The Making of the Big Bang and its Aftermath A Political Economy Perspective (Part 2 of 3)

Bert Hofman and Kai Kaiser
World Bank

Presented at the Conference:

Conference Sponsored by the International Studies Program,
Andrew Young School of Policy Studies,
Georgia State University

May 1-3 2002


    2. Issues in Administrative

Law 22 of 1999
devolves most functions of government to Indonesia’s regions—currently
30 provinces and over 348 districts and cities. The key exceptions (Art.
7) are national defense, international relations, justice, police, monetary,
development planning, religion, and finance. The districts must perform
important functions (Art.11), including health, education, environmental
and infrastructure services. The province as anautonomous region
has only a minor role, mainly in coordination, and backstopping districts
and cities that cannot yet perform their functions—which may be an
opening for an expanded provincial role. Law 22 explicitly states
that there is no hierarchical relationship between the province as an
autonomous region and the district. The province will also continue
to perform deconcentrated central tasks, and is the central government
representative in the regions. Implementing regulations (PP25/2000)
further specify the remaining roles of the central and provincial governments,
including setting standards for service delivery.

The regional
councils directly elect the head of region, although this election needs
confirmation by the President (Art. 40). The DPRD can dismiss
a head of region as well, but unlike the situation at the national level,
DPRD and head of regions are supposed to be partners of the regional
government (Art.16) after the collegial model as it exists for instance
in the Netherlands. The central government can annul regional
bylaws and regulations that conflict with national laws and regulations
(Art. 114), but the regions can appeal to the Supreme Court against
the center’s decision—at least according to the law. Urban areas
(Art. 92) are obliged to include community and private parties into
development planning. No such obligation exists for rural areas.
The intergovernmental regional autonomy advisory board with representatives
from the center and the regions is to advise the President on issues
concerning decentralization, and approves requests for new regions that
can be originated from the government of existing regions.

Whose function
is it anyway?

More than
one year into decentralization, much unclarity remains on what exactly
has been decentralized. Law 22 does not define local government
functions directly, but only by specifying what the center (Art.7) and
the province (Art 9) do. Article 11 specifies local government
obligatory functions, but not to a level of operational detail.
PP 25/2000 is not much help here, as it focuses on the remaining functions
of central and regional governments. This legal framework of “general
competency” rather than ultra vires definition of function as embedded
in Law 5/1974 is unusual for local governments. It is also more
radical than the subsidiarity principle—which was apparently the inspiration
of the drafting team.9 Subsidiarity as a principle
would not call for a limited list of central functions in the law, but
for a process by which decentralization or centralization is determined,
while specifying the principles that guide the process.

Omission of
a general clause in the law to state that local government is bound
by national law (omitted because the drafting team felt it was obvious10)
further obscured the exact extent and nature of decentralization.
This confusion was further increased by TAP MPR III which determined
the hierarchy of laws, but omitted the ministerial decree as a legal
instrument.11 Unfortunately, much of the detail on
government functions is contained in such ministerial decrees.
Moreover, even though regional regulations (PERDAs) are placed below
central government legal instruments such as government regulations
and Presidential Decrees, arguably organic regional regulations (i.e.
based directly on a law that delegates regulatory responsibility to
the regions) should take precedent over central regulations and decrees
without a direct basis in the law. Worse, some central agencies,
notably those for Land management and for Investment Approval have managed
to get a Presidential Decree issued which exempts their authorities
from decentralization as Law 22/99 calls for. And the adjustment
of sectoral laws to align them with regional autonomy, as is called
for in Law 22/99 Art. 133. Finally, the revised Art.18 of
the constitution now calls for central functions to be regulated by
Law, and the question is whether that law is Law 22/99, or whether a
separate law is called for to specify these functions.

The bottom
line of all this is that the distribution of functions, let alone the
expected performance in exercising the functions, is still far from
clear. Beyond causing utter confusion in the regions, this state
of play not only undermines accountability of the regional government,
but also hampers judgment on the vertical distribution of fiscal resources
(see below). The confusion has not stopped central government
to embark on an effort to have the regions “recognize” their functions
in a positive list that is to be cleared by Presidential Decree.12
Without deeper understanding and agreement on the functions themselves,
and the minimum standards for these functions, recognition of these
functions seems distracting at best.

One way forward
is currently under debate in Indonesia. First, international agreements
and sectoral laws could be screened on commitments on service delivery
standards already made. For instance, the Education Law guarantees
9 years of education for all. Second, central government and regions
could embark on a process that would establish agreed standards of services
in key areas, while taking into account the regions’ fiscal and human
resource capacity. Standards thus agreed could then become the
basis for monitoring and supervision, and possibly sanction. In
all likelihood, these standards will vary widely per region, given Indonesia’s
wide diversity in capacity. Meanwhile, a process to align sectoral
laws with Law 22/99 could start, and the revisions could further specify
the functions, and service standards, and which of those standards are
to be considered as binding and sanctionable under PP20/2001 Art.16.
Those sanctionable standards are likely to be few.

Levels of
Government, Size of Local Governments, and Economy of Scale

Law 22/99 assigns
most responsibility to the local government level. The provincial
level only has coordinating functions, a role in issues that surpass
district boundaries, or they can perform local government functions
for those unable to perform the functions. The Province has a
potential role in performing task on behalf of the districts, but little
initiative has been undertaken to exploit this possibility under the
law.13 The fact that the law explicitly states that
there is no hierarchical relation between the province and the local
governments did not help the province in gathering the local governments
to plan for joint operation of functions and facilities. As a
result, tasks with large externalities and significant economies of
scale such as watershed management, sea management, communicable disease
control, and others are likely to be left unperformed or underprovided.

