Decentralisation in Indonesia

Abstract

This paper attempts to assess the extent of decentralisation efforts and their impact on various dimensions of the development process. We find relatively little ‘real’ decentralisation (devolution): local governments have little tax autonomy and central priorities tightly constrain most funding from the centre. Indeed, increased revenue flows serve as a disincentive to modest local tax efforts, reduce the relative importance of locally controlled funds and thus retard real decentralisation. Central transfers for health, education and infrastructure have nonetheless significantly improved social and economic indicators. Greater local control over funds is found to lead to more expenditure on the social sectors (and within them on priority areas), and to increase spending on small scale locally oriented infrastructure. More decentralisation thus offers the potential for increased allocations to social and economic priorities, enhancing efficiency and equity within regions; but the promotion of national standards and equity across regions requires central government action.

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