The Making of the Big Bang and its Aftermath: A Political Economy Perspective (Part 1 of 3)

Bert Hofman
and Kai Kaiser

World Bank1

Paper Presented
at the Conference:


A Conference
Sponsored by the International Studies Program,

Andrew Young
School of Policy Studies,

Georgia State

May 1-3 2002



2001 decentralization was a “Big Bang,” indeed. Much of the
apparatus of government was transferred to the regions in the course
of the year, the regional share in government spending jumped steeply,
and a completely new intergovernmental fiscal system was put in place.
Surprisingly little went wrong in the logistics of this radical, hastily
prepared move born amidst the political turmoil in the aftermath of
the New Order government. But now that the dust is settling on
the first year of decentralization, several key issues have started
to emerge—some of them touching the very nature of decentralization
itself. In addressing these issues, the government needs to carefully
balance its desire to maintain a unitary state with the aspirations
of the regions, and the opportunities offered by a more decentralized
system of government.

  1. The Making of
    the Big Bang

2001 decentralization is rapidly moving the country from one of the
most centralized systems in the world to one of the most decentralized
ones. Law 22 of 1999 gives broad autonomy to the regions in all
but a few tasks that are explicitly assigned to the center—including
defense, justice, police and planning. With the authority come
the resources, lots of them. In the first year, the regional
share in government spending jumped from 17 percent to 30 percent.
Over time, with the current assignments of functions, this share is
likely to rise to over 40 percent, a sharp contrast with the average
[15] percent of spending in the 1990s. This share is also much
larger than can be expected on the basis of Indonesia’s size—whether
measures in population or geographical size. In addition to spending,
much of the apparatus of government was put under the control of the
regions. Over 2 million civil servants, or almost 2/3 of the central
government workforce, was transferred to the regions. Now, out
of a civil service of 3.9 million, some 2.8 million are classified as
regional. And 239 provincial-level offices of the central government,
3933 local-level offices,2 more than 16,0000 service facilities—schools,
hospitals, health centers-- were transferred rock stock and barrel to
the regional governments throughout Indonesia.

and Diversity
: Decentralization makes sense for a country
as diverse as Indonesia. Spread out over 5,000 kilometers and
over 13,000 islands, the country has more than 300 identified languages
and about [20] distinct cultural groups. Its geography ranges
from the swampy flatlands of coastal Java to the steep mountain peaks
of Irian Jaya, the extensive rainforests of Borneo to the dry islands
of East Nusa Tenggara. Economic development differs as widely:
Jakarta’s level of income per capita fits that of a higher middle
income country such as Brazil—and it has the towering high rises to
match this. At the other end of the scale, regions such as West
Lampung or the regency of Grobogang in West Java barely have one-tenth
of Jakarta’s per capita income. And whereas barely 10 percent
of the students in Sambang, East Java make it into senior high school,
over 85 percent of the young in North Tanapuli on Sumatera do so.
Resource-rich regions such as Aceh Utara, Riau and East Kalimantan would
by themselves be some of the major oil exporting countries in the world.
Other regions such as NTB remain predominantly agricultural.

Such diversity
in geography, culture, natural and human resource endowment suggests
a large variety in the need for government services, and an equally
large disparity in the costs of delivering these services—the classic
arguments to makes decentralization an attractive proposition.
At the same time, this diversity could argue against decentralization
if government wants to ensure a certain minimum level of welfare as
an expression of the unity of the country. Thus the Government
must strike a balance between Unity and Diversity. The New Order
regime (1966-98) clearly did not strike the right balance in its closing
decade: on the back of the oil boom it built up a strongly centralized
government apparatus that controlled the bulk of government resources.
Yet, in this, the New Order was hardly alone.

A brief
history of decentralization
: The 2001 Big Bang was hardly
Indonesia’s first attempt to decentralize. Starting back in
colonial times, there have been numerous attempts to do so, but none
became a success. Still in colonial times, the first municipalities
were created in 1905, followed by the first districts (“gewesten”)
in 1910, and the first provinces on Java in the 1920s.3 After
the proclamation of independence, Indonesia’s first law—Law 1/1945—dealt
with regional autonomy,4 which was alsospecified in article
18 of the 1945 constitution that established the Republic of Indonesia
as a unitary state. Meanwhile, the Dutch started to set up several
Indonesian republics on the islands outside Java, and all united under
the Dutch crown. This was largely a political move against the
Republik Indonesia as a means to argue that Republik Indonesia was only
one part of Indonesia seeking independence from the Dutch This
move resulted in the handing over of sovereignty to the United Republics
of Indonesia—a federal state within a commonwealth with the Netherlands.
The United Republics lasted for less than a year, and the 1950 constitution
reverted to a unitary state.

