The International Journal o f Accounting and Business Society 39

In d on esia

(A Literature Study)

Candra

F a jr i A n a n d a

Brawijaya University, Indonesia

A b s tr a c t

Institutional development for better governance, to allow for better implementation of decentralization [included fiscal]

and other policies, will take years, as unfinished if not decades, to complete. Such institutions must be built domestically, or even locally, they

can not be imported from others. German experiences have shown how their adjustment efforts against the environment changes such as globalization, European Union, domestic inter-regional disparity (reunification) for a better quality of development. By analyzing

some theories and comparison German and Indonesian experiences, t h e r e a r e t h r e e r e c o m m e n d a t i o n s : ( i) e x i s t i n g c u l t u r a l c o n t e x t , (ii)

influencing of changing role and relationship, and (iii) questions on timing and sequencing of the policy. These three institutional aspects

s h o u l d b e c o n s i d e r e d in p o l i c y d e s i g n a t a ll l e v e l o f t h e g o v e r n m e n t s and need consequently a strong central government to lead and manage the process.

Keywords: Decentralization, local institutions, comprehensive

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40 A C r i s is o r C r i ti c a l D e v e lo p m e n t

I n tr o d u c tio n

■( yrth |

Pa& ftc.

S B «HCv *

P o p u l a t i o n ( 2 0 0 6 ) : 2 2 2 M illio n p e o p l e Surface Area: 1,860.4 thousand per sq km Population growth: 1.34% (2000 - 2005) P o p u l a t i o n b e l o w n a t i o n a l p o v e r t y lin e ( 2 0 0 6 ) : 1 7 .7 ! } %

G ini in d e x : 0 . 3 5 Economic Growth (2006): 5.50

G D P ( 2 0 0 6 ): 1 ,6 6 3 B illio n I J S S Source: Biro Pus at Statistic, 2007

After more than

three decades

under a

very centralized national

e x p e c t a t i o n . L i k e in m a n y c o u n t r i e s , t h e d e c e n t r a l i z a t i o n p o l i c y i n t e n d s t o b r i n g development closer to people. As government decentralized and moves closer to

These laws were in 2004 revised to be law no 32 and 33/ 2004.

The author thanks DAAD for financial support and Prof Winlried Manig - Institute ol R u r a l D e v e l o p m e n t , G o t t i n g e n U n i v e r s i t y f o r s u p e r v i s i n g a n d k i n d n e s s d u r i n g m y s t a y in

G e r m a n y . T h e v i e w s e x p r e s s e d in t h i s p a p e r a r e t h o s e o f t h e a u t h o r , a n d n o t t h o s e o i Government of the Republic of Indonesia.

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p e o p l e , t h e c o s t o f m o n i t o r i n g p o l i t i c i a n s h o u l d d e c r e a s e a n d s o s h o u l d th e

c o u n t r y ’s c h r o n i c p r o b l e m — c o r r u p t i o n .

Under Laws 22 and 25 of 1999 [also law 32 and 33 of 2004] which, r e s p e c t i v e l y p r o v i d e t h e f r a m e w o r k f o r p o l i t i c a l a n d f i s c a l d e v o l u t i o n , lo c a l

g o v e r n m e n t s a s s u m e d n e w i m p o r t a n t f u n c t i o n s a n d p o w e r s p r e v i o u s l y a s s i g n e d to t h e c e n t r a l g o v e r n m e n t . L a w 2 2 [ r e v i s e d t o l a w 3 2 ] h a s d e v o l v e d a l l a r e a s t o lo c a l

g o v e r n m e n t w i t h th e e x c e p t i o n o f n a t i o n a l d e f e n s e , i n t e r n a t i o n a l r e l a t i o n s , j u s t i c e , p o l i c e , m o n e t a r y , d e v e l o p m e n t p l a n n i n g , r e l i g i o n , a n d f i n a n c e . S i x y e a r s a f t e r th e

f u ll i m p l e m e n t a t i o n o f t h e d e c e n t r a l i z a t i o n p o l i c y , t h i n g s h a v e g o n e m u c h b e t t e r than many expected although some improvements are still needed. However, many

i s s u e s a n d c o n c e r n s h a v e a l s o e m e r g e d , b o t h in t h e a r e a s o f a d m i n i s t r a t i v e a n d fiscal decentralization. After briefly outlined the structure of government after fiscal decentralization, this paper highlights some of the above issues and concerns. Then, the paper discusses some institutional challenges that need to be taken for

b e t t e r i m p l e m e n t a t i o n o f f i s c a l d e c e n t r a l i z a t i o n in I n d o n e s i a .

