L e s s o n s o n F in a n c ia l R e s o u r c e s The lessons that follow will focus on the issue of macro-economic stability, on the

L e s s o n s o n F in a n c ia l R e s o u r c e s The lessons that follow will focus on the issue of macro-economic stability, on the

technical aspects of the implementation of fiscal decentralization, and the issue ol equity. The issues of efficiency and accountability that are associated with fiscal

d e c e n t r a l i z a t i o n w i l l b e d e a l t w i t h e l s e w h e r e in t h i s r e p o r t .

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Postgraduate Program, Brawijava University

The International Journal o f A ccounting a n d B usiness Society

G r e a t e r c e n t r a l i z a t i o n o f r e v e n u e a u th o r ity in t h e d e v e l o p e d n a t i o n s in th e w o r l d d o e s n o t n e c e s s a r y p r o te c t a g a i n s t i n f la ti o n .

Low levels of inflation are

a k e y m e a s u r e o f m a c r o - e c o n o m i c s t a b i l i t y . In

d e v e l o p i n g c o u n t r i e s i n f l a t i o n , p a r tic u la r ly a s a r e s u lt o f g o v e r n m e n t s p e n d i n g , is a

c o n s i d e r a b l e r i s k . W h e r e g re a te r c o n t r o l o f i n f la tio n is c o n t i n g e n t o n g r e a t e r r e v e n u e c e n t r a l i z a t i o n , t h e c a s e f o r t h e m a i n t e n a n c e o f c e n t r a l p r e d o m i n a n c e in r e v e n u e c o l l e c t i o n w o u l d b e a p p ro p ria te . H o w e v e r , e v e n in d e v e l o p e d n a t i o n s th is r e l a t i o n s h i p is f a r f r o m e s ta b lis h e d - o n t h e c o n tr a r y , a s t h e m u l t i - c o u n t r y c a s e s t u d y r e f e r r e d t o b e l o w s h o w s , th e r e la tio n s h ip m a y e v e n b e a n i n v e r s e o n e .

In I n d o n e s i a , t h e r e is s t r o n g re a s o n fro m th e c e n tr a l g o v e r n m e n t t o k e e p h ig h s h a r e o f s o m e h i g h p o t e n t i a l r e v e n u e s u c h a s o il, g a s , F o r e s t r y a n d o t h e r m i n i n g s e c t o r r e v e n u e s , n a m e l y m a c r o e c o n o m y s t a b ility ( in f la t io n , d e b t p a y m e n t s , e tc ) . T h e

B undesregierung ) also distributes the federal

t a x r e v e n u e e s p e c i a l l y f r o m V A T , I n c o m e T a x ( p e r s o n a l a n d c o r p o r a t e ) to a ll lo c a l

g o v e r n m e n t w i t h s p e c i f i c p e r c e n ta g e ( s e e a b o v e ) . T h i s f i s c a l p o l i c y is a l s o i n te n d e d to m a i n t a i n t h e m a c r o e c o n o m y s ta b ility s u c h a s th e e c o n o m i c g r o w t h , in f la tio n ,

e m p l o y m e n t a n d i n t e r - r e g io n a l d is p a r ity . N e v e r t h e l e s s , t h e G e r m a n e c o n o m i c s i t u a t i o n is d e t e r i o r a t i n g d u e to r e u n if ic a tio n , a lth o u g h m a c r o e c o n o m y s t a b i l i t y is s till g a i n e d .

• The perceived absence of financial resource limits or spending constraints

a t l o c a l ( s u b - n a t i o n a l ) le v e l, e i t h e r b e c a u s e o f n a t i o n a l g o v e r n m e n t willingness to cover over-expenditure, or because of excessive sub­ n a t i o n a l b o r r o w i n g o n c a p ita l m a r k e t s , is p o t e n t i a l l y d e t r i m e n t a l t o t h e m a c r o - e c o n o m i c s t a b il it y o f a s ta t e .

