A Tale of two Practitioners: Exploring the Indonesian Model of Decentralization and Development, post- Suharto. By Michael Mercer A Thesis Submitted to Saint Mary’s University, Halifax, Nova Scotia in Partial Fulfillment of the Requirements for the Degree of Masters of International Development Studies March 28, 2016, Halifax Nova Scotia Copyright Michael Mercer Approved: Dr. Marty Zelenietz Supervisor Approved: Dr. Anthony O’Malley Reader Approved: Dr. Suzanne Dansereau Examiner Date: ____________________ Abstract A Tale of Two Practitioners: Exploring the Indonesian Model of Decentralization and Development, post-Suharto. By Michael Mercer Abstract: Indonesia underwent rapid decentralization, referred to as the “Big Bang”, at the turn of this century. This study examines the causes and developmental impacts of this process. For this study, research was conducted in Jakarta, Indonesia. The research’s aim was to examine the effects of the forced political decision to decentralize power from the national government to the district level, and its effects on development. This research was conducted by primary source interviews with development and government actors in Indonesia. Interviews were conducted in Indonesia in January, 2012 with Canadian government officials as well as with development practitioners currently working within Indonesia. Acknowlegments: This work has been a long time in the making – having started my research in 2011, and defending in 2016. I would be remiss if I did not acknowledge those life events that have happened during the course of this writing, and their impact on my family. My longtime partner and world travel companion, Lisa Courtney-Mercer and I got married in 2013, and have since also had our beautiful daughter, Ellie. They are my everything. Lisa deserves much of the credit for allowing me to finish this work – as I was doing this on the side of a very full plate of career progression, family time and extensive travel. Dr. Marty Zelenietz, my long suffering thesis supervisor – this being our second thesis together – has been both a mentor and a friend – and is credited with more that I can ever repay. Dr. Anthony O’Malley and Dr. Suzanne Dansereau round out my committee and deserve both acknowledgement and thanks for their patience and guidance. To both Saint Mary’s and the Saint Mary’s University Students’ Association, where I served two terms as Vice President – I owe a debt of gratitude for the support provided and the opportunity to learn on one of the best campuses in the country. My parents, Senator Terry Mercer and Ellen Mercer – thank you for believing in me. I told you I would get this done – and now, as promised…you owe me that graduation watch. Thank you to the country of Indonesia – if you haven’t been, go. It truly is a special place full of richness and diversity and should be on any list of travel plans. 1 Table of Contents Acknowledgments 1 Chapter One- Indonesia’s Decentralization of Power – Post Suharto 6 Central Issues in Decentralization 10 The Choice of Indonesia 11 Research problematic 12 Methodology 14 Outline – Indonesian Decentralization 16 Research Question 16 Thesis Statement 17 Background 17 Outline for thesis 17 Thesis Argument 17 Chapter Two- A review of the Debates, exploring the theories of decentralization 19 Government 24 Devolution 26 Deconcentration 27 2 The Theory of Decentralization 27 Forms of Exercised Power 29 The Impetus for Decentralization 30 The Debate 32 Administrative Efficiency 32 Local Competition 33 Fiscal Incentives 34 Democracy 35 Local information and policy innovation 36 Holding the country together 36 Decentralization: Structural Adjustment, Neoliberalism and the Conditionalities approach 37 Chapter Three- Empirical Chapter, a presentation of background information and a look at the Indonesian model of decentralization and development 40 Indonesia – An Overview 40 Indonesia – Origins 41 Indonesia – 1940`s to 1999 42 Indonesian decentralization model 48 Transition 50 The Reformasi 52 3 Law 22 and Law 25 – Decentralization reforms, 1999 54 Breaking down the Indonesian decentralization model 54 Big Bang Decentralization 57 Local Development 57 Research – A Tale of Two Practitioners 58 1 The manner in which the transition from centralized to decentralized was carried out 60 1.1 Context and rationale 62 1.2 Obfuscation 63 2 The Division of Decentralized Authority 64 2.1 Taxation, Finances 68 2.2 Corruption 71 3 Relationships – Donor-to-Government and National/Provincial/Regional Interplay 72 3.1 The Donor focus 73 3.2 Overall mood within the development sphere 77 3.3 Development relationships amongst levels of government 78 4 Lessons extrapolated from the local level 79 Chapter Four: An Analysis and Discussion of the significance and meaning of my data collected throughout my field research and documentary review 82 4 1 – The manner in which the transition from centralized to decentralized was carried out 83 2 – The Division of Decentralized Authority 84 3 – Relationships, Donor to Government and National/Provincial/Regional 85 4 – Lessons Learned from the Local Level 87 Chapter Five- Summary of Findings and Recommendations and Conclusion 88 1 – The manner in which the