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Indonesia's decentralization experiment: motivations, successes, and unintended consequences.

1. Introduction

Indonesia's "big bang" decentralization, which took effect in 2001, saw the country transform from highly centralized (Smoke and Lewis 1996) to highly decentralized governance (World Bank 2007). Unlike in many other countries that were part of the decentralization wave, this process was driven primarily by the extraordinary political circumstances of the time, rather than by attempts to capture efficiency gains in governance or economic performance. After three decades of heavy-handed and centralist authoritarian rule under President Soeharto's New Order (1966-98), Indonesia faced strong centrifugal forces along its periphery and political instability caused by elite fragmentation. Rapid decentralization was the chosen method to address both crises.

Under the decentralization laws of 1999 (Law 22/1999 and Law 25/1999), the primary responsibilities for a large range of government functions--with the exception of national defence, international relations, justice, police, monetary policy, and finance--were transferred to the district level of government. (1) While central transfers account for roughly 90 per cent of sub-national government expenditures, the decentralization laws grant localities significant autonomy over the ability to allocate resources according to local preferences, subject to standard-setting from the centre (Shah, Qibthiyyah and Dita 2012).

Concurrent with the decentralization process, Indonesia also underwent a democratic transition that saw the introduction of competitive direct elections across multiple levels of government. (2) Directly elected district-level legislatures acquired significant powers over local budgets, laws and regulations. While this devolved administrative decision-making significantly, variation in local capacities has also exacerbated differences in the quality of governance.

Arguably, there are two significant successes of Indonesia's decentralization process. First, decentralization has increased autonomy for the periphery of Indonesia's vast and ethno-culturally diverse archipelago, thereby allowing local cultural expression to thrive, enervating the centrifugal forces that have long complicated centre-region relations (Aspinall 2010; Mietzner 2014). Second, decentralization has played a role in dispersing political power across political levels and geographic areas, thereby inhibiting the extreme concentration of power that characterized Soeharto's New Order government.

While decentralization has been theorised to affect development by improving the responsiveness of governance to local conditions, we argue that a review of the evidence from Indonesia is decidedly mixed. Specifically, there is little evidence that decentralization has led to an increase in economic growth. Some aspects of public service delivery may have benefited from increased local autonomy and accountability, but the net effect is unclear at best. Elite capture and rampant administrative overspending limit the positive impact of decentralization on governance.

This paper proceeds as follows. The second section outlines the history of decentralization in Indonesia, focusing on the perpetual tensions between unity and diversity in the vast archipelagic country. The third section details the current status of sub-national-central relations. The fourth section examines current political debates around decentralization, while the fifth section provides an overview of research on the outcomes of decentralization.

2. History of Decentralization

The modern boundaries of Indonesia are a colonial creation that tie together an extraordinarily diverse and improbable population, currently the world's fourth largest at a quarter billion people. Its 17,000 islands stretch over 5,000 kilometres from Papua in the east to Aceh in the west; the country's vast diversity and size engender an inevitable tension between administrative unity and regional autonomy, as well as ensure the virtual isolation of many communities.

For early indigenous empires as well as the majority of Dutch colonial rule, reliance on regional autonomy and customary adat law was the default approach to administration (Fasseur 2007). Not until the early 1900s did the Dutch make serious efforts to establish a presence across the archipelago that would allow for a direct chain of command from the central administration in Java to the country's periphery. Sukarno and Hatta declared independence in the dying days of Japanese occupation in 1945, but the Dutch's refusal to recognize this led to a four-year armed struggle before Indonesian sovereignty was finally conceded in 1949.

Following a divide-and-rule strategy during the 1945-49 struggle, the Dutch decentralized many government functions and laid the groundwork for a federal structure (Taylor 1960). Records suggest that several key independence leaders, including Hatta himself, supported a federal structure for independent Indonesia (Feith 1962), but the envisioned 1949 election to decide between a unitary and federal structure did not take place (Booth 2014). Instead, Javanese fears about territorial integrity led to a unitary structure with administrative layers at the provincial, district/ municipality (kabupaten/kota), sub-district (,kecamatan), and village (kelurahan/desa) levels.

While a series of regional rebellions in the late 1950s were ultimately unsuccessful at securing sought after autonomy, they highlighted the precarious reach of the central state beyond Java. In fact, without the capacity to enforce official (and centrally created) laws and regulations, local officials operated independently of central directives in a form of de facto federalism (Mackie 1980).

After tensions between the military and President Sukarno over his support for the communists culminated with the still unattributed assassination of six generals in September 1965, Major General Soeharto sidelined Sukarno and established the military as the dominant institution in the country, coordinating an anti-communist campaign that resulted in the killings of between 500,000 to 1 million suspected communists (Ricklefs 2001; Roosa 2006). Upon seizing the presidency, Soeharto immediately began to consolidate the power of central state structures. One approach saw military officials inserted into every level and organ of government, consolidating the direct line of command and accountability from Jakarta down to the village level. A series of development grants, most notably the Presidential Instruction grants (Inpres), further contributed to centralization by providing ministries the ability to directly shape local level development. By the end of the 1970s, nearly every village in Indonesia had a primary school (Duflo 2004), most of which were funded by Inpres. Law 5/1974 saw many remaining influential local leaders supplanted by new regional heads (kepala daerah tingkat I) that reported directly to the central government. This had the effect of making local government agencies "deconcentrated" units of the central government, thus increasing regional accountability.