D e c e n t r a l i z a t i o n is f o c u s e d a t t h e d i s t r i c t a n d m u n i c i p a l i t y l e v e l s . T h i s h a s always been the third tier of government below the central and the provincial l e v e l s . In 2 0 0 1 , t h e r e a r e 3 4 1 s u c h a d m i n i s t r a t i o n s in I n d o n e s i a a n d 2 6 p r o v i n c e s ( S i M E R U , 2 0 0 1 ) . H o w e v e r , in 2 0 0 7 t h e n u m b e r o f d i s t r i c t s i n c r e a s e d s i g n i f i c a n t l y about 434 districts and municipalities, while number of province also increased drastically 33 provinces (MoF, 2007).2

A s m e n t i o n e d a b o v e , t h e d e c e n t r a l i z a t i o n is a c c o r d i n g t o t h e l a w ( 2 2 / 9 9 a n d also 32/2004) focused at the district and municipality levels. This focused decentralization area brings consequently some implementation problems at the district and municipality level due to lower capacity at district level (SMERU. 2002; Hofmann and Kaiser, 2002) such as:

1) T r a n s p a r e n c y in d e f i n i n g t h e m e c h a n i s m f o r e q u a l i z a t i o n f u n d a l l o c a t i o n ; t r a n s p a r e n c y in t h e u t i l i z a t i o n o f e q u a l i z a t i o n f u n d s in e a c h r e g i o n ;

2) F a i r n e s s in t h e a l l o c a t i o n o f t h e D A U ; 3)

Sufficiency of the DAU allocation for each region, consisting of:

a. sufficiency measured by the need of the routine budget for the transfer of personnel;3

A c t u a l l y a c c o r d i n g t o t h e l a w 2 2 / 1 9 9 9 . t h e r e g i o n t h a t c a n n o t f i n a n c e its o w n f i n a n c i a l b u d g e t s h o u l d m e r g e w i t h o t h e r r e g i o n s . In t h e i m p l e m e n t a t i o n , t h e n u m b e r o f r e g i o n s are increasing drastically. Answering this situation, the government revised the law 22/1999 to law 32/2004. According to the law 25/1999, local governments have authority to determine their budget structure. They should be able to catch the needs of their society.

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42 A C r is is o r C r i ti c a l D e v e lo p m e n t

b. sufficiency measured by the need of additional funds for salary increases.

4 ) A l i m i t e d S p e c i a l A l l o c a t i o n G r a n t ( D A K ) a l l o c a t i o n , in t o t a l a m o u n t o r breadth, which so far has been limited only to reforestation. Law 25/1999

d i r e c t s D A K t o w a r d s s u p p o r t i n g s p e c i a l n e e d s in t h e r e g i o n s . H o w e v e r , t h e r e is s t i l l c o n s i d e r a b l e d e b a t e a m o n g i n s t i t u t i o n s r e g a r d i n g t h e d e f i n i t i o n of “special needs” (Bunte, 2003)

Although the new law 32 and 33/2004 have been implemented, the problems are still facing remain the same even strongly wider as follows:

5) T h e t r a n s p a r e n c y a n d r e s p o n s i b i l i t y o f lo c a l g o v e r n m e n t a n d a l s o h i g h p e o p l e p a r t i c i p a t i o n in l o c a l p o l i t i c s t a y b e h i n d . M o s t o f l o c a l p o l i t i c i a n s

work only for their own interest. The decentralization here can be understood as decentralized corruption (Bunte, 2004; Volbracht, 2005);

D u e t o d i f f e r e n t p e r c e p t i o n o n d e c e n t r a l i z a t i o n , it l e a d s t o a n e w c o n f l i c t

b e t w e e n c e n t r a l a n d l o c a l g o v e r n m e n t . T h e lo c a l g o v e r n m e n t p e r f o r m a n c e t h a t m o r e f o c u s e d o n t h e i r i n d i v i d u a l o r p a r t y i n t e r e s t d e t e r i o r a t e s “ th e trust” regarding to the relation between central and local governments. This situation brings dangerously the nation integrity (Bunte, 2004);4

7) The military reform should bring the better democracy at the region,

h o w e v e r t h e i r p o l i t i c a l i n f l u e n c e is s ti l l i m p e r a t i v e a t n a t i o n a l a n d l o c a l l e v e l a n d it c a n l e s s e n c o u r a g e t h e d e m o c r a c y p r o c e s s ( B u n t e , 2 0 0 4 ) ;

8) In t h e f i s c a l d e c e n t r a l i z a t i o n , d u e t o h i g h d e p e n d e n c y o n n a t i o n a l i n c o m e the local government tries to create locai taxation policy to increase their

l o c a l b u d g e t . H o w e v e r , it d i s t o r t s m o s t l y t h e i r e x i s t i n g e c o n o m i c a c t i v i t i e s (Schreiner, 2000; Ray, 2003);

D e c e n t r a l i z a t i o n is n o t a b s o l u t e m e d i c i n e t o r e s o l v e t h e m a i n p r o b l e m s in Indonesia such as democratization, since they still have low capacity of l o c a l p u b l i c o f f i c i a l a n d d e m a n d s f o r i n d e p e n d e n c y in s u c h r e g i o n s (Eissel/Grasse, 2005);

Based on the mentioned problems above, Bunte (2004) has estimated four scenarios for Indonesian decentralization:

1) Chaotic decentralization; 2)

Anomalistic decentralization; 3)

special decentralization;

I his situation instigates pcmckaran Aufhliihcn ( ) s o m e r e g i o n s , f r o m 3 4 1 in 2 0 0 1 t o b e 434 districts and municipalities in 2007.

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4) Re-centralization; T h e d e c e n t r a l i z a t i o n f o r m s a b o v e , a c c o r d i n g t o B iin t e ( 2 0 0 4 ) c a n t a k e p l a c e b a s e d

o n i n t e r n a l e f f o r t s , b e t w e e n c e n t r a l a n d lo c a l g o v e r n m e n t , in e n h a n c i n g th e p o l i t i c a l , e c o n o m i c , a n d s o c ia l c o o p e r a t i o n t o a c h i e v e a b e t t e r r e s u l t s o f decentralization’s goals.

