Decentralisation to promote regional development in Indonesia

Abstract

In 1998 Indonesia embarked on an ambitious course of decentralisation. Over a period of a few years, facilitated by financial transfers from the central government, responsibility for many public services and administrative tasks were devolved to local authorities. This process is continuing. Regional development is now very much in the hands of the four sub-national tiers of government. However, the speed of the devolution means that much is being done without the required accompanying skills, technical capacities, resources and oversight. As a result, while good progress has been made nationally along a number dimensions, outcomes in health, education, infrastructure, corruption and the provision of other social services have not improved as quickly as was hoped, and the variance in results across the regions has been enormous. Rather than simply devolving more and more responsibilities to sub-national authorities, the central government needs to take a more strategic view of regional economic development. This includes monitoring the performance of sub-national governments, providing them with technical assistance where needed, encouraging them to emulate the best performers and in the short- to medium-term using grants to direct spending to priority areas. The inter-governmental transfer framework also would benefit from better oversight and a strategic vision. Moreover, the perverse incentives it embodies are driving rent-seeking and the fragmentation of local jurisdictions. In the longer term the objective should be tax autonomy and transfers based exclusively on block grants although this should be conditional on adequate oversight and administrative capacities within the sub-national authorities. Conflicting and overlapping laws and regulations across levels of government are also inhibiting regional development by obstructing private business development and investment. This Working Paper relates to the 2016 OECD Economic Survey of Indonesia (www.oecd.org/eco/surveys/economic-survey-indonesia.htm).