Law No 1 of
1957 tried to revitalize regional autonomy, but these attempts were
aborted after the outbreak of regional unrests on Sumatra, Sulawesi,
and in West Java. Presidential Decision No. 6 of 1959 brought back the
1945 constitution, and effectively abolished the 1957 autonomy law.
[Law 18/1965] It was not until Law 5/1974 that the issue of regional
autonomy was raised again. This law whose implementing regulations
started to dribble in only in 1992, was never fully implemented.
Although the authorities of the regions did not differ much from the
current decentralization law, the regions had to prove they were ready
for implementation—and the center was the judge and the jury. An experimental
implementation in 26 districts took off in 1996, which was fraught with
difficulties—not least because resources and facilities were not handed
over together with the tasks.
The experiment was taken over by events, when in the aftermath of the
1997 economic crisis and the fall of Suharto’s New Order two new laws
on regional autonomy were passed—law 22 and 25 of May 1999

The Politics
of the Big Bang
: The failure of the earlier attempts to decentralize,
combined with the extraordinary political circumstances in 1998 became
fertile ground for a Big Bang approach to decentralization. The
call for democracy had driven out Suharto, and had discredited the heavy-handed
centrist ways of the New Order. Long-suppressed regional separatist
tendencies reappeared, and especially in regions with long-standing
armed conflicts such as Aceh and East Timor the clamor for independence
became louder and louder. Added to this was the resentment resource-rich
regions felt against the central government who had “stolen their
natural resources.” Suharto’s successor President Habibie,
who had no intention of remaining just an interim president, nor one
presiding over a disintegrating Indonesia, was seeking actively the
support of the regions and regional autonomy seemed the instrument of
choice. The instruction from cabinet to develop new laws
on regional autonomy was picked up by a group of bureaucrats in Home
Affairs, charged with drafting the administrative law.

Those that
produced the early drafts were simply good bureaucrats that wanted
to implement the presidential orders. But they were later joined
by strong political proponents for decentralization, including Ryaas
Rashyed, who was later to become the State Minister for Regional Autonomy.5
Increasingly, regional autonomy was considered to be, and
presented as the natural complement to the emerging democracy at the
central level. Yet, the drafting of the law remained largely a
bureaucratic one, with little feedback from the politicians, and even
less consultations with the regions. By the time the first drafts
saw the light in end-1999, the basic structure for a radical decentralization
was set.6

Tight deadlines
and revenue assignment made Indonesia’s decentralization even more
radical. By law, within a year from approval, all implementing
regulations were to be prepared, and by January 1, 2001—a year and
a half after Parliamentary approval—the laws had to be implemented.
These deadlines undoubtedly entered the law to prevent Law 22/1999 becoming
just one more decentralization law that never was implemented.
The aggressive assignment of revenues to the regions added to the pressure
on Government. Although MOF, at the advice of IMF and World Bank,
had removed the specific assignment of revenues to the regions,7
Parliament brought these right back in. For central government, the
choice was now to either break the law, or to devolve as much expenditures
as possible to minimize the impact on the central government deficit.

The provinces
survived by chance. The President’s intend was to decentralize
rapidly and radically to local governments, but to eliminate the provinces.
These had been the center of the regional unrests in the 1950s, and
the military only wanted to go along with regional autonomy if there
was no chance of a rerun. In their eyes, local government was
easier to control than the larger, and thus potentially more powerful

By the time
the decentralization laws saw their first draft, new election laws had
been finished which specified in detail how the provincial parliament
and the head of the province was to be elected. Since one could
not have a parliament and head of region without a government, it was
decided to put the provinces back in, albeit with a limited role.

The tight deadlines and radical decentralization required a highly focused effort for implementation. Yet, this never came about. Key politicians
and bureaucrats were first distracted by the Parliamentary elections of July 1999, and subsequently by the presidential elections of October, 1999. A presidential decree set up an inter-ministerial implementation team (“Tim Keppres 157”) but this never really functioned—not least because of the significant rivalry between the constituting agencies, especially MOHA and MOF. It almost died when the coordinating Ministry for State Organization, which was in charge of Tim Keppres
157, was abolished itself when President Gus Dur assumed power.

The key line
ministries were outright obstructionists. They felt they had everything
to lose from decentralization, as the laws would abolish their deconcentrated
apparatus, and with it their control over projects, resources, and perks.
While the newly elected President set up a State Ministry for Regional
Autonomy in November 1999, it was not until April 2000 that it obtained
the authority to take the lead in implementing decentralization.
Throughout its existence, it lacked the apparatus and the people to
make it work. It was therefore no surprise that by the time of
the first deadline only one of the numerous implementing regulations
were actually ready, leaving much uncertainty in the regions about things
to come. Moreover, because of the attitude of the line ministries,
the regulation that was supposed to further specify administrative responsibilities
of the various levels of government, lacked the sectoral details necessary
for the regions to understand their task. The legislator itself
did not help clear up this confusion. A decree of the MPR, the
consultative assembly and the highest constitutional body of Indonesia.
passed in the fall of 2000 called at the same time for implementation
of the decentralization laws, and a revision of those very laws.

only after the abolishment of the Ministry of Regional Autonomy in August
2000 did preparation pick up again. The Ministry of Home Affairs
became yet again the lead agency, and Government now started to issue
implementing regulations in quick succession—on organizations of the
regions, on civil service, on financial management, on revenue sharing,
and on the general grant distribution.

