Regional autonomy and fiscal decentralization in democratic Indonesia

Regional autonomy and fiscal decentralization has become a hot political an d economic policy issue in Indonesia since the fall of the Soeharto Regime. In response, the interim government of President Habibie enacted two new l aws in 1999, to promote regional autonomy and fiscal decentralization, name ly Law on Local Autonomy (No. 22/1999) and Law on Fiscal Relations between Central and Local Governments (No. 25/1999), which the new government of Pr esident Abdurrahman Wahid is in the process of implementing. However, the authors maintain that the basic designs of these laws are seri ously flawed, and that the government of Indonesia would be well advised to go back to the drawing board. First, under the new laws, the central gover nment's power is substantially to be devolved to the second level local gov ernments, whose administrative, managerial and planning capabilities are in adequate. Secondly, a major part of local governments' revenue would rely o n the sharing of natural resources taxes, which would aggravate horizontal imbalances. Thirdly, there would be thus a need for large- scale fiscal tra nsfers, which would strain the central government's budget. Lastly, given t he enormity of the tasks ahead, a more gradualist approach is preferable.