In 1999, Indonesia embarked on an ambitious decentralisation program that initiated a restructuring of the country' political institutions on a scale unprecedented since the 1960s. Only a year after Suharto' New Order regime was overthrown, two new laws were adopted that shifted political and economic power from the centre to the subnational level of government. Law No. 22/1999 on Regional Government spelled out the conditions for the devolution of political authority, while Law No. 25/1999 on Revenue Sharing outlined a new system of fiscal arrangements between Indonesia' national and subnational political entities (Aspinall and Fealy 2003: 9). With the implementation of these laws in 2001, a considerable amount of political authority was handed to the district (kabupaten) and municipality (kota) level of government, leaving the centre with just a few key responsibilities, namely security and defence, foreign policy, justice and religious affairs (Usman 2001: iii). At the same time, much of the executive' fiscal authority was shifted from the centre to the district and municipal governments. The new regulatory framework required the central government to transfer a minimum of 25 per cent of domestic revenues to subnational governments, of which 90 per cent had to be allocated to districts and municipalities. In short, Indonesia has been transformed from a highly centralised state into one of the most decentralised in the world.

There were various reasons for the government' decision to shift power away from the national level after 1999. Several active secessionist movements, some of which had been lingering for decades, had raised fears among the political elite in Jakarta that the collapse of the oppressive New Order regime would reinvigorate demands for independence in such areas. Consequently, the government believed that transferring some power to the regions would meet their mounting demands for more authority and thereby forestall secessionist aspirations (Hadiz 2003: 12; Turner and Podger 2003: 25). It was this consideration that motivated the government to shift most power to the district level, with the national elite harbouring concerns that excessively empowered provinces could push for secession. While the central government was anxious to avoid the disintegration of Indonesia, it also faced tremendous pressure to reform the kleptocratic institutions the New Order government had left behind.