Fiscal Decentralization: Its Impact on Cities Growth

  • Raksaka Mahi Vice Dean of the College of Economics, University of Indonesia, Depok
Keywords: Fiscal Decentralization, Cities, Growth


Indonesia currently adopts a new decentralization policy. In the past, central government had been the major role of regional and cities development. With the new policy, central government has transferred its role in developing cities and regions to the local governments. This policy adopts two complimentary laws. Law No.22/1999, which is basically the devolution policy, has been accompanied by Law No.25/1999, which basically is the fiscal decentralization policy. Both laws reflect that decentralization policy in Indonesia has adopted the concept of "money follows functions".Before the implementation of decentralization policy, the government of cities had been benefited from many facilities built by central government on the city area. With the decentralization policy, it is expected that a reduced role of central government will have a significant impact on the growth of cities in Indonesia. The policy has three major fiscal instruments; a block grant funding, a specific grant and revenue sharing. The block grant funding is considered as the most important instruments of fiscal decentralization in Indonesia. About 80 percent of financial transfer from central to local governments will be in the block grant type of transfer. In the past, the use of transfers was determined by central government specifically. Therefore, the role of block grant was very minimal. With the new fiscal decentralization scheme, the benefits of cities from central government investments are expected to decrease. Therefore, there is a question to what extend the cities will be sustainable in the decentralization era.This paper attempts to answer the impacts of current fiscal decentralization policy on the growth of the cities. The first objective of the paper is to evaluate the current intergovernmental tranfers and their impact to cities revenues. Secondly, by utilizing a regional macroeconometric model, this paper also elaborates the implication of the transfers to the city growth and interregional disparity in Indonesia. 


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Author Biography

Raksaka Mahi, Vice Dean of the College of Economics, University of Indonesia, Depok
His research specialization includes regional economy and fiscal decentralization. This paper is submitted for the 17th Pacific Conference of the Regional Science Association International, held by PRSCO at Portland, Oregon, USA. The author would like to thank Khoinnurrofik for the statistical assistence.


Mahi, Raksaka dan Adrian Panggabean, The Impact of'the Crises on Local Government Finances: Findings Based on Field Survey in 22 Regions, laporan penelitian (tidak diterbitkan) untuk CLEAN Urban Project, Departemen Keuangan, dan LPEM-FEUI, Juli 1999.

Ter-Minassian, Teresa, Fiscal Federalism in Theory and Practice, International Monetary Fund, 1997.

Shah, Anwar, and Zia Qureshi, Brian Binder, and Heng-fu zou, Intergovernmental Fiscal Relations in Indonesia, World Bank Discussion Papers, 1994.

Bahl, Roy and James Alin, Decentralization in Indonesia: Prospects

and Problems, Working Report, USAID, June 1999.

Law No. 22/1999

Law No. 25/1999

Law No. 18/1997

Law No. 21/1997

Law No. 34/2000

Law No. 104/2000

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How to Cite
Mahi, R. (2001). Fiscal Decentralization: Its Impact on Cities Growth. Jurnal Ekonomi Dan Pembangunan Indonesia, 2(1), 1-20.