Revisiting decentralization

Revisiting decentralization

The key issues and excesses raised by the latest World Bank
report on the first two years of Indonesia's decentralization
served to confirm the complaints of businesspeople, non-
governmental organizations and other analysts.

Most of the major issues were certainly expected in the
transition from a strongly centralized government to a
decentralized one in a country as large and diverse as Indonesia.

It is worth recalling that the two laws on decentralization
were hurriedly drawn up in 1999 under strong pressure from the
regions after the fall of Soeharto.

The introduction of decentralization in 2001 was further
complicated by clamoring in the regions, often stoked by groups
with vested interests, for the creation of new provinces and
districts, mainly in pursuit of power and control of local
resources.

Now, after two years of experiment, it is time to review the
basic rules of decentralization, to prevent the problems from
worsening and eventually killing the program's very goal of
bringing government closer to the people.

The report correctly identifies the key issues in four main
areas: The assignment of functions over the three levels of
government, institutional capacity, the intergovernmental fiscal
system and government accountability.

The central government is aware of the problems, evidenced by
its proposal last year to amend the two laws to strengthen the
fiscal, legal and administrative framework for the
decentralization process. However, public opinion of the proposed
amendments was affected by the suspicions of regional
politicians, who accused the central government of being
capricious in its commitment to devolve power to the regions.

The central government should indeed tread carefully in
balancing its desire, or its obsession, as many analysts say, to
maintain the unitary state with the aspirations of the regions
and the benefits and opportunities offered by a more
decentralized system of administration.

It would perhaps be wiser to wait for the establishment of the
Council of Regional Representatives in the 2004 legislative
elections before making any comprehensive changes to the
decentralization laws.

The government has correctly made its top priorities the
strengthening of the procedures governing the issuance of
regional regulations which contradict national laws and
interests, local administrations' accountability through a more
reliable budget reporting system and control of local government
borrowing.

But there are many other issues that need to be resolved to
safeguard the decentralization process, and the government
certainly cannot address them all at once.

Moreover, many of the problems, such as those related to the
need for more clarity in the assignment of government functions,
will require time to resolve because they involve the amendment
not only of the two laws on decentralization, but also of many
other sectoral laws and regulations.

Likewise, building the capacity of local institutions is a
long-term process that must be undertaken as an integrated part
of a national campaign to build good governance. Institutional
capacity building not only involves the establishment of rules
but, most importantly, the development of human resources.

However, the government is well advised to strengthen the
measures to force higher standards of accountability in local
administrations. The system of reliable financial accountability
being developed through an audited budget report is a good start.
But facilitating direct elections of governors and district
chiefs will go a long way toward enhancing accountability.

Next on the agenda should be improving intergovernmental
fiscal relationships, notably the rules on the formulation of
equalizing grants. This would help reduce inequalities between
rich and poor regions, and inequalities in the power of taxation
held by the central and local governments.

The early decentralization process has put most of the
emphasis on devolving spending authority to regional governments,
while the power of taxation remains largely concentrated in the
central government. While this is necessary to give the central
government more resources for allocating equalizing grants to
poorer regions, it does not provide much incentive to local
governments to create a good business climate.

Instead, the tendency among most local governments now is to
impose improper taxes and levies on existing businesses, at the
expense of scaring off potential new investors.

Giving local governments more power of taxation will encourage
them to compete for more private investments, fully aware that
new businesses create jobs, thereby increasing the purchasing
power of locals and fueling economic activity on which local
taxes or levies can be collected. Rapidly expanding businesses
will in turn raise the value of local property and will enable
local governments to raise more revenue from property taxes.