Very few modern governments consider the individual sources of their income ( r e v e n u e ) w h e n s p e n d i n g d e c i s i o n s a r e m a d e d u r i n g t h e a n n u a l b u d g e t . T h e l in k

b e t w e e n i n c o m e a n d e x p e n d i t u r e is s t r e t c h e d e v e n f u r t h e r in s o m e f i s c a l f e d e r a l s y s t e m s in w h i c h m o s t i n c o m e is c o l l e c t e d b y t h e c e n t r a l g o v e r n m e n t t h r o u g h t a x e s , a n d is r e d i s t r i b u t e d t o local g o v e r n m e n t b y m e a n s o f ‘ g r a n t s ' ( t h i s p r o c e s s is

c a l l e d ‘r e v e n u e - s h a r i n g ’). T h is is r e i n f o r c e d w h e r e n a t i o n a l g o v e r n m e n t s a r e w i l l i n g t o c o m e t o t h e a s s i s t a n c e o f lo c a l g o v e r n m e n t s t h a t h a v e o v e r s p e n t b y

c o v e r i n g t h e o v e r - e x p e n d i t u r e (this is c a l l e d a n a t i o n a l ‘b a i l - o u t ' ) , o r w h e r e lo c a l

g o v e r n m e n t s h a v e u n c o n s t r a i n e d f r e e d o m to b o r r o w m o n e y o n t h e c a p i t a l m a r k e t s .

In y e a r 2 0 0 7 , a b o u t 2 7 % o f the tot al n a t i o n a l r e v e n u e is d e c e n t r a l i z e d ( t h e p e r c e n t a g e depends on the national revenue). The governments promised to increase gradually the

d e c e n t r a l i z e d b u d g e t w h e n t h e n a t i on a l r e v e n u e s r i s e i n t e n s i f y . "

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68 A C r is is o r C r itic a l D e v e lo p m e n t

T h e r e s u l t o f s u c h a p r o c e s s is t h a t l o c a l g o v e r n m e n t s a r e l e s s l i k e l y to c o n s i d e r real income limits when they incur expenditures during a fiscal year. In these

c i r c u m s t a n c e s l o c a l g o v e r n m e n t s m a y c o n d u c t t h e i r f i n a n c i a l a f f a i r s t o th e detriment of the economic stability of the state as a whole.

• The failure to match grant allocations with actual service delivery and

e x p e n d i t u r e r e q u i r e m e n t s a t l o c a l / s u b - n a t i o n a l l e v e l r e s u l t s in ‘u n f u n d e d ’ mandates. These will require that local governments must prioritize expenditure and may encourage them to neglect expenditure on important public services.

The ability of local levels of government to predict the volumes of revenue t h a t w i l l b e a l l o c a t e d t o t h e m is a n i m p o r t a n t n e c e s s a r y , b u t o n its o w n insufficient, condition for a stable intergovernmental fiscal system. Other factors that would be necessary to ensure stability would include overall macro-economic stability, sound financial management, the ease with which the intergovernmental fiscal system may be administered, the appropriate allocation of revenue and expenditure authority across levels of government, political accountability, and service efficacy.

In I n d o n e s ia , r e v e n u e is m o s t l y s till c e n t r a l iz e d . A c c o r d i n g t o th e l a w 2 5 / 1 9 9 9 a n d a lso

3 3 /2 0 0 4 , th e r e v e n u e s h a r i n g h a s b e e n e s t a b l i s h e d b a s e d o n t h e f o r m u l a e . O n e t h e m o s t

i m p o r t a n t r e v e n u e s o u r c e o f l o c a l g o v e r n m e n t is D A U ( G e n e r a l A l l o c a t i o n F u n d ) o c c u p y i n g a b o u t 8 0 - 9 0 % o f to t a l r e v e n u e o f lo c a l g o v e r n m e n t b u d g e t ( A n a n d a , 2 0 0 7 ) . It’s still n e e d e d i m p r o v i n g in t h e d e g r e e o f t r a n s p a r e n c y in t h e c a l c u l a t i o n o f th e fo rm u la e , e s p e c i a l l y in r e g a r d i n g w i t h th e r e v e n u e e s t i m a t i o n o f lo c a l g o v e r n m e n t .