By the 1980s, Soeharto's New Order had created a highly centralized state structure that relied on political suppression and military might to maintain control. From a development perspective, the authoritarian New Order was arguably successful: annual growth rates topped 7 per cent, which led to a greater than tenfold rise in per capita income and a reduction of poverty from 70 per cent of the population in the 1960s to 11 per cent by the mid-1990s (Schwarz and Paris 1999; Hill 1997). Yet the heavy-handedness of the central government created much resentment, with grievances especially strong in resource-rich parts of the country that saw significant portions of local wealth transferred to Jakarta. The Asian Financial Crisis (AFC) of 1997 invigorated demands for change, which ultimately led to Soeharto's overthrow in May 1998 and brought more than three decades of centralized authoritarian rule to a close.

The political uncertainty unleashed several long-suppressed separatist movements in East Timor, Aceh, and Irian Jaya (now Papua and West Papua) provinces (Rizal 2003; Charras 2005). (3) Ethnic conflicts fought across migrant-indigenous cleavages erupted in West Kalimantan, Central Kalimantan, Maluku, North Maluku, and Central Sulawesi (Tajima 2014). Amidst this uncertainty, threats of territorial breakup grew louder. The Jakarta-based political elite that formed the New Order's core found itself in disarray following Soeharto's ouster. Against this backdrop, Soeharto's successor B.J. Habibie turned to decentralization and electoral reform in 1999 as political solutions to carry Indonesia through the transition.

This move would have surprised many observers from the preceding years, as decentralization did not factor into any of the prominent reformasi demands heard in 1997 and early 1998 (Lane 2014a). Below the surface, however, numerous quiet proponents for decentralization existed among the bureaucrats and technocrats of the New Order state, who for a significant period of time had recognized the need to devolve elements of governance to better meet the demands of complex realities on the ground. When the two major beneficiaries of centralistic Indonesia--the Army and Soeharto-affiliated elites--were sufficiently weakened by the backlash against the New Order regime, those technocratic voices, bolstered by foreign proponents like the Asian Development Bank and World Bank, as well as the nascent regional and local economic elites, were successful in placing decentralization on the reform agenda (Lane 2014n)- Habibie, sensing an opportunity to broaden his political coalition, instructed bureaucrats in the Department of Home Affairs to quickly draft the requisite legislation, soon after which prominent political proponents like Ryaas Rasyid put their weight behind the initiative. Within a period of less than two years, a radical restructuring of the Indonesian state had been pushed through parliament, supported in large part by actors that were sidelined by the centralist forces of Soeharto's New Order.

The framework for the rapid decentralization was defined in two laws (Law 22 and Law 25), both passed in 1999. The former devolved a significant portion of government functions to district level governments and specified that public goods such as education, healthcare, and infrastructure were to become the purview of local governments, though the central ministries retained a role in implementation and regulation of provisions. This devolution fundamentally altered the power dynamic between levels of government. Law 22/1999 also introduced elections for provincial and district level legislatures, which shifted--at least in theory--political accountability from entirely top-down to partially bottom-up. Law 25/1999 established the fiscal framework for decentralization, primarily through the creation of a general allocation grant (dana alokasi umum, DAU) that provides the bulk of the revenue for regional governments. This framework was amended in 2004 (Law 32/2004 and Law 33/2004) by the introduction of direct elections for governors, mayors, and district heads, inter alia, in an effort to strengthen executive authority vis-a-vis legislative authority.

Concomitant with decentralization, fundamental changes to Indonesia's party system contributed to the further fragmentation of power. Under the highly centralized New Order system, only three national parties were officially sanctioned, a stark contrast to the nearly 200 new parties that emerged in the immediate aftermath of Soeharto's overthrow (Ufen 2006). This rapid expansion triggered fears that the nascent party system would be too fragmented to allow for coordinated governance, as well as that it might allow separatist parties to institutionalize the centrifugal sentiments prevalent along the country's periphery. The legislature responded with Law 2/1999, which attempted to promote broad-based parties by imposing a number of conditions for participation in the impending transitional elections. The core condition stipulated that parties have branches in at least a third of Indonesia's provinces, as well as a physical presence in at least half of the districts or municipalities in those provinces. Of the greater than 140 parties that applied to contest the 1999 election, 48 met these requirements.

The effect of Law 2/1999 was to impose a significant bias against parties with narrow bases, whether regional or social in nature. The elections were dominated by five parties, in which New Order elites featured prominently. Revisions in 2004 to the law regulating political parties imposed even more prohibitive conditions on small parties. These have kept Indonesia's party system relatively manageable in terms of number of parties, but have led to significant barriers to entry for those outside of the party system, at least for nationally visible positions. Since contestation in local elections is limited to those parties that meet the national level conditions, the party system has also granted central elites some informal leverage over local elites.

Government Regulations 129/2000 and 78/2007 specified conditions for the creation of new regions, ostensibly to improve service delivery and governance. This has led to the dramatic increase in the number of sub-national units in Indonesia following splitting (pemekaran) at the provincial, municipality, district, and village levels. Between 1998 and 2014, the number of provinces increased from twenty-seven to thirty-four, the number of municipalities (kota) from sixty-five to ninety-eight, the number of districts (kabupaten) from 249 to 416, and the number of villages and urban hamlets (desa and kelurahan) from 67,925 to 81,626, according to the central statistical agency Badan Pusat Statistik. The net outcome of pemekaran has been contentiously debated; the search for new patronage opportunities by local elites appears to have been a motivation along with the ostensible search for improvements in government efficiency (Fitrani, Hofman and Kaiser 2005; Firman 2009; Simandjuntak 2015).

