Expenditure assignment under indonesia’s emerging decentralization: A review of progress and issues for the future

Paul Smoke1 INTRODUCTION After decades of operating a highly centralized system, the government of Indonesia (GOI) embarked on a substantial program of decentralization in the wake of the financial and political crisis that emerged in 1997. Law No. 22 laid out a broad framework for general administrative and political decentralization, and Law No. 25/1999 (supplemented by Law No. 34/2000) outlined a system of fiscal decentralization. These laws particularly focused on defining a stronger role for local governments, or regions (kotamadya and kabupaten, the former Level II regional governments) as opposed to provincial (former Level I regional governments). Indonesia has struggled during the past few years to move forward with the detailed design and implementation of the decentralized system outlined in the 1999 decentralization laws. One key issue is clearly identifying the set of functions that local governments can and should undertake - the so-called ‘expenditure assignment’ question. This chapter very briefly reviews relevant conceptual principles of expenditure assignment, summarizes the history of expenditure assignment in Indonesia and new arrangements under the emerging situation, and considers a number of outstanding expenditure assignment issues that Indonesia has yet to deal with. BASIC PRINCIPLES The conventional wisdom about expenditure assignment among levels of government from the fiscal federalism literature is well known.2 Among the broad functions of the public sector - stabilization, distribution and allocation - the 77 78 Expenditure and tax assignment first two are widely considered to be the responsibility of central government. Sub-national governments do not necessarily undermine stabilization, and they….