Local Government Financial Performance and Decentralization in Indonesia

Abstract

Indonesia is a federalized democracy that has been negotiating the meaning of fiscal federalism to create greater local fiscal responsibility. Financial performance measures are tools used to assess local stewardship and provide transparency and accountability. This study compares these measures using 66 cities for macro-level analysis and 4 cities through a series of interviews with local officials across Indonesia for micro-level analysis. The trends in these measures preceding, during, and following the COVID-19 pandemic, along with the perspectives of local officials, provide a description of how these measures were used to interpret local financial performance. These measures include ratios that capture the degrees of decentralization, independence, direct spending, and local revenue growth. Principal components analysis revealed strong relationships between local revenue growth and decentralization, with similarly strong relationships between direct spending and independence. For individual cities, there was a wide range of performance on these measures, indicating that some cities were much better off. Although these measures seem to be important guideposts for local governments, there is no warning system used by provincial, regional, or central government authorities to alert local officials when problems arise. It is also apparent that the COVID-19 pandemic had an impact on these cities, particularly on local revenues.