I t ^ s e e m s t h a t d e c e n t r a l i z a t i o n p o l i c y i m p l e m e n t e d in I n d o n e s i a is s till facing many problems. The considerable different capacity of local governments l e a d s t o d i f f e r e n t a c h i e v e m e n t s o f d e c e n t r a l i z a t i o n i ts e lf . A d e t a i l e x p l a n a t i o n s h o u l d b e m a d e t o d e s c r i b e th e p r o c e s s o f d e c e n t r a l i z a t i o n in I n d o n e s i a , e s p e c i a l l y its i m p a c t in i m p r o v i n g p u b lic s e r v i c e s , r e d u c i n g p o v e r t y a n d u n e m p l o y m e n t ,

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

h a v e c l e a r p i c t u r e a n d b e s t p r a c t i c e s f o r b e t t e r f u r t h e r p o l i c y . G e r m a n f is c a l

d e c e n t r a l i z a t i o n w i l l b e c h o s e n d u e to a b e t t e r p r a c t i c e a n d l o n g e r e x p e r i e n c e s . S i n c e p u b l i c a n d f i s c a l p o lic y is r e l a t e d w i t h d e m o c r a t i z a t i o n p r o c e s s , t h e s tu d y will use an institutional approach to explore the issues.

S tr u c tu r e o f G o v e r n m e n t after d ecen tra liza tio n in In d o n e sia

T h e t e r r i t o r y o f I n d o n e s i a is d i v i d e d i n to a u t o n o m o u s p r o v i n c e s , d i s t r i c t s (, k a b u p a te n ) and municipalities ( k o ta ). D i s t r i c t s a n d m u n i c i p a l i t i e s a r e t e c h n i c a l l y t h e s a m e l e v e l o f g o v e r n m e n t . 5 M o r e o v e r , t h i s d i s t i n c t i o n is b a s e d a l s o o n w h e t h e r t h e g o v e r n m e n t a d m i n i s t r a t i o n is l o c a t e d in a r u r a l a r e a ( d i s t r i c t ) o r a n u r b a n a r e a (municipality).

there are sub-districts (.k e c a m a ta n ) which are smaller administrative government units. Each sub-district is f u r t h e r d i v i d e d i n t o v i l l a g e s . V i l l a g e s in r u r a l a r e a s a r e c a l l e d

descu w h i l e in an urban areas there are referred to as

ke lu ra h a n ( s e e F i g u r e 1).

T h e d i f f e r e n c e b e t w e e n d i s t r i c t a n d m u n i c i p a l i t i e s is t h e n u m b e r o f d i s t r i c t s . D i s t r i c t

involves more than 5 or six sub-districts, while municipalities involve on the average 3 to 5 sub-districts.

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44 A C r i s is o r C r i ti c a l D e v e l o p m e n t ...

Figure 1: Framework of Government according to the Law 22/1999

D istrict

: M u n ic ip a lity (K ota)

(K ab u p a te n )

Sub-district Sub-district

(K ec a m a tan ) (K ecam atan )

V illage

V illag e (K elu rah an) (D esa)

Decentralization De-concentration

Co-administration

Conceptual Framework of the Study

D e c e n tra lizn tio ti C o n c e p t in B r i e f

D e c e n t r a l i z a t i o n is t h e m a i n i s s u e o f t h i s p a p e r a s t h e “ b i g b a n g p o l i c y " (meaning an all-at-once process of decentralization rather than a gradual process) influencing social, economic and political condition

in Indonesia.

A brief

e x p l a n a t i o n o n c o n c e p t o f d e c e n t r a l i z a t i o n is n e c e s s a r y t o p o s i t i o n t h e f i s c a l decentralization within the broader context of decentralization.

T h e d e g r e e o f d e c e n t r a l i z a t i o n is g e n e r a l l y d i v i d e d i n t o t h r e e l e v e l s : d e ­ concentration, delegation, and devolution.

D e -c o n c e n tr a tio n occurs when the

c e n t r a l g o v e r n m e n t d i s p e r s e s r e s p o n s i b i l i t i e s f o r c e r t a i n s e r v i c e s t o its r e g i o n a l branch offices.

W i t h d e - c o n c e n t r a t i o n t h e r e is n o t r a n s f e r o f a u t h o r i t y t o l o w e r levels of government; rather, decision-making has simply been shifted to national

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g o v e r n m e n t s t a f f t h a t a r e lo c a te d in t h e r e g i o n s . In c o n t r a s t ,

deleg a tio n occurs

when the central government transfers responsibility for decision-making and

a d m i n i s t r a t i o n o f p u b l i c f u n c t i o n s to lo c a l g o v e r n m e n t o r s e m i a u t o n o m o u s o r g a n i z a t i o n s t h a t a r e n o t w h o ll y c o n t r o l l e d b y t h e c e n t r a l g o v e r n m e n t , b u t a r e u l t i m a t e l y a c c o u n t a b l e t o it.

