Local Government Organization and Finance: Indonesia
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and Hady 1988). However, despite these weaknesses, the system prevailed until the collapse of the entire regime. In the late 1990s, the Asian financial crisis and its aftermath eventually led to the downfall of President Suharto after more than three decades of authoritarian rule. As part of a larger package to reform Indonesia’s political system, in May 1999, after only a few months of preparation, the reform cabinet under President Bacharuddin Jusuf Habibie enacted two major laws that stipulated a redistribution of political authorities and financial resources among the country’s three levels of government. Through the enactment of Law 22/1999 on regional governance, responsibility for much government expenditure was decentralized—largely to local (district) governments rather than provincial governments. Such a move had been advocated by Shah (1998a), who argued that decentralization to the provincial level might unleash centrifugal tendencies and precipitate the secession of some especially resource-rich units from the nation. Strengthening local governments would facilitate strengthening political and economic union while addressing long-felt local grievances. Law 25/1999 on fiscal balance between the central government and the regions channeled budgetary flows to the district level. Both laws and the required implementing regulations were supposed to be in force by 2001, only two years after parliament approved them. Indonesia’s local government system has remained in a state of flux ever since. Besides numerous government regulations and ministerial decrees specifying the implications of the general decentralization framework, in 2004 a major revision of the decentralization laws took place. In late September, the parliament (Dewan Perwakilan Rakyat) approved Law 32/2004 on subnational governance and Law 33/2004 on fiscal decentralization, thereby reinforcing Indonesia’s effort to create a decentralized system of governance.
Current System of Local Governments: Legal, Fiscal, and Political Overview Indonesia’s political and administrative system consists of four government levels, the central; the provincial level (Daerah Tingkat I, or Dati I); the district level (Daerah Tingkat II, or Dati II); the urban municipalities (cities and towns, or kotamadya); and the villages (kelurahan in urban areas and desa in rural areas). Legally, local and provincial governments are autonomous administrative and territorial entities within the unitary state of Indonesia. At the end of 2004, there were 33 provinces, about 440 districts, about 100 urban municipalities, and approximately 80,000 villages. The average population of
