Table of Contents

Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

The ‘Big Bang’ Program and its Economic Consequences

Studies in Fiscal Federalism and State–local Finance series

Edited by James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati

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.

Chapter 2: The Making of the ‘Big Bang’ and its Aftermath: A Political Economy Perspective

Bert Hofman and Kai Kaiser

Subjects: asian studies, asian development, asian economics, development studies, asian development, economics and finance, asian economics, public finance

Extract

Bert Hofman and Kai Kaiser1 INTRODUCTION Indonesia’s 2001 decentralization is rapidly moving the country from one of the most centralized systems in the world to one of the most decentralized ones. Law No. 22/1999 gives broad autonomy to the regions in all but a few tasks that are explicitly assigned to the center. With the authority come the resources, lots of them. In the first year, the regional share in government spending jumped from 17 percent to 30 percent, and over time, with the current assignments of functions, this share is likely to rise to over 40 percent, a sharp contrast with the average 15 percent of spending in the 1990s. This share is also much larger than can be expected on the basis of Indonesia’s size, whether measured by population or geographical size. In addition to spending, much of the apparatus of government was put under the control of the regions. Over two million civil servants, or almost two-thirds of the central government workforce, were transferred to the regions, and currently, out of a civil service of 3.9 million, some 2.8 million are classified as regional employees. In total, 239 provincial-level offices of central government, 3933 local-level offices,2 more than 16 0000 service facilities (e.g. schools, hospitals, health centers) were transferred lock stock and barrel to the regional governments throughout Indonesia. In this chapter we examine the ‘Big Bang’ decentralization from a political economy perspective. We first discuss the history of decentralization efforts in Indonesia,...

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