In mid-1999, Indonesia passed decentralization legislation that will fundamentally change the structure of the state, which, since the 1950s, has been highly centralized. While there are considerable pressures for decentralized governance in Indonesia, the transition will not be easy and needs to be carefully sequenced. A seminar titled “Indonesia: Decentralization Sequencing Agenda” was held in Jakarta, Indonesia, on March 20–21 to place Indonesia’s decentralization effort in the context of international experience. The seminar was sponsored by the IMF’s Fiscal Affairs Department, the Center for Social and Economic Research of the University of Indonesia, and the World Bank. Delivering the keynote speech, Bambang Subianto—a member of the president’s National Economic Advisory Council and former finance minister—said that the time for implementation was very short and that many provisions of the law would have to be implemented in the 2001 budget. Subianto looked to the seminar to provide a road map for the orderly implementation of the decentralization process.
The seminar drew lessons for Indonesia from the experiences with decentralization of a number of countries, including Brazil, China, Colombia, India, and Italy. It featured presentations by external experts, as well as Indonesian academics and officials. The seminar focused on key issues for Indonesia, ranging from transfer of responsibility for making expenditure decisions and collecting revenues to management of the budget process and design of intergovernmental transfers, including untied general purpose transfers.
The IMF does not have a preconceived notion about the desired level of decentralization in its member countries, according to Ehtisham Ahmad, Advisor in the IMF’s Fiscal Affairs Department. Rather, individual countries must decide what is best for them, given their historical and political perspectives. However, he noted, the decentralization process needs to be carefully sequenced to avoid exacerbating macroeconomic imbalances, as illustrated by many countries that have already gone through this experience. A key lesson is that the decentralization of revenues and transfers should not precede the devolution of responsibilities. Moreover, to avoid a political backlash, it is imperative not to endanger...