Local Government Organization and Finance: Indonesia
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and local officials have an incentive to be responsive. Central to these reforms are principles of transparency, accountability, and participation, particularly regarding planning and budgeting. A number of new regulations have been passed lately to make planning and budgeting more participatory, in the context of a medium-term expenditure framework and a performance orientation. In addition, there are strong political dimensions, the development of pluralistic political parties, the strengthening of legislatures and checks and balances, and the encouragement of effective civil society interest groups at the local level.
Notes 1. Brief overviews of the historical development of local governments in Indonesia are provided by Jaya and Dick (2001), Mackie (1999), and World Bank (2003). 2. In 1903, a colonial law on decentralization provided for the establishment of local authorities. From 1905 onward, urban municipalities (gemeenten) were created, with Batavia, Meester Cornelis, and Buitenzorg taking the lead, soon followed by many others (Mackie 1999). 3. The federal republic comprised 15 territories, only one of which was the Republic of Indonesia, with its capital in Yogyakarta. 4. For example, the average size of municipalities is about 30,000 in China, 45,000 in the Philippines, 130,000 in the United Kingdom, and 150,000 in South Africa. 5. The correlation between per capita gross domestic product and poverty is strong but incomplete, with some resource-rich regions, such as West Papua, exhibiting high levels of poverty. In fact, in 2002, Papua, the third richest region in terms of per capita gross domestic product, had the highest percentage of people living below the poverty line (51.2 percent) (ADB 2005). 6. Whether heads of region are directly or indirectly elected and how are to be determined by law. The stipulation of universal direct elections of regional executives was not accepted. In addition, there is a constitutional provision for special legislation and special status for particular provinces. There is a requirement for justice and equity, as well as consideration of local distinctiveness and diversity, in the financial arrangements for regions. 7. The most sizable component was the SDO (subsidi daerah otonomi, or autonomous government subsidy), which covered recurrent expenditures of regional governments, including salaries of civil servants and government employees. In addition, the center employed sectoral earmarked grants (called Inpres) to finance specific projects or activities in the regions (Shah and Qureshi 1994). 8. In contrast, governors have a double function as representatives of the central government and as heads of the autonomous provinces. 9. In addition to Law 22/1999 on local governance, several aspects of the election laws (Law 3/1999 on general elections and Law 4/1999 on the election of legislatures) and Law 2/1999 on political parties are important in this regard. These three political laws, all passed in early 1999, cover the requirements for forming political parties, the election system, and the composition of the national and local representative bodies.
