Andrew Marshall, Jakarta – Indonesia's plans to give regions more control over their finances are at the heart of the country's efforts to hold its disparate provinces together. But wrongly handled, they could blow its economy apart.
Concern is growing that the government's deadline of January 1 next year for the implementation of the regional autonomy laws does not give enough time to put essential preparations in place.
Abandoning the deadline now would risk stirring up fresh resentment in restive provinces. But at a seminar this week on regional autonomy, the International Monetary Fund, the World bank, and even key government economic advisers all urged the government to rethink its tight timetable for decentralisation.
"We have been debating whether introducing regional autonomy all in one go is the right approach," said Bert Hofman, economist at the World Bank in Jakarta. "There is a danger the critical transition phase has been overlooked."
Tha main danger, analysts say, is that provinces are given more control of their revenue before they are given the matching responsibility for expenditure. This would batter Indonesia's central budget, already reeling from economic crisis.
"The proposed implementation of the revenue devolution provisions before there has been an effective decentralisation of expenditures ... is to us the key risk," said a paper prepared for the seminar by the World Bank and IMF.
"This threatens macro stability, as well as the continued provision of services at the local level during a potentially volatile period of political and economic transition."
Time short for far-reaching changes
Indonesia's regional autonomy laws, passed by the administration of former President Habibie as concerns mounted about separatist pressures, are radical in their scope.
They will more than double the regional share of government spending to over 40 percent, with districts given responsibility for managing most government services including health, education and infrastructure.
Provinces will be allowed to keep more of the revenue from their natural resources, but regional tax revenues will rise only slightly. A system of grants from the central government to regions is planned to help poorer regions which will lose out in the redistribution of natural resource revenues.
The administrative tasks involved are huge. Indonesia must define the precise functions which districts are to take over, and determine whether they are capable of doing so. And it must decentralise large parts of the civil service, government facilities and ongoing projects.
If districts get control of more revenue before the groundwork for their increased responsibilities has been laid, Indonesia's budget deficit will soar. The law on sharing natural resource revenues will deplete central coffers even further.
The only solution is to ensure enough expenditure is also devolved. But the World Bank and IMF say more time is needed. "The magnitude of the expenditure devolution required by the law would be overwhelming, especially considering the very limited administrative capacities at the district level," they said. "To achieve the legally mandated degree of political decentralisation will surely take much longer than one year."
Delay risks backlash
Sri Mulyani Indrawati, a University of Indonesia economist and government adviser, says the country needs to reconsider whether the laws should be implemented on January 1.
"We all favour decentralisation and have much to gain from it," she said. "But ... both macroeconomic stability and government services are at risk if we move too quickly. We should therefore keep an open mind to alternatives to the current approach to decentralise fully by January next year."
But delaying the measures risks a political backlash, and would give fresh ammunition to separatist movements in multi-ethnic, multi-religious Indonesia.
Separatist pressure is strongest in the resource-rich provinces of Aceh, Irian Jaya and Riau, and the revenue-sharing laws are aimed partly at quelling resentment there.
If poorer regions find themselves badly hit under the new scheme, however, Jakarta may be creating new problems.
And analysts say anger may also be fuelled once regions realise more economic autonomy does not simply mean more cash. "The regions are in for a surprise," Hofman said. "They seem to think they will get a large sum of money without strings attached. In reality, they must take on a large chunk of government spending as well. Only over time will there be money left to do new things."