership for Economic Growth (PEG) project based at the Ministry of Industry and Trade. This paper draws on, and builds upon the work by PEG and MOIT counterparts and includes the many regional and desk studies carried out under the PEG-USAID banner by local research groups such as the SMERU Research Institute, BIGS (Bandung Institute of Government Studies), KPPOD (Regional Autonomy Watch), LPPPM Sawala, AKADEMIKA, REDI (Regional Economic Development Institute), as well as a number of contracted individual researchers (see Table 6.l).

This chapter considers local regulatory problems at two levels. The first problem is at the process level. That is, the process by which a regulation (or other forms of government intervention) evolves from initial idea, to the design and review stage, through to final implementation.