The devolution of political and administrative power to local levels has given rise to powerful and assertive new regional elites, of which current President Joko Widodo (Jokowi) is a prime example. This group seized upon the sudden weakness of the central government following decentralization to assert their influence over their local domains, often in conjunction with appeals for recognition of adat (customary) law. Despite the informal controls imposed by the party system, increased access to resources and the 2004 introduction of direct elections further entrenched their positions (Crouch 2010; Choi 2014; Hadiz and Robison 2013; Schulte Nordholt 2012). This new political class has become a source of resistance against moves to recentralize power in the mould of the highly centrist state structures of the Soeharto era.

Despite the entrenchment of decentralization, numerous efforts to shift the balance of power back towards the centre have occurred. Several examples stand out. Government Regulation 38/2007 on the division of roles between national, provincial, and district level governments had the effect of expanding the scope of regulatory powers that ministries have over sub-national governments, specifically by allowing them to establish norms, standards, and procedures for evaluating local government performance. The 2009 moratorium on the creation of new districts has been interpreted as an attempt to exercise greater central control over the dynamics of regional politics (Simandjuntak 2015). Ultimately, it was only marginally effective (new proposals were accepted and approved during the moratorium) and was lifted in 2012. Once fully implemented, Law 23/2014 on Regional Governance aims to make it easier for the central government to reverse district splitting in cases where new units underperform, thus further strengthening central control over regions. The law also transfers significant control over natural resource planning and management from the local kota and kabupaten levels to the more central provincial and ministerial levels, a move which gives the centre greater control over lucrative natural resource concessions and facilitates central efforts to monitor environmental and political concerns (Endi Jaweng 2014). At the executive level, President Jokowi has made clear his intentions to use "budget politics"--i.e. increased control over central government transfers--to exert greater central influence over local government via the purse string, though it is unclear to what extent he will be able to push through the required changes to the relevant fiscal transfer laws. Ultimately, however, these actions amount to modest adjustments to the centre-local balance of power, rather than a concerted recentralization effort.

A more contentious attempt at recentralization was narrowly averted in late 2014 just prior to the inauguration of President Jokowi. The legislature, under the control of Jokowi-adversary Prabowo Subianto's Merah-Putih coalition, passed a regional election law that abolished the pilkada system (direct elections for local-level executive positions), restoring the usage of appointments (Chen and Priamarizki 2014). Abolishing pilkada would give the central party elites far greater control over local political dynamics, as parties would regain leverage over increasingly autonomous regional elites (Tomsa 2014). The move was met with significant pushback from the public, who voiced frustrations with the widespread corruption and self-serving behaviour of the parties that would gain control of the appointment process. Only in the final days of his term did outgoing President Yudhoyono restore direct elections through a perppu (government decree in lieu of law), fearing damage to his legacy. While the manoeuvre to abolish the pilkada system was unsuccessful, it underscores the tensions that remain between the centre and regions even as we approach two decades after the introduction of Indonesia's "big bang" decentralization legislation.

3. Current Status of Sub-national-Central Relations

The first elements of Indonesia's watershed 1999 decentralization laws were implemented in 2001. In conjunction with significant political liberalization, they created the framework for an unprecedented devolution of administrative and political power in Indonesia (Hofman and Kaiser 2004). In practice, incomplete implementation of decentralization laws and legislative efforts towards selective recentralization have led to a perpetual tension between central and local power, though in most areas the balance remains with the localities. Far-reaching political decentralization has created powerful new local elites that fundamentally alter the country's political dynamic and circumscribe the dominance of the Jakarta-based elite. Administrative decentralization is extensive, granting localities widespread discretion over governance decisions. Fiscal decentralization, by contrast, remains limited, as localities face significant limits on the ability to raise revenue, and thus remain dependent on central transfers to fund a large portion of their budgets. This section begins with a brief overview of Indonesia's state structure, before assessing the allocation of political, administrative, and fiscal powers.

Indonesia maintains a unitary state structure with a hybrid presidential and parliamentary system of a republican government. The current system rests on the 1945 constitution but reflects the changes from several waves of constitutional amendments made since the overthrow of Soeharto in 1998. The constitution stipulates that the highest governmental body in Indonesia is the bicameral parliament, known as the People's Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR). The MPR is comprised of the 560 member People's Representative Council (Dewan Perwakilan Rakyat, DPR) and the 136 member Regional Representative Council (Dewan Perwakilan Daerah, DPD). The DPR holds the balance of legislative authority, with the power to pass legislation, conduct inquiries, oversee the budget, dismiss the executive, and amend the constitution. Powers of the DPD, by contrast, are more conscribed and largely limited to providing inputs to the DPR on regional matters, including resource management and provincial relations. Since 2004, the president has been directly elected to a five-year term, with a limit of two terms. Despite the high visibility of the Indonesian presidency, it has become an institutionally weak office that is largely beholden to the DPR in the post-Soeharto era, at least in matters of lawmaking and budget provision.

The vast geographic size of Indonesia has necessitated the creation of multiple administrative levels. As illustrated in Figure 1, the current arrangement is largely a carryover from Dutch colonial rule, which divides Indonesia into (with 2014 numbers indicated): provinces (34); district-level municipalities (kota) (65) and regencies (.kabupaten) (416); and sub-districts (kecamatan) (7,024); with 81,626 villages (desa) and urban communities (kelurahan) at the lowest rung.

3.1 Political Decentralization

As part of political decentralization, local legislatures at the provincial (Dewan Perwakilan Rakyat Daerah Provinsi, DPRD Provinsi) and district (Dewan Perwakilan Rakyat Daerah Kabupaten/Kota, DPRD Kabupaten/Kota) levels are directly elected. Village level councils (Badan Perwakilan Desa, BPD), which support village governance are likewise directly elected, but are not constitutionally part of the government. Law 22/1999 specified the procedures for the DPRD to elect and also dismiss the provincial (Gubernur) and district level heads (Bupati and Walikota), subject to confirmation by the president. Law 32/2004 introduced direct popular elections for provincial and district level heads, which were implemented incrementally, dependent on the completion of incumbents' existing terms.