In the run-up to January 1, 2001, some key safeguards were put in place.
First, Central Government banned regions from new borrowing in 2001,
except through the center. Although Law 25 allowed the regions
to borrow, and Government Regulation 108 provided affordability limits
to borrowing by individual regions, this would not have assured that
aggregate regional borrowing was in line with macroeconomic requirements.
In the 2001 budget, the Government also included a contingency fund
of Rp. 6 trillion, of which half was used by mid-September. The
speed of decentralization and the new intergovernmental fiscal framework
made it virtually impossible to match decentralized expenditures with
the needed revenues, and despite transitional elements in the general
grant allocation formula, mismatches were going to be inevitable.
The contingency proved to come in handy, especially at the provincial
level. Finally, Central Government decided to continue to pay
the formerly central civil servants for a transitional period of 5 months,
while deducting the wage bill from the general grant allocation to the
regions. This assured a much smoother transition of personnel
than many anticipated.

The safeguards
were, however, not enough, and the Government had to apply an emergency
break to save central finances from getting out of control as a result
of decentralization. The emergency break applied was to disburse
the transfers to the region as per budgeted amount, not as per actual
revenues as Law 25/99 and Pp 104/99 prescribed. This little observed
measure saved the center more than Rp. 10 Trillion. The reason
for squeezing the regions in this way was that the central government
had underestimated t he new budget dynamics that resulted from decentralization.
Whereas before decentralization a rise in the oil price and a depreciation
worked out positively for the central budget, after decentralization
it worked out negatively. The reason was that the increased
revenues from depreciation and oil had to be shared with the regions,
whereas the increased spending on fuel subsidies that also resulted
were to be borne solely by the center.8 Fortunately for the
center, hardly any of the regions noticed.

year after
: One year into Indonesia’s decentralization,
it is fair to say that the program started off much better than many—including
the World Bank—expected. There were no mayor disruptions of
services, civil servants got paid by and large, and with the exception
of some teachers striking for the pay-out of the retroactive wage increases,
little of the feared unrest substantiated. And although a significant
part of the regulatory framework is still outstanding, regional governments
did by and large muddle through, and service delivery units did what
they used to do before decentralization—good or bad. And many
regions have already started to pursue the possibility for experimentation
that decentralization offers. For example, several local governments
have started experimenting with school funding based on numbers of students
attending the school rather than the previously centrally mandated fixed
amounts per school—thereby saving money, and fostering competition
for better schooling to attract students.

Yet, all is
far from perfect. In some of the core areas of decentralization,
the hasty preparation shows, and those not necessarily in favor of decentralization
are all too willing to exploit the confusion to their own advantage.
Some central agencies have even managed to hold on to powers that by
law should have already been devolved to the regions. And some
of the anecdotes on egregious local taxes, corruption in the DPRDs,
or fish in need of an ID card have caused a backlash against decentralization
itself. But despite the debate on possible revision of the law,
the second and third amendment of the constitution have now firmly embedded
regional autonomy in Indonesia’s system of government, and with the
establishment of a regional chamber of Parliament (DPD) it will also
be embedded in its system of politics. Whether this is for the
good of Indonesia will depend on how the country will deal with some
of the administrative and fiscal issues to which this paper now turns.


The findings, interpretations and conclusions expressed in this paper
are entirely those of the authors. They do not represent the views
of the World Bank, its Executive Directors, or the countries they represent.
This paper draws on the forthcoming World Bank Regional Public Expenditure
Review for Indonesia, and on Hofman, Kaiser and Kajatmiko (2001).
The authors wish to express thanks to Jorge Martinez, Roy Bahl, Richard
Bird, Roy Kelly, Dana Weist, Blane Lewis, Bernd May, and Machfud Sidik
for the many helpful discussions on the topic of the paper. We
thank Fitria Fitriani for excellent research assistance.

This report uses “local government” and “local level” to indicate
the second level regions, or Kabupatens (districts) and Kotamadjah’s
(cities). “Regions” refers to provinces, districts and cities

J.J. De Jong: Het Koninkrijk der Nederlanden in the Tweede Wereldoorlog,
(The Kingdom of the Netherlands in the second World War), Volume 11a,

Indonesians usually use the term regional autonomy rather than decentralization.
This report uses the terms interchangeably, except in sections
where the difference matters.


Although Ryaas Rashyed (and his expert staff Andi Malarengeng) became
the figurehead for decentralization, it was Mr. Oentarto, expert staff
in Home Affairs that drafted the first version of the administrative
decentralization law. The drafting team was subsequently led by
Rappioeddin (director….). In fact, at some point there were
two versions of the administrative law—but Rappioeddin’s version
largely prevailed.

The World Bank commented on the draft laws in December 1999, together
with the IMF. The two main concern that were raised were (i0 that
expenditure assignments were extremely vague; and (ii) that revenue
assignments were very specific. Taken together, it was felt, the
laws provided significant risk for macroeconomic stability and service

World Bank and IMF feared that, because there was hardly any clarity
on how much expenditures were to be decentralized together with the
authorities, the Government risked large deficits and macroeconomic
instability by putting in specific revenue assignments in the laws.

See World Bank (2001) The Imperative for Reform, Brief to the meeting
of the CGI in Jakarta, November.

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