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
Chapter 4: The Policy of Decentralization in Indonesia
M. Ryaas Rasyid BACKGROUND OF THE POLICY After the fall of Soeharto in May 1998, some signiﬁcant changes in the Indonesian political and administrative system have taken place. One of them is the shift of policy from a highly centralized system of administration, which had been instrumental in supporting national development for more than 30 years, to a decentralized one. The then rigid and centralized system ultimately proved itself unable to respond to the ﬁnancial and economic crises that attacked Indonesia from July 1997. It was interesting to observe the reaction of Indonesian political and economic leaders to the ﬁnancial crisis in Thailand in early July 1997. Most of them optimistically expressed their assessment that even if Indonesia should be affected by the seemingly unavoidable regional crisis, it would not be as bad as in Thailand. They said then that the fundamentals of the Indonesian economy were strong enough to guarantee our survival. However, this optimism could not be sustained longer than three weeks. When in August 1997 Indonesia got its own turn, it was actually much worse than the Thai experience of weeks before. At that time the rupiah lost 40 percent of its value, and by January 1998 it had lost a staggering 80 percent of its total value. This was a completely unexpected situation, a shock that brought Indonesia into confusion. Frankly such an economic earthquake would destroy the economic structure of any society. It was an embarrassing situation for the government and a source of...
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