In addition to standard stipulations of decentralization, five provinces have special designations with increased autonomy. With its history of secessionist movements, the westernmost province of Aceh is granted significant autonomy. This includes provisions that allow for sharia law, Aceh-based non-national political parties, the usage of a provincial flag, the right to a larger proportion of revenue from oil and gas extraction, and greater control over the implementation of central directives.


The easternmost provinces of Papua and West Papua, which have likewise experienced secessionist movements, are also in principle granted additional autonomy and special allowances, though implementation has been incomplete. These include among other things: the right to use a provincial flag; to organize a local police force; and a requirement that the governor be of local origin. Under the terms of the agreement, West Papua and Papua are entitled to 80 per cent of revenues from forestry, fishery, and mining, as well as 70 per cent of revenue from oil and gas generated in the provinces, a significantly higher share than in other provinces (Resosudarmo et al. 2014). Proposals in 2014 to introduce new terms of autonomy have been contentiously protested in both provinces, and central-provincial relations remain very tense.

With a metropolitan population of roughly 30 million, the Jakarta Capital Region (Daerah Khusus Ibukota Jakarta, DKI) grants the governor unique powers over the local government to facilitate coordination in the metropolis; while the DKI is divided into administrative districts, those units do not have the autonomy that is granted to comparable units in the provinces. Lastly, the Yogyakarta Special Region is led by the Sultan of Yogyakarta, maintaining the long-standing legacy of the Yogyakarta Sultanate that has controlled the area for centuries.

3.2 Administrative Decentralization

The basic terms of administrative decentralization in Indonesia are outlined in Law 22/1999, which was first amended by Law 32/2004 and again by Law 23/2014. These laws devolve a significant portion of government functions to the regional level. Article 7 (of Law 22/1999) specified the realms of government that are not to be decentralized (though it does not explicitly state that they are the sole purview of the central government): national defence; international relations; justice; police; monetary matters; development planning; religion; and finance.

Article 11 (of Law 22/1999) specified several public service responsibilities of the districts, namely the provision of health, education, and infrastructure, as well as environmental management. By contrast, provinces were conferred more limited powers and responsibilities, they were; to act as backstops for districts that were unable to execute their responsibilities; to facilitate coordination between districts; and to provide a limited range of province-level services, including provincial hospitals, provincial roads, and special education facilities, among others. Primary responsibility for most service delivery, in other words, fell to the districts rather than provinces. Importantly, the law also specified that the districts maintain autonomy from the overarching provinces, thus inhibiting (at least in principle) top-down interference. Regional regulations can be nullified by the central government when in conflict with central laws, which remain supreme except as specified in the provinces granted with special autonomy. It is important to note that in principle the central government--particularly the national planning agency Bappenas and the Ministry of Finance--retains an important role in planning and coordinating development, though in practice the difficulties of coordinating through the levels of government often obscure that influence (Booth 2005).

The initial 1999 decentralization framework granted regions significant organizational autonomy, including the right to hire and fire civil servants. In conjunction with the DAU that did not earmark a set amount for wages, many district level governments rapidly expanded the size of their workforce, leading to significant administrative overspending (Sjahrir, Kis-Katos and Schulze 2014). In an effort to control this, subsequent laws introduced mechanisms, including earmarked allocations for wages in DAU grants, for the centre to reclaim some control over local bureaucratic structures. These have not been met with wide success, and have been criticized as being both unworkable and inequitable. President Jokowi has signalled efforts to exercise greater control over the budgets of local governments and rejected, for example, a proposed constituency fund plan endorsed by the lower house that would have increased discretionary funding.

The aforementioned Law 23/2014 shifts several important powers back to the provincial and central levels, reducing district autonomy from the levels established by Laws 22/1999 and 32/2004. Importantly, the law strengthens the position of the provincial governors as Jakarta's representatives in the districts. This is most visible in the transfer of responsibility for several types of natural resources, including mining, forestry, maritime affairs, and fisheries, from the districts up to the province level. The law also increases the central government's authority to dismiss district level heads for a range of reasons, as well as to suspend salaries and allowances of those leaders under relatively loosely defined conditions. Further provisions of the law strengthen the mandate of the central government to set standards in areas like labour or healthcare and to sanction regional governments that fall short of the standards.

While Law 23/2014 shifts meaningful authority from the districts back towards the centre--both directly through the empowerment of central ministries and indirectly by empowering provinces that are easier for the centre to exert leverage over the more numerous and distant districts--it does not constitute a return to pre-decentralization Indonesia in which the centre dominated and relatively powerful provinces acted as mere agents of the centre. Districts retain far more power than they held prior to decentralization, much of which is sufficiently entrenched to make a completion of the circle back to strongly centralized rule infeasible.

In fact, rather than view Law 23/2014 as a recentralization of power, it might be seen instead as an attempt to redress the problem of the "missing middle", which has been addressed by numerous studies (see UNDP 2009; Hutchinson 2015). The decentralization legislation of 1999 and 2004 created powerful districts but stripped provinces of nearly all powers, despite the clear need for provinces to assist in monitoring and coordination between the still powerful central government and the more than 500 districts. (4) Without sufficient codified powers to do this, transaction costs were high and the efficacy of monitoring was low. In principle, Law 23/2014 provides provinces greater power in monitoring, especially in the area of natural resources. Without meaningful fiscal power over the districts, however, it remains to be seen whether the limited empowerment of provinces brought about by the 2014 law will fill the missing middle and positively affect coordination between the centre and the districts.

