Decentralization in Nation State Building of Indonesia

Introduction：Today, many countries, regardless of developed or developing, are trying to promote decentralization. According to Manor, as his quoting of Nickson’s argument, decentralization stems from the necessity to strengthen local governments as proxy of civil society to fill the yawning gap between the state and civil society (Manor [1999]: 30). With the end to the Cold War following the collapse of the Soviet Union rendering the cause of the “leadership of the central government to counter communism” meaningless, Manor points out, it has become increasingly difficult to respond flexibly to changes in society under the centralized system. Then, what benefits can be expected from the effectuation of decentralization? Litvack-Ahmad-Bird cited the four points: attainment of allocative efficiency in the face of different local preferences for local public goods; improvement to government competitiveness; realization of good governance; and enhancement of the legitimacy and sustainability of heterogeneous national states (Litvack, Ahmad & Bird [1998]: 5). They all contribute to reducing the economic and social costs of a central government unable to respond to changes in society and enhancing the efficiency of state administration through the delegation of authority to local governments. Why did Indonesia have a go at decentralization? As Maryanov recognizes, reasons for the implementation of decentralization in Indonesia have never been explicitly presented (Maryanov [1958]: 17). But there was strong momentum toward building a democratic state in Indonesia at the time of independence, and as indicated by provisions of Article 18 of the 1945 Constitution, there was the tendency in Indonesia from the beginning to debate decentralization in association with democratization. That said debate about democratization was fairly abstract and the main points are to ease the tensions, quiet the complaints, satisfy the political forces and thus stabilize the process of government (Maryanov [1958]: 26-27). 　　　What triggered decentralization in Indonesia in earnest, of course, was the collapse of the Soeharto regime in May 1998. The Soeharto regime, regarded as the epitome of the centralization of power, became incapable of effectively dealing with problems in administration of the state and development administration. Besides, the post-Soeharto era of “reform (reformasi)” demanded the complete wipeout of the Soeharto image. In contraposition to the centralization of power was decentralization. The Soeharto regime that ruled Indonesia for 32 years was established in 1966 under the banner of “anti-communism.” The end of the Cold War structure in the late 1980s undermined the legitimate reason the centralization of power to counter communism claimed by the Soeharto regime. The factor for decentralization cited by Manor is applicable here. 　　　Decentralization can be interpreted to mean not only the reversal of the centralized system of government due to its inability to respond to changes in society, as Manor points out, but also the participation of local governments in the process of the nation state building through the more positive transfer of power (democratic decentralization) and in the coordinated pursuit with the central government for a new shape of the state. However, it is also true that a variety of problems are gushing out in the process of implementing decentralization in Indonesia. 　　　This paper discusses the relationship between decentralization and the formation of the nation state with the awareness of the problems and issues described above. Section 1 retraces the history of decentralization by examining laws and regulations for local administration and how they were actually implemented or not. Section 2 focuses on the relationships among the central government, local governments, foreign companies and other actors in the play over the distribution of profits from exploitation of natural resources, and examines the process of the ulterior motives of these actors and the amplification of mistrust spawning intense conflicts that, in extreme cases, grew into separation and independence movements. Section 3 considers the merits and demerits at this stage of decentralization implemented since 2001 and shed light on the significance of decentralization in terms of the nation state building. Finally, Section 4 attempts to review decentralization as the “opportunity to learn by doing” for the central and local governments in the process of the nation state building. 　　　In the context of decentralization in Indonesia, deconcentration (dekonsentrasi), decentralization (desentralisasi) and support assignments (tugas pembantuan; medebewind, a Dutch word, was used previously) are defined as follows. Dekonsentrasi means that when the central government puts a local office of its own, or an outpost agency, in charge of implementing its service without delegating the administrative authority over this particular service. The outpost agency carries out the services as instructed by the central government. A head of a local government, when acting for the central government, gets involved in the process of dekonsentrasi. Desentralisasi, meanwhile, occurs when the central government cedes the administrative authority over a particular service to local governments. Under desentralisasi, local governments can undertake the particular service at their own discretion, and the central government, after the delegation of authority, cannot interfere with how local governments handle that service. Tugas pembantuan occur when the central government makes local governments or villages, or local governments make villages, undertake a particular service. In this case, the central government, or local governments, provides funding, equipment and materials necessary, and officials of local governments and villages undertake the service under the supervision and guidance of the central or local governments. Tugas pembantuan are maintained until local governments and villages become capable of undertaking that particular service on their own.

Transformation of the Financial Sector in Indonesia

Introduction : The source and deployment of finance are central issues in economic development. Since 1966, when the Soeharto Administration was inaugurated, Indonesian economic development has relied on funds in the form of aid from international organizations and foreign countries. After the 1990s, a further abundant inflow of capital sustained a rapid economic development. Foreign funding was the basis of Indonesian economic growth. This paper will describe the mechanism for allocating funds in the Indonesian economy. It will identify the problems this mechanism generated in the Indonesian experience, and it will attempt to explain why there was a collapse of the financial system in the wake of the Asian Currency Crisis of 1997. History of the Indonesian Financial system The year 1966 saw the emergence of commercial banks in Indonesia. It can be said that before 1966 a financial system hardly existed, a fact commonly attributed to economic disruptions like the consecutive runs of fiscal deficit and hyperinflation under the Soekarno Administration. After 1996, with the inauguration of Soeharto, a regulatory system of financial legislation, e.g. central banking law and banking regulation, was introduced and implemented, and the banking sector that is the basis of the current financial system in Indonesia was built up. 　　　The Indonesian financial structure was significantly altered at the first financial reform of 1983. Between 1966 and 1982, the banking sector consisted of Bank Indonesia (the Central Bank) and the state-owned banks. There was also a system for distributing the abundant public revenue derived from the soaring oil price of the 1970s. The public finance distribution function, incorporated in Indonesian financial system, changed after the successive financial reforms of 1983 and 1988, when there was a move away from the monopoly-market style dominated by state-owned banks (which was a system of public finance distribution that operated at the discretion of the government) towards a modern market mechanism. The five phases of development The Indonesian financial system developed in five phases between 1966 and the present time. The first period (1966-72) was its formative period, the second (1973-82) its policy based finance period under soaring oil prices, the third (1983-91) its financial-reform period, the fourth (1992-97) its period of expansion, and the fifth (1998-) its period of financial restructuring. The first section of this paper summarizes the financial policies operative during each of the periods identified above. In the second section changes to the financial sector in response to policies are examined, and an analysis of these changes shows that an important development of the financial sector occurred during the financial reform period. In the third section the focus of analysis shifts from the general financial sector to particular commercial banks’ performances. In the third section changes in commercial banks’ lending and fund-raising behaviour after the 1990s are analysed by comparing several banking groups in terms of their ownership and foundation time. The last section summarizes the foregoing analyses and examines the problems that remain in the Indonesian financial sector, which is still undergoing restructuring.