Skip to main content Accessibility help
×
Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-23T11:14:54.527Z Has data issue: false hasContentIssue false

4 - Continuity or Change? Indonesia's Intergovernmental Fiscal Transfer System under Jokowi

Published online by Cambridge University Press:  16 May 2019

Gerrit J. Gonschorek
Affiliation:
PhD candidate at the Institute of Economics, Department of International Economic Policy, University of Freiburg, Germany.
Günther G. Schulze
Affiliation:
Professor of Economics at the Institute of Economics, University of Freiburg, Germany; and Adjunct Professor at the Arndt- Corden Department of Economics, Crawford School of Public Policy, ANU College of Asia and the Pacific, Australian National University, Canberra.
Get access

Summary

INTRODUCTION

In 2001, Indonesia embarked on a far-reaching decentralization reform that devolved core responsibilities such as health, primary and secondary education and infrastructure to the districts. While the centre retained authority over foreign affairs, defence, law enforcement, justice, fiscal and monetary policy, and religion, control of all other functions was transferred to the regions — at least in principle (Sjahrir 2016). This implied a huge shift of expenditure from the centre to the regions (districts and provinces), which now spend around a third of the consolidated state budget. Yet, fiscal decentralization, which was accompanied by political and administrative decentralization, has remained largely one-sided. While local governments have authority over their spending, they rely heavily on transfers from the centre to finance their expenditure (Schulze and Sjahrir 2014). This particularly concerns districts, which received only 10–16 per cent of their revenue from own sources (tax and non-tax) between 2011 and 2016. Transfers to local governments accounted for around 30 per cent of central expenditure in recent years (Figure 4.1), making the design of the intergovernmental transfer system crucial for the success of the decentralization reform.

From a normative perspective, intergovernmental fiscal transfer systems should fulfil three basic functions. First, they should internalize externalities created by regional spillovers, such as public goods that benefit people from multiple local jurisdictions (Oates 1999), cross-border pollution or the erosion of tax bases in the presence of interjurisdictional competition (Wilson 1999). Second, they should incentivize local governments to mobilize resources and spend their resources efficiently. And third, they should have an equalizing function through which differences in economic development across regions are counterbalanced (Shah 2006; Boadway and Shah 2007). In the case of a one-sided fiscal decentralization, transfers of course have a major financing function (Boadway and Shah 2007). In short, intergovernmental fiscal transfers are an instrument that allow benefitting from the advantages of fiscal decentralization while minimizing its costs in terms of fiscal inequity or negative external effects (Boadway 2007). Yet, in practice, the allocation of transfers is often determined by political considerations like rewarding core voters or targeting swing voters (Gonschorek, Schulze and Sjahrir 2018; Weingast 2009, 2014). Moreover, transfer systems are often designed as a result of lobbying for regional interests.

Type
Chapter
Information
The Indonesian Economy in Transition
Policy Challenges in the Jokowi Era and Beyond
, pp. 87 - 120
Publisher: ISEAS–Yusof Ishak Institute
Print publication year: 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×