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Autonomy with equity and accountability : toward a more transparent, objective, predictable and simpler (TOPS) system of central financing of provincial-local expenditures in Indonesia

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  • Shah, Anwar

Abstract

During the past decade, Indonesia has transformed itself from centralized governance to decentralized local governance. Local governments were given extensive expenditure responsibilities while keeping the tax system centralized. To finance decentralized provincial-local expenditures, Indonesia implemented a new system of intergovernmental finance. This paper provides a review of the equity and efficiency implications of the current system of central-provincial-local transfers. It finds that the system of intergovernmental finance represents one of the most complex systems ever implemented by any government in the world. The system is primarily focused on a gap-filling approach to provincial-local finance to ensure revenue adequacy and local autonomy but without accountability to local residents for service delivery performance. This is done through a great degree of academic rigor using highly complex procedures. The complexity leads to a lack of transparency, inequity and uncertainty in allocation as well as creating incentives for jurisdictional fragmentation and reducing own-tax effort. Simpler alternatives are available that have the potential to address equity objectives while also enhancing efficiency and citizen-based accountability. Such alternatives would represent a move away from complex gap filling and special allocation approaches to simple, output based transfers to finance operating expenditures. These would be complemented by capital grants to deal with infrastructure deficiencies, and fiscal capacity equalization as a residual program with an explicit standard to ensure that all local jurisdictions have adequate means to deliver reasonably comparable levels of public services at reasonably comparable levels of tax burdens across the country. The paper argues that such an alternative system of intergoveernmental finance would preserve autonomy, while enhancing equity, simplicity, objectivity, transparency and accountability.

Suggested Citation

  • Shah, Anwar, 2012. "Autonomy with equity and accountability : toward a more transparent, objective, predictable and simpler (TOPS) system of central financing of provincial-local expenditures in Indonesia," Policy Research Working Paper Series 6004, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6004
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    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/03/20/000158349_20120320101419/Rendered/PDF/WPS6004.pdf
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    References listed on IDEAS

    as
    1. Shah, Anwar & Qibthiyyah, Riatu & Dita, Astrid, 2012. "General purpose central-provincial-local transfers (DAU) in Indonesia : from gap filling to ensuring fair access to essential public services for all," Policy Research Working Paper Series 6075, The World Bank.
    2. Jorge Martinez-Vazquez & François Vaillancourt (ed.), 2011. "Decentralization in Developing Countries," Books, Edward Elgar Publishing, number 14175.
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    Cited by:

    1. Gerrit J. Gonschorek & Günther G. Schulze & Bambang Suharnoko Sjahrir, 2018. "To the ones in need or the ones you need? The Political Economy of Central Discretionary Grants − Empirical Evidence from Indonesia," Discussion Paper Series 36, Department of International Economic Policy, University of Freiburg, revised Jan 2018.

    More about this item

    Keywords

    Subnational Economic Development; Public Sector Economics; Municipal Financial Management; National Governance; Debt Markets;

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