Decentralization looks on track but wealth distribution matters

By Martin Manurung and Erny Murniasih, Jakarta
(Jakarta Post, Thursday 22 November 2007)


Seven years on, decentralization faces a critical question: is it going down the right track?

Regional autonomy was part of Indonesian democratic reform, one of the manifestations of the democratization processes which began after the fall of Soeharto. Along with political decentralization, which aims at bringing the government closer to the people, Indonesia also launched economic decentralization to achieve better distribution of income between the central and the local governments. It is also expected that these reforms will enhance the capacity of local governments to provide better services to the people.

Nevertheless, local economic development has been slow. Although the total Gross Domestic Regional Product (GRDP)of the provinces between 2005 and 2006 increased slowly - by about 13 percent -- the GRDP distribution is still concentrated in certain provinces, such as DKI Jakarta. The province with the slowest growth is North Maluku. In addition, the gap between the richest and poorest province tripled over the same time period, demonstrating great inequality among regions.

Another issue is the amount of money that the central government has transferred to the regions. Since 2005, the ratio of the Intergovernmental Fiscal Transfer (IGFR) amount to the total amount of state budgets increased steadily. The figure, in 2005 was 27 percent, increasing to 32 percent in 2006 and 34 percent this year.

The 2007 Government Financial Note argues that more IGFR will result in a higher GDRP, which is the aggregate local income. However, due to problems of inequality and fiscal imbalance, an increase in IGFR does not always mean people are better off at the local level. We must also ask whether the allocated money is effectively spent, on better public services offered locally.

As discussed above, it is the people who should benefit the most from decentralization. Nonetheless, from a budgetary perspective, the majority of local budgets are primarily used to pay the salaries of local government officers. The proportion of the total budget spent on their salaries was 41 percent in 2006 and 43 percent in 2005. Thus, it is an undisputable fact that decentralization program monies are not effectively and efficiently utilized to enhance local economic development.

With this background, several points can be made. First, the government should reconsider the mechanism behind local budgeting. It is true that intervention from the central government is generally undesirable in the local budgeting process. Many believe this would hinder the full implementation of decentralization.

However, as in other countries, it is crucial that local governments are given certain guidelines from the central government, to ensure that budgets are created without delay and that budgetary funds are spent on the delivery of public services.
Recent reports indicate that local governments have "parked" up to 62 trillion rupiah in bank deposits and the central bank certificates (SBI). This is mismanagement of public funds which obviously does not benefit the people.

In view of the mismanagement risk, the central government should not leave local governments on their own, particularly in budgeting matters. This is extremely important because local legislative councils have not been an effective advocate for public needs and public participation in budget preparation is very limited. Therefore, the central government should provide clear and comprehensive guidelines to minimize mismanagement and misinterpretations of regional financial regulations.

Second, the equalization grant needs revision. Currently the amount of this grant is significant. The equalization grant has contributed to overall IGRF to the tune of 60 percent. However, as discussed, the gap between regions is still an unresolved problem. Thus, the government and the parliament must pursue better alternatives to fix the horizontal imbalances.

Third, the complexity of government procurement requirements deserves a thoroughgoing review. Delays in budget implementation is often blamed on these rules. The government must simplify the process without compromising on transparency and the fight against corruption.
Finally, bringing the government closer to the people -- the overall aim -- will remain merely a catchphrase if there is no harmonization between central and local governments. Both sides must work together to resolve the above issues and put aside narrow-mindedness.


Martin Manurung is a senior consultant at Sekurindo Global Consulting and Erni Murniasih is a practitioner in Fiscal Decentralization. Both are 2005 British Chevening Scholars and based in Jakarta.