transition from centralized to decentralized was carried out 89 Recommendations 90 2 – The Division of Decentralized Authority 91 Recommendations 91 3 – Relationships, Donor to Government and National/Provincial/Regional 93 Recommendations 93 4 – Lessons Learned from the Local Level 94 Recommendations 95 5 – Comparing Data and Recommendations 95 Bibliography 97 Annex A – Research Ethics Board 102 5 Chapter One: Indonesia’s Decentralization of Power – Post Suharto This thesis is a study of policy decisions, and the effects of those decisions as we follow them down the line to their eventual implementation. First, we explore the setting that Indonesia found itself in the late 1990’s, and its decision to accept an international aid package with conditionalities. This decision was to have major ramifications for the governance and development sectors within Indonesia. Next, we explore the effects of those decisions and the process in which they were carried out. Once the decision to acquiesce to the international donor organization was made, the speed at which many of those policies were implemented, and the lack of planning can be seen to interfere with the desired outcomes. We then move on to a dual practitioner data set, where two highly placed in-country practitioners, asked a set of the same questions, provide insight into the new Indonesian decentralization and development paradigm. This is followed by a tightly focused look at some ways to improve the current development arena in Indonesia. Decentralization is a process that addresses the relationship of a government to the governed. This question of relationship is, at its core, the very essence of governance: How do citizens and government interact? Every law passed, every financial resource allocated, every election (or non-election, as the case may be), can be viewed as agreements between the citizens and the government to behave in a certain manner. These decisions can be debated, fought over, died for, agreed upon, or anything in 6 between, yet every time they are altered it is a reflection of the nature of the relationship question. Governments and citizens look for a relationship type that fits how they wish to balance this choice, and recently, many of them are looking - or have been forced to look - at forms of decentralizing power to smaller, local governments. This isn’t the first time, and it won’t be the last, but it is the prevailing one now – and we will explore why. The nature of government and how a given country organizes to govern itself is an ever changing one. Throughout history, countries, regions and even whole civilizations have swung the pendulum of government from wholly centralized through almost totally decentralized, and every point in between (Chase-Dunn, 1997, p. 20). In the past few decades, this swing has landed yet again on the idea of decentralization, as developing countries the world over have been moving away from the typically planned and controlled form of centralized government. A shift towards various forms of decentralization and deconcentration has been a staple of their development plans. This change is being encouraged by a growing number of development agencies and international development institutions. As a condition of acceptance to receiving large financial support packages from organizations such as the International Monetary Fund (IMF), developing countries were forced to participate in a series of structural reforms that would align them with the prevailing neo-liberal theoretical underpinnings of: divestiture of government assets; 7 market liberalization; financial and corporate sector overhaul; and encouraged decentralization (International Monetary Fund, 2000). There are a varied set of benefits that are associated with this shift towards decentralization depending on such factors as: geographical characteristics, population makeup and diversity, historical attitudes, and capacity of the newly devolved geographic areas to implement the changes, among others. In terms of development, having a more localized approach to decision making is a key factor to community engagement and acceptance. This can turn a development project or concept into a successful endeavour, or consequently, can be a source of irritation or disillusionment if overly centralized. A clear picture of local versus central was presented along these lines in Lisa Courtney-Mercer’s work, which demonstrated that without local knowledge and buy-in, a project cannot be truly successful (Courtney- Mercer, 2013). One country that had no choice but to follow the decentralization path was Indonesia, following the fall of the Suharto regime in 1998. This was a period in the history of the country that can safely be said to have been a crossroads for its development. The catalyst for the change was the Asian financial crisis that shook the economies of many Asian countries during the period from 1997-2000 - some of its effects were still being felt long after the crisis was ‘over’ (Asian Development Bank, 2006). The highly centralized Suharto regime was unable to react to the unexpected crisis which saw the Rupiah lose 80% of its value by January of 1998 and caused widespread unemployment. 8