3.3 Fiscal Decentralization

The basic framework of Indonesia's fiscal decentralization specified in Law 25/1999 and revised by Law 33/2004 catalysed two principal departures from the preceding centralized system. First, the regions received more discretion over budgetary allocations, thereby gaining a measure of autonomy over service delivery. Second, a larger share of total government resources went to the regions: the sub-national proportion of public spending jumped from 17 per cent in the year 2000 to 30 per cent in 2001 following the implementation of Law 25/1999. By 2010, the figure had increased to around 40 per cent. The central government, however, has retained a near monopoly over the most important sources of tax revenue, leading it to account for roughly 90 per cent of collected revenue (Fadliya and McLeod 2010; Shah, Qibthiyyah and Dita 2012). This has left the regions reliant on the centre to fund budgets, as was the case prior to decentralization in which centre-to-region transfers in the form of earmarked grants provided the vast majority of local revenue. Few legally recognized options existed for the regions to raise revenue locally through taxation. The grants specified how funds were to be spent and, with few exceptions, allowed relatively little discretion in implementation. Local governments, in essence, operated as tightly constrained agents of the central government.

Following the implementation of Law 25/1999, a bulk of intergovernmental transfers come through DAU, a specific allocation grant (dana alokasi khusus, DAK) and a revenue sharing grant (dana bagi hasil, DBH). These--in particular the dominant DAU grant--differ from their pre-decentralization counterparts in that they specify fewer restrictions on how funds are to be allocated, increasing the autonomy of local governments. The decentralization laws also increase the share of locally generated revenue that districts are entitled to, particularly for natural resources: 80 per cent for forestry, mining, and fishing; 30 per cent for gas; and 15 per cent for oil. Prior to decentralization, nearly all of this revenue went to the central government. In addition, they enable regional governments to borrow for infrastructure development from capital markets and governments (Lewis and Woodward 2010).

Collectively, the DAU, DAK, and DBH transfer funds amounting roughly to 90 per cent of total sub-national expenditures: 54 per cent for provinces, 86 per cent for kota, and 93 per cent for kabupaten (2010 figures). According to Ministry of Finance data, the DAU comprises over half of the centre-region transfers. Of this, the vast majority goes to the district level and below, with only around 10 per cent going to the province level. The funding is intended to cover the basic costs of administration, in particular wages and other operating expenses, at the province, kota, and kabupaten levels.

Law 34/2000 on local taxes and levies provided local governments more channels through which to raise revenues. It specified a list of approved regional taxes, but also allowed regions to impose additional taxes provided they did not contradict specified conditions. In practice, the constrained ability of many regional governments to efficiently assess tax liabilities, in addition to the poor capacity of local economies and voters to support higher tax rates, limited the efficacy of this channel. Poor oversight from higher levels of government and ineffective checks from voters allowed for rampant inefficiency and abuse. Law 28/2009 was created to address these challenges by strengthening protections against abuse (specifying a "closed list" to stop nuisance taxes, for example) and adding channels for regional governments to raise revenues, for example through property taxes and property transfer taxes. Issues of limited capacity and significant wealth disparities still hinder the potential of regions to consistently generate a larger proportion of revenue.

An extensive literature on Second Generation Fiscal Federalism (see Weingast 2014) has examined how institutional arrangements provide incentives and disincentives for local governments to raise revenue locally. On balance, Indonesia's decentralization framework has faired poorly on this dimension, as it has generally not encouraged fiscally sound practices at the local level (Fadliya and McLeod 2010).

The DAU fund is intended in large part to reduce fiscal inequalities between local governments. Law 25/1999 (revised by Law 33/2004) specified that the total transfer amount would be the sum of a Base Allocation (comprised largely of personnel expenditure) and the Fiscal Gap Allocation, which is the gap between local expenditure needs and local revenue capacity. Fiscal needs are determined by a set of proxy indicators that incorporate population size, area, and various development measures, including life expectancy, educational attainment, and income levels. Local revenue capacity is comprised largely of qualifying own source revenue raised by local governments. Under this allocation formula, local governments faced few incentives to raise revenue locally, since every unit of qualifying local revenue raised is offset by a roughly comparable reduction in the central transfer amount. They also faced no incentives to decrease expenditures on personnel, since any cost savings would likewise be offset by reductions in transfer amounts. (5) In addition, DAK transfers--which among other things provide matching funding for local capital expenditures--have been argued to discourage spending on maintenance of physical assets, since expenditures on maintenance are not matched (Lewis 2013). While adjustments to the grant allocations formulas have been discussed in the legislature, particularly in the scope of the DAU, a comprehensive solution to addressing the perverse incentives has yet to emerge.

4. Political Debates

Indonesia's decentralization project has created winners and losers that have remained in continual tension over the appropriate balance between unity and regional autonomy. As the importance of local politics has increased following the "big bang" decentralization, so has the power of the political elites that have come to dominate that level of politics. In many areas, local elites have leveraged the greater administrative autonomy and availability of financial resources to build powerful clientelistic networks that allow for comprehensive control of localities. Direct elections have in many instances helped secure local elites' grip on power, since disbursing patronage and vote buying have become rampant (Buehler 2010). Moreover, administrative autonomy has limited the ability of provincial and central level governments to interfere in district-level politics. In addition, poor accounting standards, particularly around campaign financing, have facilitated clientalistic practices.

