Decentralization of fiscal rules threaten domestic trade

JAKARTA (JP): Regional autonomy, and the subsequent decentralization of fiscal policies are threatening domestic trade due to the creation of new trade barriers by regional governments, according to analysts on Tuesday.

They said since the implementation of regional autonomy laws in January, domestic trade barriers had increased.

The analysts also warned that higher trade barriers would cost Indonesia the competitiveness of its products and impede growth of local and foreign investment.

Analyst at the Center for Economic and Social Studies Brahmantio Idsijoso said regions ran the danger of misinterpreting fiscal decentralization under the autonomy laws.

"It (regional autonomy) could become a serious threat to the creation of free internal trade, which regions badly need to spur their economies," Brahmantio said in his presentation during a conference on decentralization and domestic trade.

The one-day conference was organized by the Partnership for Economic Growth, which is an Indonesia-United States joint project.

Through fiscal decentralization, regions have greater authority to set their own budget, including seeking new sources of revenue.

As an adjustment to the regional autonomy laws, the government replaced Law No.18/1997 on regional taxes and levies with Law No. 34/2001.

But Brahmantio suspected that the new law on decentralization would further distort prices of commodities and trading activities.

He cited two reasons why regions tend to misinterpret the law.

First, he said, the previous Law No 18/1997 was too tight, because it severed the revenue sources of many regions.

Secondly, under regional autonomy, regions are pressured to finance more of their own spending, he added.

He said that several regions were already preparing new taxes and levies in line with Law 31/2001.

Citing a study, he said that the city of Makassar in South Sulawesi was planning two new tax forms and 10 more levies.

The city of Pontianak in West Kalimantan was drafting five new tax forms and three new levies to bring the number of their local taxes to 10, and levies to 17.

Whereas the Pontianak regency, he went on, planned 10 new tax forms and 12 new levies.

The government began implementing regional autonomy laws this year, in response to pressure from regions for more power.

People in provinces rich in natural resources like Riau and Irian Jaya are still poor as in the past the central government centralized most of the revenue generated in their area.

But a researcher at University of Indonesia's Center for Popular Economic Development Mohammed Ikhsan warned that the poor will be the hardest hit by the presence of new trade barriers.

"Farmers, which make up about 63 percent of our poor population, will suffer the most," he told reporters on the sideline of the conference.

He said food producers purchasing farmers' commodities, would abandon those who live in regions with high levies on their commodities.

While these regions rake in greater revenue, Ikhsan doubted local governments would return the earnings through higher social spending.

However, he added that regions would, sooner or later, learn that they cannot treat their local economies in such a manner.

"There will be a learning curve, the question though is how long it will take for them (regions) to learn" he added.

According to KPMG consultant and fiscal adviser to the Ministry of Finance, Douglas Todd Consulting, trade barriers can create economic isolation among regions.

He warned that Indonesia is at risk from disintegration, even though decentralization was aimed at avoiding that risk in the first place.

"If you allow the decentralization process to incorporate trade barriers, you will harm the very thing you're trying to achieve," he explained.

Chief researcher at the International Center for the Study of East Asian Development, William James, said that trade barriers discouraged domestic and foreign investment.

"Investors want to see a large and open domestic market," he explained.

He said that manufacturers avoided investing in regions with small markets, if they knew that inter-regional trade was costly. (bkm)