Notes

Local Government Organization and Finance: Indonesia 271

and local officials have an incentive to be responsive.Central to these reforms are principles oftransparency,accountability,and participation, particularly regarding planning and budgeting.A number ofnew regulations have been passed lately to make planning and budgeting more participatory,in the context ofa medium-term expenditure framework and a performance orientation.In addition, there are strong political dimensions, the development ofpluralistic political parties,the strengthening oflegislatures and checks and balances,and the encouragement ofeffective civil society interest groups at the local level.

Notes

1.Briefoverviews ofthe historical development oflocal 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 oflocal 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 ofwhich was the Republic of

Indonesia,with its capital in Yogyakarta. 4.For example,the average size ofmunicipalities 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 ofpoverty.In fact,in 2002,Papua,the third richest region in terms ofper capita gross domestic product,had the highest percentage ofpeople living below the poverty line (51.2 percent) (ADB 2005). 6.Whether heads ofregion are directly or indirectly elected and how are to be determined by law.The stipulation ofuniversal direct elections ofregional 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 oflocal distinctiveness and diversity,in the financial arrangements for regions. 7.The most sizable component was the SDO (subsididaerah otonomi, or autonomous government subsidy),which covered recurrent expenditures ofregional governments,including salaries ofcivil 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 ofthe central government and as heads ofthe autonomous provinces. 9.In addition to Law 22/1999 on local governance,several aspects ofthe election laws (Law 3/1999 on general elections and Law 4/1999 on the election oflegislatures) 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 ofthe national and local representative bodies.

272 Sebastian Eckardt and Anwar Shah

10.The law on political parties required parties standing for election to be registered in at least halfofthe electoral districts,which effectively prevented the establishment oflocal parties. 11.Article 133 ofLaw 22/2004 and article 237 ofLaw 32/2004 require sectoral laws to comply with the principles ofdecentralization.Government Regulation 25/2000 further delineated functional assignments by defining provincial and central responsibilities. 12.The procedural rules require subnational governments to submit bylaws that establish new charges or taxes with 15 days for review.National government approval or dismissal is supposed to be given within one month (Lewis 2003b). 13.The information draws on two data sets,one from the finance ministry and one from an independent autonomy watch organization (Lewis 2003b). 14.These laws are Law 18/2001 on Aceh’s special autonomy and Law 21/2001 on Papua’s special autonomy.The differences concern the rules for sharing natural resources for these two regions.The special autonomy laws give 55 percent ofoil revenues and 40 percent ofnatural gas revenues to the provincial government ofAceh and 70 percent ofoil and natural gas revenues to the provincial government ofPapua. 15.The description ofthe DAU allocation formula draws on Ahmad (2002);Brodjonegoro and Martinez-Vazquez (2002);Hofman,Kadjatmiko,and Kaiser (2004);and

Lewis (2002a). 16.Fiscal needs were estimated as a function offour expenditure need indicators— population,poverty,area,and regional price differentials—reflecting the assumption that these four factors drive expenditure needs. 17.In the past,the weights assigned to different indicators were changed.See Lewis (2002a). 18.These stipulations do not apply to the reforestation fund,which is governed by a separate government regulation (35/2002).This regulation stipulates that 40 percent of the reforestation fund is distributed to local governments on a derivation basis,and the remaining 60 percent is retained by the central government.The reforestation grant works more like revenue sharing. 19.Subnational governments can propose the sector-specific DAK grants to line ministries,which in turn request that the Ministry ofFinance consider the stipulation of

DAK grants in a ministerial decree.The Ministry Finance is supposed to consult with the relevant technical ministries,the Ministry ofHome Affairs,and the National

Development Planning Board. 20.The Human Poverty Development Index is a weighted average ofthe percentage of the population with life expectancy shorter than 40 years,the percentage ofthe population without access to clean water,the percentage ofthe population without access to health facilities,and the percentage ofmalnourished children below the age offive. 21.See UNDP (2004) for evidence on the variation in public services and human development outcomes across local governments in Indonesia. 22.This condition is now directly included in Law 33/2004. 23.Estimating a typical debt-service coverage ratio at 9.5 percent,Lewis (2003a) concludes that local governments have borrowed well within their fiscal capacities to repay. 24.Law 22/1999,articles 75–77.This general direction has been specified by Government Regulation 96/2000,which assigns to the local level the authority for the