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THREE YEARS OF FISCAL DECENTRALIZATION IN INDONESIA : ITS IMPACTS ON REGIONAL ECONOMIC DEVELOPMENT ... - page 11 / 21

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intergovernmental transfer proportion. In 2001-2002, the debt proportion was higher than DAU but lower than intergovernmental transfer. Any proportion increase of debt payment together with DAU proportion pattern (and other transfer instrument) will certainly put the national budget in danger. To finance the development in decentralized era, there are possibilities that both central and local governments have to look for external sources. The internal sources should come from tax revenue intensification and higher economic growth that leads to higher

tax revenue. Due to current economic growth because of

difficulties in expanding lack of investment, the

the tax base and external sources

promoting should be

prioritized but with cautions. The central for sources of funding and it will imply in

government already issues government bonds debt payment burden of the budget in the near

future. The foreign unpopularity among

loan is still there but its importance might decline Indonesians. Local government, on the other hand,

a little

bit due to

is still

prohibited

to borrow from discussions that

external sources, especially from foreign sources. There the prohibition might be lifted in the near future, and

have been the central

government has already amended the law 25/1999 by for local governments. With this on-lending concept,

introducing the on-lending concept the international agencies will have

to negotiate governments

and that

make an agreement with central government on behalf need foreign borrowing. The central government will then

of local lend the

money to the local governments and supported by an agreement, the central can charge the local governments through the intergovernmental transfer

government if the local

governments are in default position. This might minimize the fiscal sustainability. Another possibility is the issuance

the bigger risk of threatening of local government bonds. It

local

governments

The

risk to fiscal

might take some years before the the financial sources they need.

can really issue sustainability is

the bonds and get there if the local

governments are have to bail out.

allowed to issue the bond, To minimize the risk, the

especially if the local government

central government might bankruptcy law has to be

ready together with the secondary bond market. But first of toward the local government management from the market and

all, there has to be trust it has to be developed by

local governments the local economic

themselves through good development process.

governance

practices

and

ability

to

manage

CONCLUDING REMARKS The three years period of decentralization process could be labeled as a “mild” success. The success could be demonstrated by how the Indonesians quickly adjusted to massive and drastic changes from a very strong centralized government, given only one year of preparation. The relatively smooth transfer of 2 millions civil servants might be the symbol of smooth devolution process that did not create significant social or political unrest. The central government, especially some line ministries, is still trying to be involved more in the local activities, and it is understandable given their almost absolute power in the past. The local governments might be still in the learning process on how to rely on their own but they are learning quickly and given the limited budget, they can still manage the government administration relatively well. The amendment of both law 22/1999 and law 25/1999 should be treated as a significant improvement of decentralization process with the emphasis on better monitoring from central government and accountability at local level. On the fiscal side, there might be a problem of less than

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