Finally,

devolution o c c u r s w h e n t h e c e n tr a l

g o v e r n m e n t t r a n s f e r s a u t h o r i t y f o r d e c i s i o n - m a k i n g , f i n a n c e a n d m a n a g e m e n t to q u a s i - a u t o n o m o u s u n i t s o f lo c a l g o v e r n m e n t , w h o a r e a c c o u n t a b l e t o th e ir constituencies for their performance (Litvak, Ahmad and Bird, 1998; Usman,

These different degrees of decentralization can be applied across political,

f i s c a l a n d a d m i n i s t r a t i v e d i m e n s i o n s o f d e c e n t r a l i z a t i o n . B y d e f i n i t i o n , p o litic a l

According to law 22 and 25/1999 [revised 32 and 33/2004), the structure o f I n d o n e s i a n g o v e r n m e n t in t h e d e c e n t r a l i z e d g o v e r n m e n t is d i v i d e d in to decentralization,

de-concentration,

and

co-administration. Some central

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

g o v e r n m e n t s ( s e e p r e v i o u s e x p l a n a t i o n ) . S o , it c a n b e c o n c l u d e d t h a t I n d o n e s i a

g o v e r n m e n t s t r u c t u r e is s i m i l a r w i t h t h e t h e o r e t i c a l g o v e r n m e n t s t r u c t u r e in decentralization framework.

E r r o r ! R e f e r e n c e s o u r c e n o t f o u n d , d e s c r i b e s t h e k e y f e a t u r e s o f th e political, fiscal and administrative concept within the context of de-concentration,

d e l e g a t i o n a n d d e v o l u t i o n . In p r a c t i c e , h o w e v e r , t h e s e d i f f e r e n t d i m e n s i o n s d o n o t always line up. For instance, even though there may be locally elected governments that are accountable to their constituents, the degree of fiscal decentralization may

be more characteristic of delegated authority. In s o m e c a s e s , t h e r e m a y b e

e x t e n s i v e f i s c a l a u t o n o m y in t h e f o r m o f t a x i n g a u t h o r i t y a n d f o r m u l a - b a s e d unconditional grants, but centrally determined wage rates and establishment

c o n t r o l s m a y e f f e c t i v e l y d i c t a t e h o w t h o s e f u n d s a r e s p e n t . S i m i l a r l y , fu ll lo c a l

a u t h o r i t y o v e r h i r i n g , f i r i n g a n d e s t a b l i s h m e n t c o n t r o l s m a y b e o v e r s h a d o w e d by fiscal arrangements that are governed by detailed conditionality.

of staff and related administrative issues can have a direct effect on how well the intended degree of

As the above

analysis

implies,

the treatment

d e c e n t r a l i z a t i o n i s a c h i e v e d i n p r a c t i c e . T h i s is n o t t o s a y t h a t m o r e a d m i n i s t r a t i v e decentralization is necessarily better; in fact, extensive decentralization can have negative consequences for developing a strong, professional civil service at the

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46 A C r i s is o r C r i ti c a l D e v e lo p m e n t

lo c a l l e v e l , i f m o b i l i t y , p r o m o t i o n a l a n d f i n a n c i a l o p p o r t u n i t i e s a r e c u r t a i l e d a s a r e s u l t . R a t h e r , t h e c o n c l u s i o n t h a t s h o u l d b e d r a w n is t h a t t h e i n t e r a c t i o n o f f i s c a l , political and administrative features needs to be taken into account if the intended

d e g r e e o f d e c e n t r a l i z a t i o n is t o b e r e a l i z e d .

T a b le 1: K ey Feature o f P olitical, Fiscal and adm inistrative C oncept

Sou rce: Evans and M annin g, 2 0 0 4

D econcentrati •

on (rrfrnimal)

a r m o f th e c e n tr a l employees of the

little o r n o d is c r e tio n

government, and

over how or where

fully accountable

s e r v ic e is p r o v id e d .

to the

c e n te r , usually

through • Local leadership

their respective is v e s t e d in lo c a l

F u n d i n g is p r o v i d e d

central ministries. o f f i c i a l s , s u c h as a

by

government through

appointed by and

independent revenue

Delegation

G o v e r n m e n t at

Spending priorities

Staff could be

(intermediate)

a r e s e t c e n t r a l l y , as employees of the lead

t h e lo c a l le v e l is

central or local elected politicians,

and government, but but

norms

lo c a l pay and conditions accountable,

of employment are partially

typically set by

over the center. central

a c c o u n t a b l e , to th e

authority

of government.

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• F u n d in g , is p r i d e d • L o c a l g o v e rn m e n t

h a s s o m e a u th o rity over

h irin g an d lo c a tio n o f s ta f f s b u t

is le s s lik e ly to h a v e k a n a c o n d itio n a lg r a n ts .

_t

a u th o rity o v e r firin g .

Devolution

G o v e rn m e n t a t

S u b je c t to m e e tin g

Staff are

(substantial)

th e lo c a l le v e l is

e m p lo y e e s o f local le a d

m in im u m s ta n d a rd s , government.

g o v e rn m e n t Local government who

e le c te d p o litic ia n s

h a s full d is c re tio n

and o v e r s a la ry levels, th e ir e le c to ra te .

a c c o u n ta b le

to

p rio ritie s

sta f f i n g numbers

h ire a n d fire.

F u n d in g c a n c o m e

(Standards and

fro m local r e v e n u e s ,

procedures for

re v e n u e

sharing

h irin g and

arrangements

and

managing staff,

t ra n s fe rs

( p o s s i b ly

h o w e v e r , m a y still

c o n d itio n s )

fro m

w ith in an

c e n tra l g o v e r n m e n t . o v e r a r c h in g civil se rv ic e f r a m e w o r k

c o v e r in g local governments

g e n e ra lly ).