In G e r m a n y , T a x r e v e n u e ( a s f e d e r a l m a i n s o u r c e s ) is s h a r e d a n d a p p o r t i o n e d a m o n g layers o f g o v e r n m e n t s a c c o r d i n g to c o n s ti tu t io n ( i n c o m e t a x ) a n d l a w ( V A T ) a n d

d is b u r s e d h o r i z o n t a l l y a m o n g lo c a l g o v e r n m e n t s b a s e d o n f o r m u l a e w ith s t r o n g

e q u a l i z a ti o n v a r i a b l e s . H o w e v e r , th e ru le s p r o t e c t m i n o r i t y r a t h e r e f f e c t i v e l y t h r o u g h v a rio u s a s y m m e t r i c p r o v i s i o n . In f a c ts , it is so d i f f i c u l t to e s t a b l i s h a n e x a c t a m o u n t for the t r a n s f e r b e c a u s e o f r e g i o n a l a s y m m e t r i c in th e e x p e n d i t u r e a n d r e v e n u e o f f e d e ra l government (Spahn, 2001)

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The In te r n a tio n a l J o u r n a l o f A c c o u n tin g a n d B u sin e ss S o c ie ty

E f f e c t i v e a n d o p e r a t i o n a l d e c e n t r a l i z a t i o n r e q u i r e s a n i m p r o v e m e n t in fiscal management and a stronger financial capacity at the regional and/or local level.

A c c o r d in g to N u r r o c h m a t ( 2 0 0 4 ) , th e d e c e n tr a liz a tio n p o l ic y h a s tw o k in d s o f im p a c ts , fir s t in c r e a s in g p e o p le p a r t ic ip a tio n , s e c o n d , u n f o r tu n a te ly it h a s c o n t r ib u te d to la r g e r s o c ia l c o n f lic t in J a m b i p r o v in c e . M o r e o v e r , th e in te n s ity c o n f l ic t in f o r e s t c o n c e s s io n ,

e s ta te p la n ta tio n , o r tr a n s m ig r a n t a n d lo c a l c o m m u n ity in c r e a s e s ig n if ic a n tly d u r in g th e

d e c e n t r a liz a tio n e ra . A n a n d a ( 2 0 0 4 ) s ta te d t h a t f is c a l d e c e n tr a li z a tio n in E a s t J a v a c o u ld n o t r e d u c e th e in te r - r e g io n ^ l d is p a r ity s in c e th e lo c a l g o v e r n m e n t h a s s till h ig h f in a n c ia l

d e p e n d e n c y to c e n tr a l g o v e r n m e n t.

Lessons on Human Resources

D e c e n t r a l i z a t i o n i m p l i e s in m o s t c a s e s a t r a n s f e r o f p e r s o n n e l f r o m t h e national level to the local government. This can be a risk as well as an opportunity.

R a s y i d in F O R U M D E S A r e p o r t ( 2 0 0 6 ) r e v e a l e d t h a t r e g i o n a l a u t o n o m y in I n d o n e s i a through revised law 32/2004 had aborted the spirit of autonomy itself due to abolishing o f c i v i l s e r v i c e m a n a g e m e n t f r o m d i s t r i c t / m u n i c i p a l i t i e s to p r o v i n c i a l le v e l. A c c o r d i n g to F O R U M D E S A r e p o r t ( 2 0 0 6 ) l o c a l g o v e r n m e n t still h a d p r o b l e m s in m a n a g i n g th e lo c a l p u b l i c o f f i c i a l s u c h a s s a l a r y s e t u p b y c e n t r a l g o v e r n m e n t w h e r e q u a l i t y is still neglecting. Local government can however build organization structure as their needs

a l t h o u g h still h a r d l y i m p l e m e n t e d . M o r e o v e r , t r a n s f e r p e r s o n a l s h a v e c o n t r a r y p r o b l e m s among local governments since an

“p u tra daerah ” [o rig in p e o p l e ] is s u e h a s r o s e u p a n d l i m i t e d th e t r a n s f e r p r o c e s s .

A c c o r d i n g t o R e i c h a r d ( 2 0 0 3 ) , In G e r m a n y , t h e a d m i n i s t r a t i v e r e f o r m s h a v e n o t b e e n p a r t i c u l a r l y s u c c e s s f u l ( s e e a ls o S e ib e ll , 2 0 0 1 , W o l l m a n n , 1 9 9 7 ). M o s t m a n a g e r i a l r e f o r m s c o n c e r n e d o n l y o n b u r e a u c r a t i c s t r u c t u r e i n s te a d o f c o o r d i n a t i o n a n d c o n t r o l . T h e lo c a l g o v e r n m e n t r e f o r m s a f t e r r e u n i f i c a t i o n w e r e n o t a r e f o r m p r i m a r i l y b u t o n l y a te x t b o o k a d m i n i s t r a t i v e t r a d i t i o n a l m o d e l s a n d c o n c e p t s t r a n s f e r r e d f r o m w e s t to th e

e a s t ( s e e R e i c h a r d a n d R o b b e r , 1 9 9 3 ). It still n e e d s an i m p r o v e m e n t in c o n t r o l a n d coordination between layers of governments.