Scale economies
are also at risk because of the size of local governments. This
is likely to get worse in the near future due to the apparently unstoppable
tendency to create new regions—both provinces and local governments.
The number of local governments since Law 22 passed has increased from
less than 300 to 348 in 2002, with over 20 new ones expected for 2003,
and the number of provinces increased from 26 to 32 (including the apparently
defunct new provinces on Irian Jaya). The regions already show
a wide variety in population size: provinces range from less than 800,000
inhabitants (Gorontalo) to over 35 million (East Java), and local governments
from 24,000 to 4.1 million. Creation of new regions—which requires
a law—is driven by several considerations, including historic and
ethnic ones. But the wish to create a new region is likely to
come from fiscal incentives as well. For one, if a district has
a significant amount of natural resource revenues it will be better
off to become a province, as it then no longer need to share the revenues
with surrounding districts, or with the originating province.
Urban areas are more likely to receive a share of the personal income
tax than rural areas, and they have an incentive to split off from the
kabupaten they are part off. And in the new DAU system, every
region gets a lump-sum amount, thus creating incentives for each region
to split up.

Creating more
and more regions is not without consequence. Information on the
wage bill of local government per capita of the population seems to
point at sharply decreasing efficiency at the level of about 500,000
people (Figure). The districts with less than 100,000 people have
about twice the wage bill per capita that those districts with 500,000
people have. Some of the difference could perhaps be explained
by geography or a negative correlation between population size and density—thereby
necessitating a larger civil service to supply the same amount of services.
But prima facie the suggested scale economies would argue for consolidation
of regions rather than the creation of new ones.

and Accountability

The potential
benefits of decentralization depend crucially on governance. By all
accounts, the jury on the link between decentralization and the prospects
for improved governance at the local level is still out, and14
several concerns about the prospects of decentralization/devolution
in developing countries.15 On the one hand government
closer to the people reduces monitoring costs of the electorate, and
competition among local governments could drive out corruption.
On the other, local governments seem to be more prone to elite capture.

The fall of
New Order regime in 1999 and the subsequent “Big Bang” decentralization
of 2001 promised to fundamentally change the locus of responsibility
and accountability for public service delivery in Indonesia. By
“bringing government closer to the people,” decentralization can
serve as a driving force towards generating improvements in Indonesia’s
notably poor governance environment. Symptomatic of this governance
environment is that Indonesia continues to be perceived as suffering
from one of the highest internationally levels of corruption.
This has proven corrosive to both public service delivery and the private-sector

Numerous governance
issues have received public attention in Indonesia. These include
money politics (“politik uang”), centered especially on concerns
that local elections for regional heads have been increasingly bought.
Local political elites in executive and legislature has to the political
aspirations of the wider populations (“politik elit”). The
new local heads have increasingly started acting a little kings (“raja
kecil”) who are neither accountable to central authorities, or their
local constituencies. Meanwhile, rent-seeking has proliferated
in many regions due to the proliferation of these new actors and increased
the dangers of overgrazing (many hands of “campur tangan”).
This problem is accentuated by the belief on some parts of the executive
and legislative that their tenures are limited, and hence their access
to rents is limited as well.

To blame decentralization
per se for these weaknesses seems far fetched. Moreover, the weaknesses
in governance at the regional level should be considered relatively
to those taking place at the center. Whether these incidences
of weak governance are systematic remains to be seen. In part,
weak accountability of the head of region could be temporary: many heads
of regions have not yet been elected, but were appointed by the government
before local elections took place. The vaguely defined authorities and
functions of the regions undermines accountability as well, but these
are likely to become clearer over time. But other, more fundamental
causes seem at work as well. One issue is Indonesia’s strong
party system that limits the interest local councilors take in their
local constituents. Another is that Government Regulations on the accountability
of the head of region have strengthened the position of the head such
that it has become almost impossible for regional parliaments to fire
him. And finally, absence of formal accountability mechanisms
such as external audit of regional governments also undermines accountability.



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.

Gabe Ferazzi, (2002): Obligatory Functions and Minimum Standards: A
Preliminary Review of the Indonesian approach GTZ SfDM, Report No/2002-2,

Conversation with Bernd May.

The then-Minister of Justice argued in a letter to all ministries that
the MPR decision constitutionally higher than a law) does not apply
as far as ministerial decrees are concerned.

The “positive list” approach came from an idea mentioned in an IMF
technical assistance report in the year 2000. The report argued
that no judgment on assignment of revenues could be made without a detailed
costing of expenditure assignments.

One exception familiar to the authors are the two Provincial Health
Projects financed by the World Bank. These projects create province-level
cooperative structures among he local governments to develop and implement
province-wide health policies.

Save for a brief federalist constitution in the wake of independence
from Holland in 1949, Indonesia’s prevailing constitution of 1945
is that of a unitary state.

See for example Crook and Sverrisson (1999) or Azfar et al. (2000;2001).

See for example O.B. Server (1996) and Partnership for Governance Reform


In December 2001, the Head of the DPR’s budget commission, Benny Pasaribu,
created a stir when he claimed that 40 percent of the General Block
Allocation Grant (DAU), implicitly arguing that more control and oversight
from the center was needed (Jakarta Post 2001a). Arguably capacities
differ widely by islands. On islands like Java-Bali capacities
can generally be argued to be sufficient, which the situation more difficult
in Local Governments in some of the Outer Islands.

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