In d o n e s ia n F isca l D ecen tra liza tio n in B rief: C oncept, L a w 25/1999 a n d 33/2004

F i s c a l D e c e n t r a l i z a t i o n a l s o h a s b e c o m e p a r t o f a w o r l d - w i d e " r e f o r m ’' agenda of decentralization policy itself, has become an integral part of economic

d e v e l o p m e n t a n d g o v e r n a n c e s t r a t e g i e s in d e v e l o p i n g a n d t r a n s i t i o n a l e c o n o m i e s (Bahl, 2001). Along with “globalization,” fiscal decentralization and the desire for l o c a l d i s c r e t i o n a n d d e v o l u t i o n o f p o w e r is s e e m e d b y t h e W o r l d B a n k a s o n e o f

the most important forces shaping governance and development today (World Bank, 1999).

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48 A C r is is o r C r i ti c a l D e v e lo p m e n t

Why this renewed interest in fiscal decentralization as reform? There are three

b a s ic r e a s o n s ( K e e , 2 0 0 3 ) a s f o l l o w s :

1. C e n t r a l g o v e r n m e n t s i n c r e a s i n g l y a r e f i n d i n g t h a t i t is i m p o s s i b l e f o r t h e m t o meet all of the competing needs of their various constituencies, and are

a t t e m p t i n g t o b u i l d l o c a l c a p a c i t y b y d e l e g a t i n g r e s p o n s i b i l i t i e s d o w n w a r d to their regional governments.

2. Central governments are looking to local and regional governments to assist th e m o n n a t i o n a l e c o n o m i c d e v e l o p m e n t s t r a t e g i e s .

3. Regional and local political leaders are demanding more autonomy and want the taxation powers that go along with their expenditure responsibility.

F is c a l d e c e n t r a l i z a t i o n is n o w s e e n a s p a r t o f a r e f o r m a g e n d a o f m a n y n a t i o n s to strengthen tiieir regional and local governments to meet the challenges of the 21st

C e n tu r y . Theoretically, we can conclude that a “proper” distribution of tax authority

and expenditure responsibility is an extremely complex issue. Economists generally focus only on issues of efficiency and equity, while public administration and political

distribution of powers, responsiveness

and accountability,

and coordination.

E c o n o m i s t R i c h a r d M u s g r a v e ’ s f r a m e w o r k f o r a n a l y z i n g r o l e s o r f u n c t i o n s is- widely accepted (Musgrave, 1959, 1961; see also Oates, 1977). The Stabilization

F u n c t i o n i n v o l v e s t h e r o l e o f t a x a n d s p e n d i n g p o l i c i e s a n d m o n e t a r y p o l i c y in managing the overall level of economic activity.

I t is w i d e l y a g r e e d t h a t t h i s macroeconomic function should be assigned to the national government. This suggests that the national government must have a broad-based tax suitable for this role. The case for assigning this function to the national government rests on two

assumptions that:

1) T h e n a t i o n a l g o v e r n m e n t ’ s b r o a d t a x i n g p o w e r s c a n m o r e e a s i l y r e d i s t r i b u t e income; and

2) T h e a b i l i t y o f t a x p a y e r s t o m o v e f r o m o n e j u r i s d i c t i o n t o a n o t h e r t o t a k e advantage of more attractive spending and taxation policies weakens local government’s ability to “soak the rich and redistribute to the poor.”

There are some arguments for fiscal decentralization. The theoretical case for fiscal decentralization dates from

18th Century philosophers, including Rousseau, Mill, de Tocqueville, Montesquieu and Madison. Central governments were “distrusted” and small, democratic governments were seen as the principal

17th and

hope to preserve the liberties of free men (Bennet, 1990). The modern case for decentralized government was articulated by Wollmann (in

Bennet, 1990). Wollmann divided the proponent arguments under two headings: Efficiency Values and Governance Values.

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The In te rn 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 ffic ie n c y Value is a n e c o n o m i c v a l u e s e e n a s t h e “ m a x i m i z a t i o n ” o f s o c i a l welfare. The public sector does not contain the same price signals as the private sector, to regulate supply and demand.

Public sector allocation of goods and services are inherently political; however, as nearly as possible tax and service packages should reflect “the aggregate preferences of community members” ( W o l l m a n n , 1 9 9 7 ) . H o w e v e r , w i t h i n a n y p o l i t i c a l j u r i s d i c t i o n , s o m e p e o p l e w ill p r e f e r m o r e , s o m e l e s s , p u b l i c s e r v i c e s . A s a r e s u l t t h e r e is a “ d i v e r g e n c e b e t w e e n the preferences of individual community members and the tax and service packages reflecting the aggregate community preferences”. Since such divergence r e d u c e s s o c i a l w e l f a r e , it is d e s i r a b l e t o h o l d t h o s e t o a m i n i m u m a n d t h e y w i l l b e less

than in larger, more heterogeneous areas (the nation).

in smaller communities

(e.g.,

municipalities)

