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:

CAN DECENTRALIZATION HELP REBUILD INDONESIA?

A Conference Sponsored by the International Studies Program,

Andrew Young School of Policy Studies,

Georgia State University

May 1-3 2002

Atlanta, Georgia

Abstract

Indonesia’s 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

Indonesia’s 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.

Decentralization 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 provinces.

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.

Countdown: 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.

Ironically, 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.

Safeguards: 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.

One 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.

References

¹ 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.

² 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 together.

³ J.J. De Jong: Het Koninkrijk der Nederlanden in the Tweede Wereldoorlog, (The Kingdom of the Netherlands in the second World War), Volume 11a, pp.

⁴ Indonesians usually use the term regional autonomy rather than decentralization. This report uses the terms interchangeably, except in sections where the difference matters.

⁵ 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.

⁶ 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 delivery.

⁷ 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.

⁸ See World Bank (2001) The Imperative for Reform, Brief to the meeting of the CGI in Jakarta, November.