and Political Overview

Local Government Organization and Finance: Indonesia 235

and Hady 1988).However,despite these weaknesses,the system prevailed until the collapse ofthe entire regime.

In the late 1990s,the Asian financial crisis and its aftermath eventually led to the downfall ofPresident Suharto after more than three decades of authoritarian rule.As part ofa larger package to reform Indonesia’s political system,in May 1999,after only a few months ofpreparation,the reform cabinet under President Bacharuddin JusufHabibie enacted two major laws that stipulated a redistribution ofpolitical authorities and financial resources among the country’s three levels ofgovernment.Through the enactment ofLaw 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 offlux ever since.Besides numerous government regulations and ministerial decrees specifying the implications ofthe general decentralization framework,in 2004 a major revision ofthe 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 ofgovernance.

Current System ofLocal Governments: Legal, Fiscal, and Political Overview

Indonesia’s political and administrative system consists offour 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 ofIndonesia.At the end of2004,there were 33 provinces,about 440 districts,about 100 urban municipalities,and approximately 80,000 villages.The averagepopulation of

236 Sebastian Eckardt and Anwar Shah

a province is about 7 million,ranging from fewer than 1 million in North Mollucu to more than 38 million in West Java.The average population under Indonesian local governments (including rural districts and urban municipalities) is about 480,000 people,rather large by international standards.4 There is fairly wide diversity in size,from fewer than 25,000 in sparsely populated Sabang to almost 4 million in metropolitan Bandung.Some ofthese entities might in fact be too large,whereas others might be too small to deliver services efficiently.

Local governments also differ vastly in their geographic and socioeconomic characteristics.Per capita incomes in the richest 20 percent ofdistricts are more than three times higher than in the poorest 20 percent of districts.This uneven distribution ofeconomic activity is reflected in large disparities in living conditions.5 Poverty rates range from about 7 percent in the industrialized district ofBekasi at the fringe ofJakarta to more than 40 percent in the West Sumba districtin the eastern part ofIndonesia.Illiteracy in the East Javanese district ofSampang is still more than 40 percent, though it has decreased to 12 percent for Indonesia as a whole.And though about 98 percent ofpeople in Tanjung Jabung Barat in the province ofJambi have access to primary health care,only 22 percent do in Sintang in West Kalimantan (BPS 2003).Although this heterogeneity potentially increases the benefits ofdecentralization,it also places considerable pressure on the fiscal system to ensure minimum quantity and quality in and access to public service and to enable the convergence ofliving conditions across Indonesia’s local governments.

Article 18 ofthe 1945 Constitution Act provides for the creation and maintenance oflocal governments through the enactment ofa local government act.The decentralization laws of1999 and 2004 and associated regulations are the basis ofIndonesia’s current local government system.The Second Constitutional Amendment Act,passed in 2000,has embedded parts ofthe decentralization reforms—for example,the democratic elections ofmayors and governors—into the constitution to ensure the long-term stability ofthe system and to provide political safeguards against arbitrary reversals.6

The resources that local governments have at their disposal have been increased through the enactment ofarticle 7 ofLaw 25/1999,which requires the central government to transfer at least 25 percent ofdomestic net revenues (total domestic revenue minus revenue sharing) to subnational levels ofgovernment.Ten percent ofthat amount accrues to the provincial governments,and 90 percent to the local governments,which carry out the bulk ofexpenditure responsibilities.As a consequence,the share ofconsolidated subnational expenditures in total public expenditures rose from roughly 17