Decentralization~ 1) what it is about?

.......السلام عليكم ورحمة الله وبركاته

For 30 years from 1967, Indonesia made remarkable progress. A period of economic growth raised per capita income from US$50 in 1968 to US$ 1,124 in 1996, despite an increase in population from 147 million in 1980 to 179 million in 1990, with a forecast of 210 million in the year 2000. Between 1980-1990 the annual population growth rate was 1.9%, with a Crude Birth Rate of 22.5 per 1000 and a Crude Death Rate of 7.4 per 1000 in 1998. The population pyramid grew towards an older population, with a life expectancy at birth of 64 years for males and 67 years for femalesinfant mortality rate declined from 142 per 1000 in 1968 to 50 per 1000 in 1998. The proportion of the population living in poverty dropped from 60% in 1970 to an estimated 11 -13% in 1996. Most of the poor lived in rural areas, in some of the remote islands or upland areas. By 1997 the literacy rate for those aged 10 years or more was 89%.

However, these achievements received a severe set back in mid-1997 when the Indonesian economy collapsed. The value of the currency plummeted, prices increased, and unemployment rose dramatically. In addition, parts of the country suffered from long droughts and extensive forest fires. This sudden crisis resulted in political turmoil and, in 1998, a change of government. The ensuing political instability has had a direct impact on economic recovery. The proportion of population living in poverty increased from the estimated 11-13 % (1996) to 24.2%(1998).

Triggered by the financial crisis of 1997, the resignation of the Soeharto government, and the weak public support for the Habibie government, demands for political and fiscal decentralization increased in 1998.

The new policy of decentralization is outlined in Law No. 22, 1999 concerning “Local Government”1 and Law No. 25, 1999 concerning “The Fiscal Balance Between the Central Government and the Regions”. Both these laws are based on five principles:

1. democracy,
2. community participation and empowerment,
3. equity and justice,
4. recognition of the potential and the diversity within regions and
5. the need to strengthen local legislatures.

*** One aim of the policy of decentralization and regional autonomy is to bring the governments closer to their constituents so that government services can be delivered more effectively and efficiently. This is based on the assumption that district and municipal governments have a better understanding of the needs and aspirations of their communities than the central government.

The territory of Indonesia is divided into districts (kabupaten) and municipalities (kota). They are technically the same level of government but differ in its location. If located in a rural area (district) or if an urban area (municipality). Within districts and municipalities there are sub-districts (kecamatan) which are smaller administrative government units. Each sub-district is further divided into villages. Villages in rural areas are called desa, while in an urban areas there are referred to as kelurahan.

Law No. 22, 1999 transfers functions, personnel and assets from the central government to the provincial governments. This means that additional powers and responsibilities are being devolved to district and municipal governments, establishing a far more decentralized system compared to the deconcentrated and co-administrated systems of the past. The bupati (district head) and walikota (municipal head) as the head of the autonomous local government will be directly responsible to the local assembly (Dewan Perwakilan Rakyat Daerah, DPRD), while the deconcentrated agencies for devolved functions will be abolished and the civil servants of these agencies will be placed under the authority of the regional governments.

The two new decentralization laws cover all major aspects of fiscal and administrative decentralization. Under the laws, all public service delivery functions except defense, foreign affairs, monetary and trade policy, and legal systems will be decentralized to subnational governments. Most public services, including education, health, and infrastructure, will be delivered by districts and cities, with provinces performing only the role of coordinator. The previous hierarchical relation between provinces and districts or cities will be abolished. Any task not specified in the law will fall to districts or cities. The subnational share of government spending will reach more than 40 percent, up from 19 percent in fiscal 2000.

Risks of the new laws !!!

IMF and World Bank experts found that Indonesia’s decentralization process, as structured by the two laws, contained serious risks:

• The Law on Regional Governance is too general in assigning spending responsibilities—and so threatens effective service delivery. Rather than clarifying responsibilities, the implementing regulations for the law have confused regional governments, because the regulations specify only the center’s remaining responsibilities. Because of this lack of clarity in the assignment of functions, the decentralization of revenue under the Law on Fiscal Balance could exacerbate macroeconomic imbalances.

• Decentralizing most functions of public service provision to districts may not be compatible with government capacities, or in line with economic principles of scale and spillover.

• Political decentralization is incomplete. Although regional parliaments were elected in July 1999, many regional heads were appointed by the old government and will be replaced by elected heads only when their terms expire. As a result the key element of local government accountability may be missing for years to come.

• The proposed sharing of oil and gas revenues would distribute significant revenue, most of which is not from royalties or taxes on resource rents, to a small number of provinces and districts. This arrangement would exacerbate regional disparities in revenue and is inconsistent with the objective of equalizing transfers. In addition, highly volatile oil and gas revenues are not ideal sources of local revenue, and would create considerable uncertainty for local budgeting.

• The coincidence of administrative and fiscal decentralization renders nearly impossible the design of an objective equalization scheme. Cost differences among regions cannot be determined because most functions were financed through the central budget. Moreover, information is not available on current costs for each function, impeding the determination of the aggregate transfers needed to finance the decentralized functions.

• The Law on Fiscal Balance does not provide regional governments with new taxing powers. Regions have only limited autonomy over small taxes such as water use taxes and street lighting taxes. Thus local governments cannot cover additional local spending through taxes on local residents— compromising local accountability.

• The timetable for implementing the new laws is extremely tight. International experience indicates that at least two years are needed to prepare detailed regulations for functional devolution of major services and to establish a system for administering grants. Hasty implementation could interrupt important local public services.

RESOURCES
1) http://www.ino.searo.who.int/en/Section3_24.htm
2) http://www.who.or.id/eng/strategy.asp?id=cs2
3) http://www.mekonginfo.org/HDP/Lib.nsf/0/7C32092FE86174C847256D8F0019DDA1/$FILE/Q%201.2%20-%20World%20Bank%20-%20PremNote43_DecInd.pdf
4) http://www.smeru.or.id/report/workpaper/euroseasdecentral/euroseasexperience.pdf