G o v e rn a n c e va lu es include responsiveness and accountability, diversity, and political participation (Wollmann, 1997). Decentralization places distributional decision making closer to the people. This fosters greater responsiveness of local o f f i c i a l s a n d g r e a t e r a c c o u n t a b i l i t y t o c i t i z e n s . T h i s is b e c a u s e w e e x p e c t l o c a l

decision makers to be more knowledgeable about the problems and needs of their l o c a l a r e a t h a n c e n t r a l i z e d d e c i s i o n m a k e r s . F u r t h e r , t o t h e e x t e n t t h a t t h e r e is accountability through local elections, those elections are more likely driven by issues of local allocation, whereas national elections are seldom focused on local s e r v i c e d e l i v e r y . D i v e r s i t y in p u b l i c p o l i c y is a s e c o n d g o v e r n a n c e a r g u m e n t f o r

f i s c a l d e c e n t r a l i z a t i o n . It is v a l u e d b e c a u s e it o f f e r s c i t i z e n s a g r e a t e r c h o i c e in public service and tax options when they are deciding where to reside (Tiebout, 1956).

for innovation and experimentation, which sometime serves as models for later implementation by the central government or by example to other local governments. Finally, fiscal

In addition,

h a s t h e p o t e n t i a l t o e n h a n c e d e m o c r a t i c v a l u e s a n d p o l i t i c a l s t a b i l i t y a t t h e lo c a l l e v e l . It p r o v i d e s a f o r u m f o r l o c a l d e b a t e a b o u t l o c a l p r i o r i t i e s , a n d c a n b e a proving ground for future political leaders.

Meanwhile, there are also some arguments against fiscal decentralization (Homines, 1995; Tanzi, 1995, Prud’homme, 1995). Tanzi (1995) summarizes this

c r i t i q u e b y r a i s i n g a n u m b e r o f s i t u a t i o n s o r c o n d i t i o n s , e s p e c i a l l y in d e v e l o p i n g countries, where fiscal decentralization may lead to less than an optimal result:

1. T a x p a y e r s m a y h a v e i n s u f f i c i e n t i n f o r m a t i o n o r n o p o l i t i c a l p o w e r t o p r e s s u r e local policymakers to make resource-efficient decisions.

2. L o c a l p o l i t i c i a n s m a y b e m o r e c o r r u p t t h a n n a t i o n a l p o l i t i c i a n s o r a t l e a s t fin d t h e m s e l v e s in m o r e c o r r u p t i n g s i t u a t i o n s .

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

3 . T h e q u a l i t y o f n a t i o n a l b u r e a u c r a c i e s is l i k e l y t o b e b e t t e r t h a n lo c a l bureaucracies.

4. Technological chance and increased mobility may reduce the number of s e r v i c e s t h a t a r e t r u l y “ l o c a l ” in n a t u r e .

5. Local governments often lack good public expenditure management systems to

a s s i s t t h e m in t h e i r t a x a n d b u d g e t c h o i c e s .

6. Fiscal decentralization may worsen a central government’s ability to deal with structural fiscal imbalances.

P r u d ’ h o m m e ( 1 9 9 5 ) f i n d s o t h e r p o t e n t i a l f l a w s in t h e t h e o r y o f f i s c a l decentralization. The economic efficiency argument, he suggests, requires roughly

e v e n r e g i o n a l f i s c a l c a p a c i t i e s — a c o n d i t i o n n o t e x i s t i n g in d e v e l o p i n g c o u n t r i e s . Fiscal inequities may actually increase with decentralization. In addition, localities m i g h t e n g a g e in d e s t r u c t i v e c o m p e t i t i o n t o a t t r a c t i n d u s t r y . F i n a l l y , t o t h e e x t e n t

that local governments are viewed as agents of the central government, fiscal

d e c e n t r a l i z a t i o n m a y l i m i t t h e a b i l i t y o f t h e p r i n c i p a l ( t h e c e n t r a l g o v e r n m e n t ) to influence policy at the local level. Homines (1995) sees decentralization as ' ‘e s s e n t i a l l y a p o l i t i c a l p r o b l e m ” . T h u s , f o r H o m i n e s ( 1 9 9 5 ) a n i r o n y o f f i s c a l decentralization may be the need for more central government controls to protect against this danger.

The concerns raised have been partially addressed by other scholars (McClure, 1995; Oates, 1995). McClure argues that Prud’homme (1995) sets up a s t r a w m a n — p u r e d e c e n t r a l i z a t i o n o f f i s c a l f e d e r a l i s m — a n d e a s i l y d e t a i l s its f l a w s . Decentralization done badly says McClure, will cause problems. However, no one p r o p o s e s f u l l d e c e n t r a l i z a t i o n ; r a t h e r , w h a t is p r o p o s e d is d e c e n t r a l i z a t i o n o f s o m e functions. Clearly, the central government must retain sufficient revenues (and

d i s c r e t i o n ) t o b e e f f e c t i v e in b o t h t h e i r s t a b i l i z a t i o n a n d d i s t r i b u t i o n r o l e s . P e r h a p s t h e m o s t i m p o r t a n t i s s u e r a i s e d b y o p p o n e n t s is t h e “ l o c a l c a p a c i t y ” i s s u e .

