T

he planned revision of Law no. 32/2004 on local government presents an opportunity for Indonesia to rationalize its approach to decentralization that, so far, has gone awry. The drastic transfer of political, fiscal and administrative autonomy was done in part to maintain the territorial integrity of the country amid ethno-communal clashes and demands for greater autonomy in separatist areas. Decentralization has indeed maintained the unity of Indonesia.

But, it has also had adverse consequences: the creation of large numbers of new districts and municipalities, many of which are economically nonviable.

The proliferation of administrative units, colloquially known as '€œpemekaran'€, promises to bring government closer to the people and increase the welfare of the poor. But this promise has not materialized. While exceptions exist, new administrative units have generally underperformed when measured by their impact on poverty, inequality and governance.

Compounding the problem is that many poorly performing districts have been further subdivided into smaller, even weaker, units. Since the enforcement of decentralization law in 2001, about 220 new administrative units (7 provinces and 213 districts and municipalities) have been created. A large proportion of this growth occurred in Papua, a region with the nation'€™s lowest regional Gross Domestic Products (GDP) per capita and human development indicators. By any definition of '€œreadiness'€, these new units should have never been approved.

There are powerful incentives for further proliferation. In ethnically and religiously polarized areas, carving out new districts typically implies creating smaller, more homogenous units, thereby increasing the likelihood of placing favored co-ethnics in power. Another incentive is to increase central government fiscal transfers. These transfers are higher in per capita terms in small districts than they are when allocated to the larger pre-split districts.

Another appeal of continued subdivision is the lack of accountability over district use of local budget and ministry funds. This provides the opportunity for local elites to misuse state funds with minimal penalties.

The irresponsible creation of new districts and municipalities has resulted in increased local government dependence on the central government support. With large numbers of governance tasks and limited local resources, these new administrative units can barely function effectively, much less autonomously.

Discussions on revision of Law no. 32/2004 are currently underway. Three points are being debated: to replace direct elections of local leaders, especially at the provincial level; to merge new administrative units that have performed poorly; and to provide governors with sanctioning authority and increased budgets.

The outcomes of these debates will determine whether Indonesia continues the present dysfunctional intergovernmental arrangements, or constructively moves beyond them.

Perhaps the most harmful aspect of the proposed revisions is the suggestion to eliminate direct elections. Indonesia has made extraordinary progress towards democratic consolidation.

Undoing direct elections of local leaders would remove one of the main channels through which voters can keep their leaders accountable. Merging poorly performing units would be an improvement, if it focuses on economic viability. The resulting larger administrative units would have more human resources and capacity to administer effectively.

The greater diversity of political opinions would stimulate participation and enhance accountability. The third point would strengthen the capacity of provincial governments to coordinate and enable districts in meeting their goals.

A recent Harvard Kennedy School study on inclusive growth in Indonesia has identified three key requisites for inclusive growth.

First, reduce transactions costs through the expansion/upgrading of infrastructure and promote financial development to benefit the whole population.

Second, boost employment by raising the quality of education and removing public regulations which hinder job creation.

Third, rationalize center-provincial-district administrative relations in ways that encourage inclusive growth.

The proliferation of administrative units wastes national resources, rewards a minority of well-connected officials and undermines development.

As the Harvard study found, the issue is not to boost the power of one administrative level relative to the others.

Rather, it is to achieve a balanced system of intergovernmental relations that matches the functions of each level to their particular capacities and goals.

In the absence of these changes, continued dysfunction will undermine any prospect of Indonesia achieving inclusive growth. By 2025, when Indonesia, according to the Master Plan on the Acceleration and Expansion of Indonesia'€™s Economic Development (MP3EI) is supposed to be an upper middle-income country, it will still be struggling to move beyond the modest rates of improvement into which the current administrative system has the country locked.