Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia
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Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia

The ‘Big Bang’ Program and its Economic Consequences

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.
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Chapter 4: The Policy of Decentralization in Indonesia

M. Ryaas Rasyid


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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