At lower levels, this dynamic has given rise to the raja kecil ("little kings"), powerful empires that entrench themselves in local state structures and effectively control vast swathes of economic and political activity (Aspinall 2010). In major cities and at the provincial level, the same expanded sphere for economic and political activity has facilitated the growth of a regional capitalist elite that is increasingly assertive in national level politics (Lane 2014b). President Jokowi, whose rise began as a leader of the Solo business community and mayor of the city before reaching national visibility as Governor of Jakarta, is emblematic of this class. Other notable examples include Surabaya mayor Tri Rismaharini and Bandung mayor Ridwan Kamil. Unsurprisingly, given that this powerful new elite owes its advances to regional autonomy, decentralization remains highly popular among the group.

Many of the gains enjoyed by regional and local elites came at the expense of central government capacity. The basic framework of Indonesia's "big bang" decentralization was constructed in the midst of political chaos and transition, and did not receive input from the full spectrum of central government actors. Reactions from the ministries were mixed. The Ministry of Home Affairs, for example, saw an opportunity to leverage decentralization in order to expand its influence over other ministries. Others, perhaps foremost the Ministry of Forestry, saw Law 22/1999 as a major threat to their powers and manoeuvred through political and legal challenges to retain influence following the rebalancing of power. Nearly all ministries expressed dismay at the rapid pace of change and the lack of transparency in formulating the framework of decentralization, as those made it difficult for the ministries to fully understand consequences and formulate responses.

Assessing the position of political parties on decentralization is challenging given the great variation in composition of Indonesia's parties, with many acting as little more than personal vehicles for individuals or small elite networks. Indonesia's 2014 presidential election captures this well. Former General Prabowo Subianto and his financier brother Hashim Djojohadikusumo owe their rise to the centralistic New Order system: the former through Soeharto's military; and the latter through a resource extraction empire that was enabled by the lack of regional autonomy. Unsurprisingly, Prabowo and his Gerindra party attacked many features of decentralized Indonesia and made campaign promises to return to a more disciplined, efficient, and presumably centralist form of government. While Jokowi, who owes his rise to decentralization, promised more oversight over the regional governments through policies such as unannounced blusukan-style inspections. His focus was on improving governance rather than recentralizing the political system. In any case, decentralization has opened access to local resources that were once the exclusive domain of the Soeharto-era Golkar party, with the effect that Indonesia's party system has remained unmanageably large despite the introduction of electoral thresholds that were designed to consolidate it (Allen 2014).

Evidence suggests that support for decentralization among the general population has been consistently strong (Mietzner 2014), despite widespread shortcomings in local governance efficacy and presence of corruption, collusion, and nepotism. A 2007 poll (LSI 2007), for example, suggested that nearly three-fourths of Indonesians supported decentralization, in part because of perceived improvements to service delivery (which evidence does not conclusively support, as discussed in the next section). Other surveys reflect general satisfaction with local government institutions and their officials (Democracy International 2008; World Bank 2009).

As Mietzner (2014) argues, one major reason for the enduring popularity of decentralization is that regional autonomy has allowed local identities to flourish. While the nation-building project of Sukarno and Soeharto brought to the vast archipelagic nation a common language and semblances of a shared identity, these were often delivered through heavy-handed assimilationist pressures that had the effect of supplanting--rather than merely supplementing--local identities. Resentment against this, particularly the perceived domination of Java, added fuel to many of the centrifugal persuasions found throughout the country's periphery.

While decentralization has become sufficiently entrenched to preclude a return to the highly centralized structure of New Order Indonesia, proposals to scale back elements of political decentralization are frequently voiced. The aforementioned--and ultimately failed--attempt to abolish all local elections in late 2015 was perhaps the most visible attack on the pilkada system, but it was not the first. In 2009, then Minister of Home Affairs Gamawan Fauzi proposed abolishing direct elections for provincial level governors. These local direct elections, he argued, were costly in absolute terms due to Indonesia's archipelagic nature, as well as indirectly due to their role in entrenching money politics and facilitating the rise of dynastic politics. Others have brought to light the violence that has accompanied local elections in Indonesia (see Tadjoeddin 2014), or the negative social consequences of holding local elections prior to the development of adequate administrative capacity (Horiuchi, Suryadarma and Susamto 2014). Counter-proposals that rely on similar criticisms have suggested maintaining provincial elections but appointing district level positions.

The popular uproar as well as the international condemnation that accompanied the 2014 attempt to abolish pilkada will likely render such initiatives moot for the foreseeable future. Local elections will nonetheless remain the targets of reform efforts. Principal amongst these is the decision reached in March 2015 by the DPR to hold local elections simultaneously on one day--rather than dispersed across the year--in an effort to reduce the costs of their administration. The first of these harmonized pilkada were held in December 2015 and appear to have been successfully executed, though there are indications that the new format provides additional incumbency advantage (Arifianto and Chen 2015).

5. Decentralization Outcomes

Much attention has been directed towards assessing the impact of decentralization on key outcomes, including economic development, public service delivery, and governance quality (Bardhan 2002). Prevailing theory at the time of the 1999 decentralization laws--which was widely championed by actors like the Asian Development Bank and the World Bank--held that decentralization should positively impact the above areas through two primary mechanisms (World Bank 2000). First, decentralization empowers local administrators, who by virtue of proximity to constituents have informational advantages over more distant central-level decision makers. Second, regional autonomy may lead to greater experimentation with policy and to greater inter-jurisdictional competition, which likewise is expected to generate more positive policy outcomes.

