INTRODUCTION

Decentralisation has changed the fiscal relationship between the centre and the regions, a relationship in which natural resource revenue-sharing plays a significant role. Resource-rich regions are now receiving a fairer share of the revenue generated by their natural resources, fulfilling a longstanding demand of those regions.

However, three years after decentralisation, there are concerns about how the present arrangements for sharing natural resource revenue are affecting interregional fiscal disparity. I approach this question by comparing fiscal disparity across regions before and after decentralisation, taking into account all sources of regional revenue, not just natural resource revenue. A related issue is how the present arrangements are affecting regional development in the resource-producing and non-producing regions. Although it is too early to reach firm conclusions at this stage, some differences in regional expenditure patterns are emerging between the two types of regions. A final issue is whether the current share of natural resource revenue given to the producing regions is fair and appropriate. I consider whether a greater share would be warranted given the existing fiscal relationship between the centre and the regions and the varying fiscal conditions of the regions.

In addressing the above issues, I try to shed light on whether Indonesia has the balance right in its approach to natural resource revenue-sharing, and identify the issues that warrant immediate attention. The discussion is preceded by an examination of how decentralisation has changed the role of natural resource revenue in central and regional budgets.