Kai Kaiser

UNITY IN DIVERSITY? THE CREATION OF NEW LOCAL GOVERNMENTS IN A DECENTRALISING INDONESIA

This paper evaluates the proliferation of local governments concurrent with Indo-nesias 2001 decentralisation. Largely static for decades under the New Order, the number of municipalities (kota) and districts (kabupaten) has increased by half, from 292 before decentralisation to 434 in 2003. Most of the increase is off-Java. This represents a fundamental change in Indonesias subnational administrative, political and fiscal landscape. We present a new dataset that elucidates the characteristics of these new kota and kabupaten, and review political, fiscal and economic incentives for creating new jurisdictions. We find that geographic dispersion, political and ethnic diversity, natural resource wealth and scope for bureaucratic rent seeking all influence the likelihood of regional splits. Since jurisdictional changes will affect local governance and service delivery, we stress the importance of providing an effective institutional framework for the creation – or future amalgamation – of local governments as part of a strategic approach to consolidating Indonesias decentralisation.

The Making of the ‘Big Bang' and its Aftermath: A Political Economy Perspective

Indonesia is currently facing some severe challenges, both in political affairs and in economic management. One of these challenges is the recently enacted decentralization program, now well underway, which promises to have some wide-ranging consequences. This edited volume presents original papers, written by a select group of widely recognized and distinguished scholars, that take a hard, objective look at the many effects of decentralization on economic and political issues in Indonesia.

Agglomeration, transport, and regional development in Indonesia

How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? The authors examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. They distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, the authors find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, they illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. Their findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development.

Evaluating Fiscal Equalization in Indonesia

This paper presents a methodology to evaluate fiscal decentralization focusing on the potential mis-targeting of intergovernmental fiscal equalization transfers. The approach builds on an explicit comparison and the summary measurement of different (horizontal) allocation distributions across states or localities. Whereas formula-based fiscal transfers have the merit of being transparent and promoting revenue predictability in fiscal decentralization, in practice, two challenges emerge: (1) What are the appropriate formula designs given the sub-national data constraints evident in most decentralizing developing countries? and (2) How costly in terms of mis-targeting to the presumed expenditure needs and fiscal capacity are deviations from these types of benchmark formulas (for example, due to historical factors or the need to meet establishment costs such as civil service wages)? The authors illustrate this approach by assessing Indonesias evolving intergovernmental fiscal system instituted in the 2001 Big Bang decentralization. The discussion comes against Indonesias recent policy decision to fully fund sub-national civil servant wages as part of the base general allocation grant (DAU) transfers, raising questions about both incentive effects for local governments and potential mis-targeting. The authors identify potential efficiency losses from the DAUs horizontal misallocation from half a dozen alternative scenarios found in the policy dialogue, ranging from 9 to 30 percent-on the order of US

Electoral Accountability, Fiscal Decentralization and Service Delivery in Indonesia

3.9 billion-of the overall annual size of this large intergovernmental transfer. The scale of these tradeoffs highlights the importance of intergovernmental transfers in more general debates in public finance for decentralized countries.

Managing Post-Disaster Reconstruction Finance - International Experience in Public Financial Management

This paper takes advantage of the exogenous phasing of direct elections in districts and applies the double difference estimator to: (i) measure impacts on the pattern of public spending and revenue generation at the district level; and (ii) investigate the heterogeneity of the impacts on public spending. The authors confirm that the electoral reforms had positive effects on district expenditures and these effects were mainly due to the increases in expenditures in the districts outside Java and Bali and the changes in expenditures brought about by non-incumbents elected in the districts. Electoral reforms also led to higher revenue generation from own sources and to higher budget surplus. Finally, the analysis finds that in anticipation of the forthcoming direct elections, district governments tend to have higher current expenditures on public works.

International Competition and Environmental Expenditures: Empirical Evidence from Indonesian Manufacturing Plants

In recent years, natural and man-made disasters have confronted the international community with its most demanding reconstruction challenges since the aftermath of World War II. Managing the inflow of resources and spending those resources well have proven to be two of the main difficulties in such reconstruction projects, particularly after large-scale disasters. A central dilemma of the public financial management of reconstruction is the need for very high levels of accountability to demonstrate fiduciary credibility, while at the same time ensuring the rapid implementation of recovery programs. This paper identifies options and lessons for managing post-disaster reconstruction finance in three key areas: (i) the establishment of special institutions to manage the reconstruction process; (ii) the selection of public financial management systems with respect to the application of country systems, special fiduciary arrangements, or donor/NGO execution; and (iii) monitoring and evaluation systems. The authors synthesize the phasing of assistance and approaches in eight recent post-natural disaster reconstruction efforts (Aceh-Indonesia, Yogyakarta-Indonesia, Sri Lanka, Maldives, Pakistan, Colombia, Grenada, and Honduras) to help guide the priorities and options for future instances of public financial management for disaster reconstruction. The paper also compares the challenges posed by post-conflict versus post-natural disaster public financial management.

Local Conflict in Indonesia: Measuring Incidence and Identifying Patterns

This paper analyzes environmental expenditures in Indonesia – a significant newly industrializing economy – reported at the plant level comprising all 23 thousand manufacturing establishments with more than 20 employees. Since compliance is barely enforced, pollution abatement expenditures are effectively voluntary in nature. This allows us to test whether foreign owned firms expend more due to a technology that adheres to stricter Western standards or whether the predominant effect is that both foreign and domestic exporting companies are more environmentally conscious due to better technology transfer or green consumerism in the Western countries. If so, this would contradict conventional wisdom that environmental expenditures reduce competitiveness and that increased levels of foreign direct investment or export-orientation in manufacturing will necessarily pre-empt firms from behaving in a ?greener? fashion.