• Decentralization requires increased coordination among and between the

d i f f e r e n t s e c t o r s a n d m i n i s t r i e s in o r d e r t o t r a i n p e r s o n n e l a d e q u a t e l y f o r their positions.

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70 A C r i s is o r C r itic a l D e v e lo p m e n t

In I n d o n e s ia ,

a n t i c i p a t i n g “ o v e r la p p in g ” in d e v e lo p m e n t p la n n in g , th e c e n tr a l

g o v e r n m e n t h a s p r o v i d e d la w 2 5 /2 0 0 4 - N a tio n a l D e v e lo p m e n t P la n n in g S y s te m - w h e r e d i s tr ic t/m u n ic i p a litie s , p r o v in c ia l a n d c e n tr a l g o v e r n m e n t s h o u ld w o r k h a n d in

h a n d d e s ig n in g a n d e x e c u tin g s o m e a g r e e d p r o g r a m s s u c h a s e d u c a tio n d e v e lo p m e n t, p o v e r ty e r a d i c a t i n g , h e a lth s e r v ic e s . A c c o r d in g to B a p p e p r o p ( 2 0 0 7 ) th e d if f e r e n t o f tim e lin e o f p l a n n i n g p r o c e s s a n d fin a lly a g r e e d b u d g e t l e a d to d if f ic u ltie s f o r lo c a l

g o v e r n m e n t p r o v i d i n g s h a r in g b u d g e t f o r c o m m itte d p r o g r a m s ( a s n a tio n a l c o m m itm e n t s u c h a s e d u c a ti o n , p o v e r ty a n d h e a lth s e rv ic e s ). S o , c o o r d in a tio n is o n ly s im p le ta lk e d ,

b u t a c tu a lly d i f f i c u l t tb b e e x e c u te d .

In G e r m a n y , lo c a l g o v e r n m e n t, e .g ., m u n ic ip a lity , h a s c o n s tit u tio n a lly p r o te c te d r ig h ts as lo n g a s th e ir a c t i o n s m u s t n o t c la s h w ith h ig h e r a u th o r itie s . G e n e r a lly , m u n ic ip a litie s ’

a d m in is tr a tiv e is d e le g a te d to

Kreis le v e l a n d to Regierungsbezirk le v e l ( a d m in is tr a tiv e

L e s s o n s o n I n fr a s tr u c tu r e

• Appropriate resources at local government level contribute significantly to

a n i n c r e a s e i n p u b l i c c o n f i d e n c e in t h e q u a l i t y o f s e r v i c e d e l i v e r y . It is a recurrent problem of local government and contributes significantly to the l o s s o f p u b l i c c o n f i d e n c e in its a u t h o r i t y . A d e c e n t r a l i z e d s y s t e m in w h i c h

power is not fully devolved may make decision-making more complexes and thus complicate the procedure for approving projects such as

infrastructure maintenance. In I n d o n e s i a , S M E R U ( 2 0 0 6 ) h a s s h o w n th a t 3 7 c itie s in I n d o n e s i a h a v e la r g e i m b a l a n c e

b e t w e e n c it i e s a n d d i s t r i c t s in c o n t r i b u t i n g to th e G D P . T h i s s i t u a t i o n s u g g e s t s a la rg e

i m b a l a n c e b e t w e e n la r g e a n d s m a ll c i ti e s a n d a ls o b e t w e e n d is t r ic t s . T h e s e in t e r r e g i o n a l

d i s p a r i t i e s c a u s e r u r a l a r e a s to b e left b e h i n d u r b a n a r e a s . T h i s s i t u a t i o n is e x a c e r b a t e d b y th e l i m i t e d p r o v i s i o n o f j o b o p p o r t u n i t i e s in ru ra l a r e a s a n d l i m i t e d in f r a s t r u c t u r e s u p p o r t i n g th e d e v e l o p m e n t o f h u m a n r e s o u r c e s in v i l l a g e s ; n o t to m e n t i o n th a t th e

a g r i c u l t u r a l s e c t o r r e m a i n s le s s p r o f i t a b l e c o m p a r e d w i th o t h e r s e c t o r s .

