Lessons for Developing Countries

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Inadequate implementation ofthe administrative decentralization framework has hindered the success ofIndonesian reforms.It has saddled local governments with large bureaucracies that eat up precious resources. It has also opened doors for stealth control oflocal governments by the central government.The ability oflocal government to hire,fire,and set terms ofemployment for local employees is an integral element oflocal autonomy in resource allocation and local accountability for service delivery.

Further clarification is needed ofthe roles ofgovernment levels,especially for shared responsibilities.Although to some extent the distribution ofgovernment functions is contested and blurry even in most mature federations,such as Germany and the United States,further clarification and delineation offunctional assignments should be promoted in Indonesia. The move away from omnibus assignments—from a negative list ofobligatory functions in Law 22/1999 to a positive list in Law 32/2004—is a step in the right direction.Given the complexity and sensitivity ofreorganizing functions,the law sets out only general principles for the allocation offunctions,broadly following subsidiarity.To ensure further clarification,policy makers must ensure sectoral laws (on health,education,and so forth) align with these principles.Central government departments in decentralized sectors continue to spend significant funds directly in the regions,at least part ofthem for functions officially assigned to local governments.This spending creates accountability problems because citizen-customers do not know which level to hold accountable for the quality ofservice delivery.

Lessons for Developing Countries

Indonesia’s evolving local government system,including its organizational and financial structures,provides a number oflessons on how to design such reforms elsewhere.

Big Bang versus Gradual Reforms As in Poland,political consensus for the reform program in Indonesia developed over a long period oftime,but reforms were implemented in a relatively short period at a politically opportune moment ofa serious fiscal crisis faced by the central government,a moment when resistance to reform was weak and political commitment to reform was strong.Moreover,the reforms were relatively comprehensive and emphasized political,fiscal,and administrative decentralization simultaneously.Some teething problems arose because some provisions were either not implemented or were

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reversed.Although decentralization in Indonesia occurred in a particularly eventful historical context and under extraordinary circumstances,it shows that,with the political will and opportunity,far-reaching changes can be achieved in relatively short periods.Given their sweeping character,the reforms gained substantial political traction and enthusiasm,particularly at the local level.At the same time,decentralizing Indonesia—one ofthe largest and most diverse countries in the world—posed a tremendous challenge and entailed significant risks.Indonesia’s smooth transition to a significantly more decentralized mode ofgovernance without breakdowns in service delivery or macroeconomic instability shows that deliberate attempts to manage those risks can work.A good example is Indonesia’s judicious approach toward the issue ofsubnational borrowing,an approach that emphasizes responsible (fiscal rules) credit market access.Although circumstances in other countries might vary in subtle ways,paying close attention to potential risks and learning from international practice and design principles can guide the design and sequence ofreforms and help avoid some ofthe pitfalls associated with decentralization reforms (see Bahl and Martinez-Vazquez 2005;Shah and Thompson 2004).

Streamline Regulatory Framework Decentralization reforms mean changes in the regulatory framework ofthe local government system.The multidimensional and cross-cutting nature of the reforms means that numerous regulatory areas are affected,ranging from financial management,taxation,and civil service to sectoral issues in health and education.The Indonesian experience shows that such wideranging changes can result in overlapping,unclear,or even conflicting regulations.For example,functional assignments in sectoral laws on education are not yet consistent with the decentralization laws.To prevent such effects, lawmakers must strategize the lawmaking process,identify potential conflicts,and streamline laws and implementing regulations to ensure a sound legal framework for local governments.

Define New Roles ofGovernment Levels

Striking a balance between decentralization and some desirable level ofcentral oversight is difficult to achieve in practice.The experience in Indonesia shows that there can be stealth centralization,with central line ministries that are involved in formally decentralized functions coexisting with weak lines of intergovernmental coordination and communications.Theseproblems can

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be prevented,however,with sufficient attention to building trust and lines ofcommunication among levels ofgovernment.

Strengthen the Supply Side through Capacity Development As in other countries,the experience in Indonesia makes it clear that changes in laws and regulations are only part ofthe story.Beside changes in the legal framework,decentralization requires that governments at all levels have the capacity (and willingness) to cope with their new roles.Regional governments must be able to manage increasingly large financial flows and organizations;they must understand the problems and demands oftheir communities and deliver a host ofcomplex public services.Central government agencies,at the same time,must shift substantial parts oftheir operational responsibilities from direct delivery ofservices to oversight and provision oftechnical assistance,guidance,and information.The Indonesian experience illustrates that such changes are not readily achieved by changing rules but entail the use ofdifferent skills and attitudes by civil servants as well as the establishment ofnew organizational procedures at all levels ofgovernment.From the outset,decentralization reforms should thus incorporate strategies and resource allocations to tackle capacity development and change management at all levels ofgovernment.

Strengthen the Demand Side through Voice and Accountability Accountability systems matter in decentralization reforms (Shah 1998a). Decentralization alone will enhance public sector performance only ifit leads to an environment where there is some sort ofaccountability for policy choices,expenditure decisions,and service delivery.Clearly,giving authority to local governments that are not responsive to their local populations may not improve outcomes.The initial evidence from Indonesia indicates that local accountability systems—at least in some places— continue to be frail,thus leading to mismanagement ofscarce public resources and,in the long run,potential deterioration ofpublic services.The success ofdecentralization reforms depends not only on the design ofintergovernmental fiscal and administrative relations but also on making local governments accountable to their communities.To this end,systematic attention needs to be paid to institutionalizing and broadening options for voice and participation at subnational levels,thereby allowing citizens to voice their preferences,effectively monitor the performance ofthe local government,and react appropriately to that performance so that politicians