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THREE YEARS OF FISCAL DECENTRALIZATION IN INDONESIA : ITS IMPACTS ON REGIONAL ECONOMIC DEVELOPMENT ... - page 8 / 21

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complaining about the extra fees and levies. Combined with the fact that Indonesia is considered not conducive yet for foreign investment, the decentralization process becomes one of major factors discouraging new investment in Indonesia. The illegal and excessive new charges, levies, or fees were some of major factors but more than that, the local government in Indonesia is not business friendly yet. The KPPOD survey (KPPOD, 2003) revealed that the major concern for investors to locate their activities at localities was the institutional factors that cover the certainty, law enforcement, licensing process, and local regulation. In fact, the local governments create disincentives rather than incentives for incoming investment. This lack of incentives comes from a combination of political structure, economic structure and the relationship between central and local governments. In the current relationship between local executives and legislatives, the latter has becomes the more powerful party. Local executives have to follow the guidance from the legislative. However, due to their weak capabilities, the evaluation of executive performance is mostly based on what happens to the APDB budget, especially the total amount and its allocation. It is very rare to hear the local legislatives (DPRD) go beyond the APBD itself and evaluate the executive performance on how the APBD stimulates the local economic development and growth, and subsequently generates jobs and reduces local unemployment. In other words, it is APBD that matters for both local legislatives and executives, while the GRDP is seen as a factor that will follow automatically the national economic conditions (Brodjonegoro, 2003). The lack of local elected officials accountability to their voters, due to the current election system, is another reason why local economic growth and local unemployment are not perceived to be as important as increasing the revenue in the APBD.

The lack of local government focus in promoting the output and employment growth leads to lower economic development activities in the regions. It should be noted, however, that the impacts of economic crisis might play significant role in slow economic growth both at national and local level. At this stage, it is hard to separate the effects of economic crisis and decentralization on the regional economic growth. Comparing the decentralization period with the crisis period, it is obvious that there has been economic growth improvement as indicated by GRDP, investment, and export growth by province in table 4,5, 6 and 7. However, the economic growth in decentralization era is still far below the economic boom (and centralized) era. The difference for all provinces is quite significant and it has to be examined further the reason of the difference apart from the national macroeconomic condition. Table 4 – 7 should also alarm the central government that the less impressive performance of export and investment at national level might be due to problems at regional level that may require more local oriented actions than the uniform macroeconomic policy. Decentralization may play a role in that local oriented economic policy. Another alarming finding is de-industrialization all over Indonesia as indicated by table 7. The minus growth at some regions plus almost zero growth at other regions indicated slow or even declining manufacturing growth that has to be anticipated as early as possible by both local and national policy makers. KPPOD survey (KPPOD, 2003) indicated that manufacturing is the main victim of illegal and excessive charges or levies. This might effect the manufacturing activities at the local level and eventually at the national level. An integrated national economic policy that incorporates the local

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