H o w e v e r , it is n o t s e l f - e v i d e n t t h a t n a t i o n a l p o l i t i c i a n s a n d b u r e a u c r a c i e s a r e superior to or less corrupt than their local counterparts. If political decision making is d e c e n t r a l i z e d t o t h e l o c a l l e v e l , y o u m a y s e e a n i n c r e a s e in t h e c a p a c i t i e s o f l o c a l

g o v e r n m e n t s . O n e o f t h e m a j o r o b j e c t i v e s o f r e f o r m is b u i l d i n g t h e c a p a c i t y o f l o c a l g o v e r n m e n t a n d l o c a l c i t i z e n s t o a c t i v e l y p a r t i c i p a t e in t h e i r g o v e r n m e n t a l

d e c i s i o n s . P r u d ’h o m m e ( 1 9 9 5 ) a n d H o m i n e s ( 1 9 9 5 ) a r e c o r r e c t t h a t a s i m p l e

d i v i s i o n o f r e s p o n s i b i l i t i e s is s e l d o m a p p r o p r i a t e . A g o o d i l l u s t r a t i o n o f t h i s i s s u e is environmental protection, where national standards are appropriate, and regional or local

produce, e.g., deforestation (Nurrochmat. 2004).

governments may

enforce,

regulate, and

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P o s t g r a d u a t e P r o g r a m , B r a w i j a x a I !n i \ e i s i t \

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

Financing could easily be a shared responsibility. Hommes (1995) would provide grants with strings attached to enforce local accountability. Hommes (1995) notes the seeming paradox of decentralization is that it demands of the central government more sophisticated political control.

Ultimately, however, effective decentralization requires the relinquishing of some central control.

F r o m t h e d i f f e r e n t e x p l a n a t i o n s a b o v e , w e c a n c o n c l u d e t h a t F is c a l d e c e n t r a l i z a t i o n is n o t a d e v o l u t i o n o f a u t h o r i t y f r o m t h e c e n t r a l g o v e r n m e n t t o l o c a l g o v e r n m e n t s (province, district/kabupaten, municipalities/ kota), but also political institutions where people participation, involving local values and people awareness [through

l e a r n i n g p r o c e s s ] w i l l i n c r e a s e t h e q u a l i t y o f F is c a l d e c e n t r a l i z a t i o n i t s e l f . T h i s p a p e r is t r y i n g t o e x a m i n e t h e u n d e r l y i n g t h e o r y s u p p o r t i n g a n d o p p o s i n g f i s c a l decentralization,

implemented in Indonesia.

especially with the fiscal decentralization

I n I n d o n e s i a , t h e f i s c a l d e c e n t r a l i z a t i o n is f o r m e d in la w 2 5 / 1 9 9 9 a n d 33/2004 where local government are assigned to provide and manage local tax. Table 2 below explains the distributed responsibilities between central, provincial

a n d l o c a l g o v e r n m e n t in I n d o n e s i a . T a b l e 2 : R e s p o n s i b i l i t y a g e n c y in f i s c a l d e c e n t r a l i z a t i o n in I n d o n e s i a Revenue sources © -

G o v e r n m e n t in c h a r g e

Administration O i l ( n o n ta x ) r e v e n u e

C C C Corporate Income tax

C C C Value Added tax

C C C Import tax

E x c i s e ta x

E x p o r t ta x

Personal Income tax

C C C Land and Building tax (PBB)

C C C , P ,L Land and Building Transfer Fee (BPHTB)

C C C Mining: Royalty

C C C M o t o r v e h i c l e ta x

C, P

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

M o t o r v e h ic le o w n e r s h ip ta x

c,j>K

.YS&pfe-;

P.

, -yV/IU v-

Source: Ministry of Finance, law 25/1999 and law 33/2004

As explained above that decentralization policy has some various pictures due to different resources (especially natural resources), local capacity, and low trust [bad perception] to central government. These all factors lead to high demand

from some regions for special autonomy,6 e.g., provincial government of Aceh and Jayapura. The reasons of demanding this special autonomy are mostly based on

political and economic aspects. Since the both regions have high endowment factors such as LNG, Oil and Gas, forestry, fishery, however their regional

d e v e l o p m e n t u n f o r t u n a t e l y a c h i e v e s l e s s b e h i n d o t h e r r e g i o n s in I n d o n e s i a . T h e i r regions are rich ones, on the other side most of their population live under poverty, u n d e r b a d h e a l t h s e r v i c e s , l o w e d u c a t i o n f a c i l i t i e s , e t c . 7 It is e x p e c t e d t h a t t h r o u g h

a b e t t e r f i n a n c i a l s h a i i n g , t h e l a c k o f its d e v e l o p m e n t c a n b e r e d u c e d a n d e x p e c t e d welfare can obtained respectively.

Due to different natural endowments, some of regions occupy more and others not, the central government creates an equalization grant, the so-called DAU (general allocation grant), DAK (specific allocation grant). General Allocation

F u n d ( D A U ) is a d i s c r e t i o n a r y b l o c k g r a n t d e s i g n e d t o e q u a l i z e t h e f i s c a l c a p a c i t i e s o f r e g i o n a l g o v e r n m e n t s . T h e D A U is t r a n s f e r r e d m o n t h l y a n d d i r e c t l y f r o m t h e

6 See also Biinte, 2004; '

In the both regions, there are movements against national government, they demand for independency such as GAM (Free Aceh Movement) and OPM (Independent Papua Organization).