Others have warned that in settings like Indonesia, local bureaucrats may have insufficient capacity to effectively capitalize on greater autonomy and access to resources, leading to poorer policy decisions and less efficient resource usage (Tanzi 1996; Bardhan and Mookherjee 2000). The greater number of local governments may also reduce the efficacy of top-down monitoring (Persson and Tabellini 2002). Theoretical expectations, in other words, leave open the possibility for a range of empirical outcomes. Kaiser, Pattinasarany and Schulze (2006) provide a useful overview of both perspectives in the Indonesian case.

Indonesia has made gains in key development indicators during the fifteen years since the watershed Laws 22/1999 and 25/1999 were implemented. By most measures, however, these gains have been modest in scope and largely consistent with the general developmental trajectory of the country. It is difficult, in other words, to attribute these gains to the unprecedented "big bang" decentralization, a conclusion which a broad review of the literature also supports.

5.1 Economic Outcomes

Indonesia's economic performance since the AFC has been strong, with an average annual GDP growth rate of around 5.5 per cent and stable inflation rates (Basri and Hill 2011). This growth was fuelled in part by the commodities boom, which resource-rich Indonesia profited from significantly. Evidence from a range of studies, however, suggests that decentralization has had no discernable net effect on growth rates at the national level. Pepinsky and Wihardja (2011), for example, use a synthetic case control to estimate economic growth in a counterfactual Indonesia that did not decentralize, and find net growth to be roughly comparable. Using district level data, Moricz and Sjoholm (2014) leverage the staggered rollout of district-level elections to estimate the effects of political decentralization on economic growth. They likewise do not find evidence of an effect. The same general conclusion applies in regards to particular outcomes of economic development. Ilmma and Wai-Poi (2014) argue that aggregate poverty rates, for example, fell at roughly the same rates prior to and following decentralization.

At the sub-national level, the story is slightly more complex. Some resource-rich areas have benefited from the decentralization provisions that allow a greater portion of locally generated resource revenue to stay within the district; subsequently, these districts have grown at a more rapid rate than their resource-poor compatriots. Importantly, however, benefits have not always been equitably distributed, for example in Papua where they have accrued disproportionately to migrants rather than indigenous groups. Pepinsky and Wihardja (2014) also argue that limitations in factor mobility as well as endogenous institutional quality may ultimately make it difficult for poorer districts to compete with wealthier ones. Given this, we might expect decentralization to exacerbate inter-regional inequality, but there is also little conclusive evidence to support this supposition. Hill and Vidyattama (2014), for example, find no evidence of divergence in inter-regional inequality following decentralization, at least at the provincial level. Ilmma and Wai-Poi (2014) show evidence of limited inter-regional convergence driven by a catch-up effect in poorer regions (with the exception of those that have experienced conflict), but it again is unclear whether this can be attributed to decentralization. The limited impact of decentralization on economic development is due at least in part to insufficient efforts to build local capacity in economic development planning, as well as the general incentive to focus on licensing related fee collection--rather than on growth--for local level revenue generation.

5.2 Public Service Delivery Ofutcomes

Many of the strongest claims by proponents of decentralization focus on its hypothesized benefits for public service delivery. The scholarship on Indonesia comes to a range of conclusions, though again there is little evidence for the most optimistic of expectations. Kaiser, Pattinasarany and Schulze (2006) find a positive effect on the perception of public goods provision and service delivery in schools, health, and administration, even though the evidence that actual provisions have improved is unclear. Interestingly, the perceived positive effect is absent for policing, which was not decentralized.

Chowdhury, Yamauchi and Dewina (2009) use village level survey data (PODES) to estimate the effect of decentralization on a range of public goods provision, including roads, streetlights, and education and health infrastructure. While they find that public goods provision is dependent on initial resource endowments, they also find evidence that decentralization has improved the availability of local infrastructure and has led to a convergence of public goods provision. Chowdhury and Yamauchi (2010) examine access of households to road and electricity services, specifically whether outcomes reflect the preferences of elites or those of the majority. They find that public goods reflect majority preferences more in the post-decentralization period than they did prior to decentralization.

Skoufias et al. (2011) also leverage the staggered phasing-in of direct elections to estimate the impact of political decentralization on district level public spending and revenue generation, and find a generally positive relationship with both. Kis-Katos and Sjahrir (2014) examine the effects of decentralization on budget allocation towards public infrastructure in education, health, and physical infrastructure for 271 districts between 1994 and 2009. Political decentralization does not appear to have an effect on local public investments, suggesting that it may lead to elite capture with adverse effects on local resource allocation. Kreuse, Pradhan and Sparrow (2012) use district level data to show that public health spending is driven largely by central government transfers, which do not appear to crowd out private services or household spending. While some public health spending improves wellbeing of the poor, most of the benefits accrue to existing users of services.

Poor infrastructure has been consistently identified as one of the major brakes on Indonesia's development (World Bank 2013). Patunru and Rahman (2014) argue that administrative decentralization and pressures to secure votes during electoral cycles combine to shorten the time-horizon for expenditures and create inter-jurisdictional coordination problems, which have particularly adverse effects on infrastructure investment.

Sjahrir, Kis-Katos and Schulze (2013) provide insights on the positive relationship between decentralization and spending for public goods. By leveraging the staggered rollout of direct elections, they find compelling evidence for the presence of political budget cycles, especially when incumbents with access to the resources of office run for re-election. Some of the increased expenditure on public goods provision picked up by aforementioned studies may thus be the result of campaign spending, which prioritizes capturing votes rather than maximizing the public good.

