Blane D. Lewis

Fiscal decentralization in Indonesia: A new approach to an old idea

Abstract The system for financing and delivering local public services in Indonesia, as in many developing countries, is highly centralized. Growing awareness of the weaknesses of the present system has recently generated much interest in decentralization and numerous government policies and programs toward that end. In spite of these efforts, the role and capacity of local governments remain weak. In this paper, we outline the most critical obstacles to decentralization and examine a strategy to reduce their significance. Instead of centering our analysis on the definition of a normatively desirable decentralization outcome, we focus on the development of a process through which genuinely feasible outcomes could be defined and implemented, in this case an interministerial and intergovernmental process for evaluating local governments.

District-level economic linkages in Kenya: Evidence based on a small regional social accounting matrix

Abstract This paper explores the nature and extent of the economic linkages in a small regional economy defined by a market center and its hinterland in Kenya. The analysis is based on a set of income and employment multipliers derived from a social accounting matrix estimated for the region. Issues considered include the impact of production activities on regional value added and employment; the influence of sectoral production on the level of household income and the impact of household expenditure on regional value added; and the relative significance of production and consumption linkages in terms of stimulating aggregate income. The above questions are examined under the assumption of complete excess capacity in regional production and under the assumption of supply constraints in agriculture. The usefulness of the analysis for district level economic planning is demonstrated.

Tax And Charge Creation By Regional Governments Under Fiscal Decentralisation: Estimates And Explanations

Under fiscal decentralisation, regional governments have been given the authority to create new taxes and charges. Many observers have criticised the regions for being too aggressive in establishing new revenue instruments, and the central government for allowing too many of them to stand. Regional governments authorised nearly 1,000 new taxes and charges in the run-up to and through fiscal year 2001, many of them focused on primary sector goods and factors. The analysis here suggests that only around 40% of all newly authorised subnational taxes and charges were submitted to the centre for review as required by law; the remainder were presumably implemented without central evaluation and therefore illegally. Regional governments argue that they create new taxes and charges out of fiscal need, but this paper finds no evidence to support the claim that lack of fiscal capacity is a driving force in the creation of new revenue instruments.

Local Government Borrowing and Repayment in Indonesia: Does Fiscal Capacity Matter?

Abstract Most regional government borrowing in Indonesia has been conducted via central government mechanisms. While the terms and conditions of central lending have been highly favorable to regional borrowers, repayment of debt has been very poor. The empirical evidence suggests that local governments have borrowed well within their fiscal capacities to repay and that repayment problems are largely a function of unwillingness to repay debts and of central government acquiescence. Regional borrowing must significantly increase in the years ahead in order to meet growing demand for infrastructure services and lending to regions will have to become more market-based. Reducing systemic credit risk and improving the creditworthiness of regional borrowers are prerequisites to increased and sustained market-based lending.

Urbanization and Economic Growth in Indonesia: Good News, Bad News and (Possible) Local Government Mitigation

Lewis B. D. Urbanization and economic growth in Indonesia: good news, bad news and (possible) local government mitigation, Regional Studies. Time-series analysis for Indonesia over the period 1960–2009 suggests that the level of urbanization is positively associated with economic growth but that the rate of change of urbanization is negatively correlated with growth of economic output. A sub-national dynamic panel investigation provides additional evidence of the positive and negative level and rate effects, respectively. The panel analysis also implies that the harmful impact of urban population growth is linked to insufficient local public infrastructure spending. Local governments that invest more heavily in infrastructure are better able to cope with the apparent detrimental effects of rapid urbanization on economic growth.

Indonesian Decentralization: Accountability Deferred

For nearly a decade, Indonesia has been engaged in one of the worlds largest programs of public sector decentralization. The evidence suggests that Indonesian decentralization has not yet, however, led to good quality local public services. Implementation of immediate remedies typically proposed by government officials and others are all likely to be deficient in one regard or another. A long-term, incremental approach that focuses on experimenting with output-based central-local incentive grants, enhancing local government capability in expenditure and revenue management, and, most importantly, building capacity in civil society groups to educate citizens and motivate demand seems the most feasible strategy for moving forward under the current circumstances.

Local government taxation: An analysis of administrative cost inefficiency

Local governments in Indonesia administer taxes inefficiently. The average cost of local tax administration as a percentage of revenue generated is estimated to be over 50%. There is, however, a wide variation in administrative inefficiency across local governments. The estimation of a stochastic cost frontier model suggests that administrative cost inefficiency increases significantly as fiscal transfers from the centre rise; the investigation also demonstrates that local governments with elected executives are no more administratively cost efficient than those with appointed heads. The simple and complex measures of cost inefficiency yield broadly similar results concerning the level and variation of inefficiency across local governments, but can offer significantly different estimates of the relative inefficiency of individual local governments. This poses a dilemma for the central government in monitoring and evaluating local government tax administration performance.

Intergovernmental Fiscal Transfers and Local Incentives and Responses: The Case of Indonesia

Indonesian policymakers are convinced that a number of perverse incentives are embedded in their system of intergovernmental transfers. Officials in countries throughout the developing world have similar views about their own intergovernmental frameworks. In Indonesia, perverse incentives are thought to negatively influence a wide range of local government fiscal behaviours, including as regards own-source revenues, spending and savings. An empirical analysis of the local government response to transfers, however, offers only mixed support for the existence and strength of the presumed incentives. Overall, the findings in this paper highlight the benefits to central governments of rigorously examining assumed perverse incentives in their intergovernmental frameworks before embarking on attempts to expunge them.

Local Government Capital Spending in Indonesia: Impact of Intergovernmental Fiscal Transfers

Indonesian policymakers intend to increase capital spending, especially on traditional infrastructure, at all levels of government in order to stimulate economic growth. Intergovernmental capital grants can have very significant impact on encouraging such spending at the subnational level. The main problems with capital transfers in the Indonesian context are that grant funding has stagnated at low levels and the proportion of funding allocated to infrastructure has declined considerably. Given current institutional constraints, the likelihood of increasing grant funding for subnational infrastructure is dubious, which suggests that economic growth in Indonesia may remain suboptimal for the near future.

ON-LENDING IN INDONESIA: PAST PERFORMANCE AND FUTURE PROSPECTS

On-lending to sub-national governments in Indonesia has a long and generally disappointing history. Among other noteworthy problems, an insufficient amount of funds has been channelled through the system vis-à-vis capital fi nancing needs, and loan repayments have proved poor. Aid agencies and government have recently invested substantial resources in attempts to improve the on-lending system; the resultant newly installed regulatory framework for sub-national borrowing is, however, unlikely to improve outcomes substantially. Developing sub-national government access to private capital markets would appear to constitute the way forward, although this will not come quickly or easily. A positive step in the right direction would be for government and aid agencies to embrace the anticipated change and work together to make the transition a successful one, rather than continue to tinker with reforms at the margin of a moribund system.