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 9: How Should Revenues from Natural Resources be Shared in Indonesia?

Roy Bahl and Bayar Tumennasan

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


Roy Bahl and Bayar Tumennasan INTRODUCTION The share of ‘mining and quarrying’ in GDP is quite large in a number of countries, above 10 percent in 29 of 100 countries for which we could find data and accounting for more than one-fifth of GDP in 13 countries.1 The share in Indonesia is especially large. At 10.1 percent, Indonesia’s share is about five times higher than the international median. Of the countries in the East Asian region, only Mongolia and Papua New Guinea are more heavily dependent on natural resources than is Indonesia. As we document later, we find that countries with larger mining shares tend to delegate more spending power to local governments. One possible explanation for this is that the pressures to devolve some of the rents extracted from the natural resource sector are irresistible. Based on our cross-section evidence, we can say that if the mining share of GDP is higher in one country than another by 100 percent (i.e. it is 20 percent versus 10 percent of GDP), the expected local government expenditure share will be higher by 13 percent. However, based on its mining share, per capita GDP, population and land area, Indonesia’s local government expenditure share in the 1990s was 14.4 points below the expected level.2 The ‘Big Bang’ decentralization of 2001 brought Indonesia close to the expected level, but the share of local government expenditure remains lower than in similarly situated countries. The arguments for sharing natural resource revenues with regions are often...

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