5.3 Governance Outcomes

Findings for the impact of decentralization on governance quality are less ambiguous, as increases in both administrative overspending and corruption are widely noted. Sjahrir, Kis-Katos and Schulze (2014) find administrative spending to be far higher in Indonesia than international standards, which they attribute to strong discretion over budgets and lack of political accountability. This may also be related to the use of civil service positions as a source of patronage, which has become an important component of building electoral support at the district level. Valsecchi (2013) relies on the staggered implementation of local election to test the effect of political decentralization on corruption. Using data on corruption prosecutions, Valsecchi finds that decentralization increases the number of corruption crimes by about half. Hofman, Kaiser and Schulze (2009) argue that poor capacity in local level government officials and institutions leads to an increase in corruption and a deterioration in public service provision.

A range of other studies point to the prevalence of exploiting rents, patronage, and elite capture. Burgess et al. (2012) use satellite imaging of Indonesian forests to estimate rates of deforestation, which they link to incentives of local bureaucrats and politicians. They find a positive correlation between the number of jurisdictions and deforestation. Further, they find that the rate of illegal logging increased with proximity to elections, suggesting that rents and patronage drive logging. Suharyo (2003) and Sumarto, Suryahadi and Arifianto (2004) make similar connections between decentralization and increased corruption.

Von Luebke (2009) demonstrates that quality of local leadership accounts for a significant portion of inter-district governance performance, including in such areas as taxation and corruption practices. This runs counter to the extensive range of demand-side arguments, which contend that the societal pressures from newly empowered (through decentralization) citizens and small and medium enterprises (SMEs) will keep poor governance practices in check. The weak demand-side pressures, von Luebke argues, result from the rapid pace of Indonesia's decentralization, which introduced perverse incentives for political participation and did not allow social groups the space to find solutions to the collective action problem.

Another strand of research on governance examines variance in the ease of doing business (see especially World Bank 2012). Among other factors, this research examines sub-national variation in the regulatory environment for commercial activities, including the time and cost of starting a business, securing construction permits, and registering property. As might be expected in post-decentralization Indonesia where local regulations and practices vary significantly across regions, dramatic differences are evident between the top performing cities and the laggards.

5.4 Political Change and Democratization

As discussed at some length in section 4, decentralization has dramatically influenced Indonesia's political landscape. Despite consistently low voter turnouts, direct elections for local level leaders receive significant support as a principle, which the broad outcry against a late 2014 attempt to abolish them demonstrates. For many Indonesians, local democracy is the most immediate and visible manifestation of the country's democratic transition. Tomsa (2014, p. 170) quotes a Jakarta Globe editorial on the 2014 challenge: "For all of their cons, direct elections are possibly what Indonesians are most proud of. For ten years, we felt that direct elections single-handedly defined Indonesia's strong intention to become a good and democratic nation in the truest sense."

6. Conclusion

The rapid decentralization of governance and resources of the post-Soeharto period have had some of the impacts anticipated by its proponents, but also many that were unanticipated. Decentralization has been accompanied by a cauterization of many of the centrifugal forces that Indonesia faced at the end of the Soeharto period. Support for decentralization remains high, as it has been seen to allow for the expression of regional identities and an improvement in the perception of service delivery quality. However, evidence for the hypothesized improvements in service delivery and downstream impacts on economic outcomes have not materialized. Perhaps the most concrete impact of decentralization is the strengthening of regional political elites, many of whom represent successful SMEs that have arisen during this period (Lane 2014a). The introduction of elections and greater resources at the local level has led to a newly empowered class of political elites that, while more independent of national and provincial elites, are now beholden to the vicissitudes of district-level money politics in order to win and maintain office. As a result, while there has been an increase in the amount of resources allocated to the districts, there has been a concomitant rise in administrative spending commonly associated with patronage. This shift in resources to the districts has diminished the resources controlled by national level elites. As such, decentralization has emerged as a key flashpoint of conflict between the old guard of national-level elites and the newly emboldened class of regional elites and their national level advocates. This tension is likely to continue to shape political debates in the future.

DOI: 10.1355/ae33-2b


(1.) There is frequent inconsistency in how levels of government in Indonesia are described below the provincial level. We use the terms district to refer to regencies and cities (kabupaten and kota) and local governments to refer to villages and urban communities (desa and kelurahan).

(2.) Indonesia held regular elections under Soeharto's New Order government (1966-1998), but participation was limited to Soeharto's Golkar party and two state-sanctioned opposition parties. Restrictions on competition ensured Golkar dominance.

(3.) Note that East Timor was not a part of Indonesia until it was invaded and occupied nine days after declaring independence from Portugal in 1975. Resistance in the territory first escalated sharply between 1989 and 1991, but did not see increased political space until 1998. Likewise, resistance to central control preceded the 1998 political upheaval in Aceh and Irian Jaya.

(4.) Law 32/2004 provided limited authority to provincial governments, including setting and monitoring of minimum service standards. From a broader perspective, however, these were minor adjustments rather than a comprehensive empowerment necessary to fulfill the required monitoring and coordination activities.

(5.) Note that while an analysis by Lewis and Smoke (2015) found evidence for perverse incentives in personnel expenditures, they did not find strong evidence to support the claims on raising of local revenue.


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Kai Ostwald is Assistant Professor at the Institute of Asian Research and Department of Political Science at the University of British Columbia, #224-1855 West Mall, Vancouver, BC, V6T 1Z2, Canada, and the Director of UBC's Centre for Southeast Asia Research; email:

Yuhki Tajima is Assistant Professor at the Edmund A. Walsh School of Foreign Service at Georgetown University, ICC 302-J, 3700 O St., NW, Washington, D.C. 20057, USA; email:

Krislert Samphantharak is Associate Professor at the School of Global Policy and Strategy, University of California, San Diego, 9500 Gilman Drive #0519 La Jolla, CA 92093, USA; email:
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