In G e r m a n y , ( K a s t r o p , 2 0 0 7 ) r e m i n d e d th a t th e G e r m a n fis c a l p o l i c y / a l l o c a t i o n a re still m a r k e d d i f f e r e n c e s in th e f i n a n c i a l e n d o w m e n t o f i n d i v i d u a l L a n d e r . T h i s m a y be

a tt r i b u t a b l e to g e o g r a p h i c a l d i s a d v a n t a g e s , to w e a k in f r a s t r u c t u r e , o r to m i s d i r e c t e d / p o l ic y d e c i s i o n s b y a r e g i o n a l g o v e r n m e n t . T o l e s s e n th e i m p a c t o f th i s , G e r m a n y h a s a v e r y c o m p l e x s y s t e m o f h o r i z o n t a l a n d v e r tic a l fin a n c ia l e q u a l i z a t i o n . The c o m p l e x fin a n c i a l e q u a l i z a t i o n s y s te m , in te n s if ie d b y th e s p e c i a l p r o b l e m s f o l l o w i n g the u n i f i c a t i o n o f G e r m a n y , s i g n i f i c a n t l y e n c u m b e r s th e p o l it i c a l a n d e c o n o m i c e f f i c i e n c y o f

th e G e r m a n f e d e r a l r e g im e .

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The International Journal o f A ccounting a n d B u sin ess Society

T h e r e is a t e n d e n c y f o r n e w ly d e c e n t r a l i z e d lo c a l g o v e r n m e n t s t o f a v o r spending on

in f r a s tr u c tu r e r a t h e r th a n o n p u b l i c p r o g r a m s . Local

g o v e r n m e n t s m u s t b e s u f f ic ie n tly d e m o c r a t i c a l l y a c c o u n t a b l e to e n s u r e th a t

f i n a n c i a l r e s o u r c e s a re n o t d iv e r te d in to p r e s t i g i o u s c a p i t a l p r o j e c t s th a t m a y b e i n c o n s i s t e n t w ith a c tu a l p u b l i c n e e d s .

In I n d o n e s ia , e d u c a tio n s e c to r has b een less p a id a tte n tio n b y th e [lo c a l] g o v e rn m e n ts ,

a lth o u g h th e n e w c o n s titu tio n stip ulated 2 0 % ex p e n s e s o f to ta l b u d g e t fo r e d u c a tio n s e c to r. R u k m a n ta r a ( 2 0 0 6 ) exposed th at th e re w ere a b o u t 8 ,0 0 0 s c h o o ls a c ro s s th e

c o u n try in u tte r d is r e p a ir , it so d e m an d in g g re a te r b u d g e ta r y s u p p o rt fro m th e

g o v e rn m e n t; In 2 0 0 4 , th e n et p articipation ra te (A P M ) fo r ju n i o r h ig h s c h o o l re a c h e d

7 2 .7 p e r c e n t in u r b a n area s b ut o nly 60.1 p e r ce n t in ru ra l a re a s , w h ile th e g ro s s p a r tic ip a tio n r a te ( A P K ) fo r the lo w est in co m e q u in tile w a s a m e re 6 3 .8 a n d th e h ig h e s t in c o m e q u in tile a t 9 7 .2 p e r a n t (B A P P E N A S , 2 0 0 5 ). T h e s e d is p a ritie s s u g g e s t th a t s ig n if ic a n t e f f o r t m u s t b e devoted n o t o n ly to a c h ie v in g n a tio n a l ta rg e ts b u t a ls o to re d u c in g s u b - n a tio n a l d isp arities.

A c c o r d i n g to B u s e m a y e r (2007) fiscal d e c e n tra liz a tio n h as a p o s i ti v e im p a c t on

e d u c a ti o n s p e n d i n g , w h e t h e r one looks at total, sectoral o r p e r s t u d e n t e x p e n d i t u r e . T h is r e s e a r c h h a s b e e n d o n e in some O E C D ’s co u n trie s in c lu d e d G e r m a n y w h e r e local

g o v e r n m e n t s h a v e a u t h o r i t y to m anage the e d u c a tio n se c to rs.