REGIONAL AUTONOMY AND FISCAL DECENTRALIZATION IN DEMOCRATIC INDONESIA

Abstract

Regional autonomy and fiscal decentralization has become a hot political and economic policy issue in Indonesia since the fall of the Soeharto Regime. In response, the interim government of President Habibie enacted two new laws in 1999, to promote regional autonomy and fiscal decentralization, namely Law on Local Autonomy (No. 22/1999) and Law on Fiscal Relations between Central and Local Governments (No. 25/1999), which the new government of President Abdurrahman Wahid is in the process of implementing. However, the authors maintain that the basic designs of these laws are seriously flawed, and that the government of Indonesia would be well advised to go back to the drawing board. First, under the new laws, the central government's power is substantially to be devolved to the second level local governments, whose administrative, managerial and planning capabilities are inadequate. Secondly, a major part of local governments' revenue would rely on the sharing of natural resources taxes, which would aggravate horizontal imbalances. Thirdly, there would be thus a need for large- scale fiscal transfers, which would strain the central government's budget. Lastly, given the enormity of the tasks ahead, a more gradualist approach is preferable.