Regional Autonomy and Local Resource Mobilization in Eastern Indonesia: Problems and Pitfalls of Fiscal Decentralization

Abstract

Does fiscal decentralization empower sub-national governments to raise sufficient revenue from local sources thereby reducing their dependence on the national government? This paper addresses this question by focusing on Indonesia's most recent decentralization policy and assessing and analysing the role of local governments in this regard. Based on data collected from two different locations in Eastern Indonesia the paper shows that the dependency of local authorities on central government is excessive and that the share of local revenue in regional budget has remained rather small. It also shows that while the fiscal power granted to local governments is limited, a combination of politico-economic and contextual factors has further undermined the prospect of revenue mobilisation at the local level.

Keywords:

• Eastern Indonesia
• fiscal decentralization
• governance
• regional autonomy
• resource mobilization

Notes

The district of Pangkep lies on the west coast of South Sulawesi province. With an area of 1,112 km² and a total population of 302,874, the district consists of 12 sub-districts, 37 urban areas, and 65 villages. The economy of Pangkep is mainly agriculture-based. Even though Pangkep's per capita income is better than those of other districts, given its poor HDI index, it is ranked 21 among 23 districts and municipalities in South Sulawesi (BPS Pangkep, 2008) and 328 among the 4771 districts and cities (GoI, 2008) nationally. The other sample-kota Kupang is the capital city of NTT Province. The city has a population of 282,035 (BPS, Kupang, 2008) spread across four sub-districts. While NTT province is among the bottom three of all provinces in Indonesia, as a provincial capital, Kupang's per capita income is relatively high compared to other districts in the province and is comparable to the provincial average for South Sulawesi (BPS Kupang, 2008). The city's economy is mainly based on secondary sectors like trading, hotels and restaurants, and construction services. It would be interesting to see if such variations have any impact on the performance of local governments in matters of revenue collection.

However, it must be noted that provincial governments have been given the authority to monitor and evaluate the districts and cities within their jurisdiction. Also, under the UU32/2004, some local government functions have later been recentralized to the provincial level.

Some qualifications are in order. Despite such threat, in reality businesses in Indonesia are rarely able to move elsewhere. In Indonesia, as in neighboring Malaysia and Brunei, most businesses are owned and managed by ethnic Chinese, who, given their general vulnerability, relies heavily on long-established relationships with local political leaders. As such, they find it difficult to move to another regency or province where they would need to build such relationships again (for more, see von Luebke, 2009).

It is relevant to note that under the recent amendment to Law 34 the government plans to devolve urban and rural property tax to respective local governments by 2013 in an attempt to strengthen their financial positions. Once implemented, this would have a significant bearing on local governments’ own revenue, for it offers, at least in theory, huge prospect for local governments to bolster their revenue situation. But it remains to be seen if and to what extent local authorities are able to manage such powers. Wide range of issues like inefficiency in tax administration, corruption and mismanagement, influence of party politics, and even fear of voter backlash are some of the potential challenges that local governments face in this regard.

However, not all of them are new taxes and charges—some of these relate to revision of tariff rates or bases of existing taxes or charges.

Duncan (2007) has documented some of the harmful effects of fiscal decentralization and regional autonomy on natural resource management. He shows that it has led to an increase in illegal logging and displacement of ethnic minorities.

This is seen as a serious problem that hampers the planning and implementation of development projects locally. It is also this that largely explains the poor utilization of available funds and huge unspent balances accumulated by local authorities (see Lewis and Oosterman, 2009).