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The In te rn 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 s in e s s S o c ie ty

c e n t e r t o r e g i o n a l g o v e r n m e n t s . I t is a l l o c a t e d b a s e d o n a n a t i o n a l f o r m u l a t h a t

c o n s i s t s o f f i s c a l g a p a n d b a s i c a l l o c a t i o n . F i s c a l g a p is o b t a i n e d f r o m t h e difference between the fiscal needs and fiscal capacity of each region. Fiscal needs to take into account variables such as population, regional area, regional gross

domestic product (RGDP) per capita, and human development index. Fiscal

c a p a c i t y is m e a s u r e d b y o w n - s o u r c e r e v e n u e a n d r e g i o n a l p e r c e n t o f r e v e n u e - s h a r i n g . B a s i c a l l o c a t i o n is c a l c u l a t e d b a s e d o n t h e b u d g e t s p e n d i n g o n c i v i l s e r v a n t s ’ s a l a r y in t h e r e l a t e d r e g i o n . D A U is d i s t r i b u t e d t o t h e r e g i o n s in t h e proportion of 10 percent for province and 90 percent for local government.8 The

D A U a l l o c a t i o n a m o n g l o c a l g o v e r n m e n t s is o b t a i n e d b y m u l t i p l y i n g e a c h lo c a l government’s weight by the total amount of DAU for all local government. The w e i g h t i t s e l f is d e t e r m i n e d b y t h e p r o p o r t i o n o f f i s c a l g a p o f t h e r e l a t e d lo c a l

g o v e r n m e n t t o t h e t o t a l f i s c a l g a p o f a ll lo c a l g o v e r n m e n t . S p e c i f i c A l l o c a t i o n F u n d ( D A K ) o r e a r m a r k e d g r a n t is a c o n d i t i o n a l g r a n t

reflecting national priorities provided to finance regions’ specific needs not covered by the DAU’s formula. DAK cannot be used for research, training,

a d m i n i s t r a t i o n , a n d o f f i c i a l t r a v e l . T h e s o u r c e o f D A K is t h e n a t i o n a l b u d g e t ( A P B N ) . E x c e p t f o r r e g i o n s w i t h l i m i t e d f i n a n c i a l c a p a c i t y , a r e g i o n is r e q u i r e d t o provide from the regional government budget (APDB) a matching grant of a m i n i m u m o f 1 0 p e r c e n t o f t h e p r o j e c t b u d g e t . D A K is t r a n s f e r r e d q u a r t e r l y b a s e d o n p r o j e c t p r o g r e s s . B a s e d o n a M i n i s t r y o f F i n a n c e ( M o F ) d e c r e e , D A K is t r a n s f e r r e d d i r e c t l y t o p r o v i n c i a l a n d l o c a l g o v e r n m e n t . S t a r t i n g in 2 0 0 3 , D A K covers several sectors such as education, health, infrastructure, and government facilities (for new local governments).

De-concentrated and Emergency Funds are also revenue sources of such local government where central government prioritizes which local governments selected.9 De-concentration can be considered revenue for the province and local

g o v e r n m e n t s i n c e t h e a c t u a l i m p l e m e n t a t i o n is in t h e r e g i o n . T h e f u n d is t r a n s f e r r e d t o t h e p r o v i n c e b a s e d o n c e n t r a l g o v e r n m e n t p r i o r i t i e s in t h e f o r m o f development expenditures that do not cover routine/recurrent spending of vertical

a g e n c i e s in t h e r e g i o n f o r n o n p h y s i c a l p r o j e c t s . L a w 3 3 / 2 0 0 4 s p e c i f i e s t h a t provinces can request emergency funds from the central government to finance extraordinary and urgent needs, such as natural disasters, that cannot be covered by r e g i o n a l g o v e r n m e n t b u d g e t ( A P B D ) . A l t h o u g h t h e p r o g r a m is i m p l e m e n t e d b v t h e p r o v i n c e a n d l o c a l g o v e r n m e n t , d e - c o n c e n t r a t i o n is n o t r e c o r d e d in t h e p r o v i n c i a l

a n d l o c a l g o v e r n m e n t b u d g e t ( A P B D ) . I n s t e a d , d e - c o n c e n t r a t i o n is r e c o r d e d in t h e

s Based on Government Regulation PP 55/2005 v

T h e d e t a i l e d a r r a n g e m e n t o f t h e d e - c o n c e n t r a t i o n f u n d is s t i p u l a t e d in l a w 3 3 / 2 0 0 4 . T h e

d e - c o n c e n t r a t i o n f u n d is c e n t r a l g o v e r n m e n t d e v e l o p m e n t s p e n d i n g in t h e r e g i o n c a r r i e d out by the province or local government as a part of line ministries' responsibilities. The m a i n o b j e c t i v e is t o f i n a n c e c e n t r a l g o v e r n m e n t f u n c t i o n s a n d a c t i v i t i e s r e l a t e d t o national priorities by financing nonphysical assets (de-concentration - i/ck<j/isenii\i.si) and physical assets

(tugas pembantuan). Vol. 16, No. 2 December 2007

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54 A C r is is o r C r i ti c a l D e v e lo p m e n t

n a t i o n a l b u d g e t ( A P B N ) . T h e p r o v i n c e a n d lo c a l g o v e r n m e n t r e p o r t t h e i r s p e n d i n g , and are accountable directly, to central government.

Own-Source Revenue (PAD); the revised decentralization law has given local governments the opportunity to expand their revenue base, particularly from t a x e s . L a w 3 3 / 2 0 0 4 a l l o w s f o r lo c a l t a x e s , lo c a l l e v i e s , r e v e n u e s f r o m l o c a l s t a t e -