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The Case for Decentralized Financing of Economic Development in Indonesia*

Published online by Cambridge University Press:  23 March 2011

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The Struggle to consolidate the gains of Indonesian independence has been dramatically reflected in the fiscal field. In the six years since the transfer of sovereignty from the colonial masters to the new Indonesian Republic, the central government has striven for an unprecedented degree of centralization of fiscal functions. What has emerged appears to be the broadening of central responsibility for expenditures, particularly on Java, without corresponding increases in revenues to meet these new responsibilities. The problems of sharing with localities these responsibilities and the resources to finance them have received much thought but little action. Virtually no attention has been given to the ways in which local governments might contribute to Indonesian economic development by utilizing the resources available to them. The case for greater decentralization of Indonesia's fiscal system is based on the argument that the rate of economic growth could be accelerated by the extension of greater fiscal autonomy to local levels of government and by more effective coordination between central and local development plans, particularly on the matter of financing.

Copyright © The Association for Asian Studies, Inc. 1955

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1 Karakacheff, V., Notes on the Budget System of Indonesia, 2.Google Scholar

2 Bank Indonesia, Report for the Year 1953–1954, 54.Google Scholar

3 These levels of local government were provided by the legislation in 1948. However, this legislation does not yet have full government support. The province is the level of administration just below the central government and is headed by the Governor, a central government appointee. The kabupaten is theoretically to be controlled by an elected council, with one councilor designated as the executive officer. The latter is to cooperate with the Bupati, who is the central government official at the kabupaten level. This arrangement is now in effect in some areas of Sumatra, while on Java the Bupati is the chief administrator at this level. The kabupaten corresponds roughly to the Regency, headed by the Resident, in the Dutch colonial administrative structure. The village is the lowest administrative unit, headed by the Lurah on Java and the Kepala Negeri on Sumatra.

4 The Prime Minister recently stated that the central government spends approximately Rp. 100,000 on each village on Java and Madura annually—a total for these islands of about Rp. 2 billion. In the same statement he indicated that this amount was inadequate to sustain village functions. American Indonesian Chamber of Commerce Bulletin, No. 402 (03 1955), 30.Google Scholar

5 It is clear that factor proportions in these construction projects are relatively variable. The high labor-capital ratio found in Central Sumatra is a natural adjustment to abundance of the labor factor.

6 For 1954 it is estimated that subsidy will comprise 72 per cent of the current budget and 77 per cent of the combined budgets.

7 In fact, officials concerned with kabupaten finance pointed out that in the prewar period about 70 per cent of kabupaten expenditures were capital-producing in nature while today this percentage has declined to about 40 per cent.

8 Retributions are conceived of as payments for specific government services and hence, are distinguished from taxes. In West Java, they include levies on the construction of new buildings, on legal contracts, on reproductions of legal documents by the government, on inspection of meat and animals for slaughtering, on pasars, on trash removal, on public sales of sea produce and on parking places for public vehicles.

9 I wish to thank Mr. Clifford Geertz for his careful investigations on the operation of the padjak ketjil in Pare, East Java. Mr. Geertz reports that in Pare the Lurah was allowed to retain 8 per cent of his collections.

10 Dr. Leon Baransky, U. N. Fiscal Expert of the National Planning Bureau of Indonesia, reported to me that his personal investigation of local finance in Sulawesi and Bali impressed him with the scope of locally financed investment projects in these areas.

11 This estimate is based on a study of these budgets as well as intensive discussion of development plans with local officials.

12 Neumark, D. S., “The National Income of Indonesia,” Ekonomi dan Keuangan Indonesia, Tahun Ke 7, No. 6 (06 1954).Google Scholar

13 Neumark, , 358.Google Scholar

14 See Higgins, Benjamin, Economic Stabilization and Development in Indonesia (reproduced by the Institute of Pacific Relations), 23Google Scholar. Professor Higgins in fact estimated current annual net investment well above the Neumark estimate.

15 Grasberg, Eugene, “Indonesia's Investment Requirements,”Google Scholar Center for International Studies, Document No. C/54–9.

16 Higgins, , 23.Google Scholar

17 See Paauw, Douglas S., Financing Economic Development in Indonesia: A Suggested ProgramGoogle Scholar, Center for International Studies, Document No. C/55–3. These estimates suggest that per capita consumption could be increased by 2 per cent per annum with this amount of investment.

18 Obtained by deducting Dr. Neumark's estimate of total depreciation from his estimate of gross investment.

19 Four times the amount of local investment supported by central government subsidy (Rp. 271 million) or approximately Rp. 1 billion.

20 The officials to whom this question was put included both representatives of the central fiscal system, concerned with increasing central government revenues collected in localities, and provincial and kabupaten officials concerned with maximizing revenues at these levels of administration.

21 Paauw, Douglas S., “The Tax Burden and Economic Development in Indonesia,” Ekonomi dan Keuangan Indonesia; Tahun Ke 7, No. 9 (09 1954), 568569.Google Scholar

22 Ibid, 571.

23 The ways in which the two reinforce each other are emphasized in Dr.Lockwood, William's study, The Economic Development of Japan (Princeton, New Jersey: Princeton University Press, 1964).Google Scholar

24 For 1953 the Ministry of Interior reported subsidies to local governments amounting to Rp. 1.9 billion, or 12 per cent of total reported central government expenditures.

25 The Nasrun Committee was appointed to study the problems of financial relations between central and local governments in Indonesia. It is a continuing committee, composed of fiscal experts from various government departments. After intensive investigation of the problems involved in the fiscal sphere of central-local relationships, the Committee has offered its recommendations on the matters to which it addressed itself. These recommendations have appeared in an Indonesian document and have also been presented in Indonesian and Dutch by J. de Bruine in a series of articles in Ekonomi dan Keuangan Indonesia.

26 The pasar (market) tax, the amusement tax, and the bicycle tax are examples of local taxes now in effect to be retained by localities. The urban real estate tax (verponding), the vehicle tax, a tax on consumption in restaurants, and the household property tax (personeele belasting) are examples of taxes to be transferred from the central government.