Andrew Young School receives major grant to assist Indonesia in decentralizing its fiscal operations
at the Andrew Young School of Policy Studies

Indonesia is engaged in an unprecedented social and economic experiment. Responsibility for much government expenditure is being decentralised, largely to local (district) rather than to provincial governments. If this process is successful, the world's most centralised large country could become one of its most decentralized. … issues … include policy and administrative matters yet to be resolved, such as local budgeting, financial management and auditing, practices, personnel decentralisation, local taxation, borrowing by local governments, and the match between revenues and expenditures. A major theme is the importance of a continuing national and local discussion on the goals and processes of decentralisation.

James Alm, Robert H. Aten, Roy Bahl, "Can Indonesia Decentralise Successfully? Plans, Problems and Prospects." Reprinted from the Bulletin of Indonesian Economic Studies, with permission.

The Andrew Young School of Policy Studies was awarded a $2 million grant this year from the U.S. Agency for International Development (USAID) to improve and strengthen fiscal policy in Indonesia. The school is applying its nationally recognized expertise in public finance research and outreach and economics instruction in two programs designed to improve the capabilities of Indonesia's districts, or local governments, as the country moves rapidly to decentralize its fiscal operations.

The Challenge in Indonesia

Indonesia's relatively recent move to decentralization has caused unprecedented social and economic change in one of the world's largest and most diverse countries. Now that the country is adopting an open and democratic system, Indonesians have a high expectation of change and improvement, said Sri Mulyani Indrawati, the secretary of the National Economic Council to the Republic of Indonesia. The Andrew Young School is helping the country make a successful transition by providing ongoing technical assistance in fiscal policy and its first United States-based Indonesian Masters Program in economics designed specifically for Indonesian nationals.

"Indonesia is not atypical of the more than 40 countries that the Andrew Young School has served," said Jorge Martinez-Vazquez, director of the Andrew Young School's International Studies Program. "Yet it offers a complexity and diversity that make it very challenging and exciting."

While Indonesia's great size and diverse cultures are fascinating, said Martinez, and the Andrew Young School relishes this opportunity - all countries, large and small, receive the same detailed attention from the school. "Whether we are in Latvia or Indonesia, we do our best to understand the nuances of the cultures and the necessities of the economies. We're firefighters," said Martinez. "If there are no problems, then we are not there."

Providing technical assistance

Major structural changes began in Indonesia in 1998 after the election of President B.J. Habibie, who emphasized decentralization. His goal was to give more authority to the country's outlying provinces that were demanding it. Attendant new laws made fundamental changes but ignored the details, said Jim Alm, chair of the economics department at the Andrew Young School. "The country's new decentralization policies were not based on a coherent or rational blueprint, and many details of the implementation were ignored."

In May of 1999, Alm joined Dean Roy Bahl on a technical assistance mission to Indonesia for the World Bank and USAID-Jakarta. They began talking to local (district) government officials to assist in the development of policy recommendations on the new decentralization program. Martinez was later drawn in to help design the intergovernmental grants process and continues to serve as an economic advisor to the country's leadership.

A key question in - and cause of - Indonesia's push for decentralization is the need to allow more revenue from natural resources to stay in the resource-rich regions. "Equalization transfers will help regions by taking into account the different needs and capacities to raise revenues in these outlying regions," said Martinez.

The Andrew Young School's technical assistance team hopes to have a positive impact on Indonesia's public sector economics. In the last few years, Alm, Bahl and Martinez have advised the country on its tax administration and policy, public expenditures and expenditure reviews, priorities, levels of efficiency and the budget process. The school is supporting the Indonesian government in creating a more successful transition to decentralization as it reviews how well the country integrates processes at the national, provincial and district levels.

"We have worked closely with the Indonesian experts in providing formulas for them to consider, showing pros and cons and consequences. After two reforms, the government committee has made quite a lot of progress," said Martinez. A final proposal for the design of intergovernmental grants has been submitted to the Indonesian government and is currently in the process of discussion and approval.

Ongoing technical assistance in Indonesia will be long-term and structural, said Martinez. The country will need to gather more data to move forward. The Andrew Young School will continue to aid in this transition as it trains a select group of Indonesian nationals who will help move their country forward in its decentralization.

Educating future policy leaders

The Indonesian Masters Program began classes this fall in the Andrew Young School to train Indonesia's future policy planners and leaders. Martinez and Bahl assisted Alm in recruiting 35 university and government professionals from several districts in each of the country's major provinces to spend a year in Atlanta.

USAID funded the program to help improve the capabilities of Indonesia's local governments. The intent, said Alm, is to develop institutional capabilities outside of Jakarta, the capital. "These students will help the country decentralize as they work on developing and implementing local policy."

The students come from Indonesia's most important regions, according to Indrawati, areas rich in people and natural resources, many from districts harboring a history of dispute with the central government on topics ranging from education to development. "They are an important combination of students, chosen because they have the most influence and are expected to become important in contributing to improvements that will accelerate the changes," she said.

Martinez said the concept of the program is to bring a group of bright students from all diverse areas of the country together to create camaraderie, develop relationships and create a critical, unified mass of policy makers and future leaders for Indonesia. The program involves traditional training in economic theory, policy and econometrics. In addition, it features a yearlong research lab, where the class works on real world international economic issues.

The school's goal for the one-year program is to make the experience similar to any Andrew Young School masters program, said Martinez, fully credible with rigorous academic demands. "We are offering these students an authentic academic experience."

Indonesian student Linda Lambay, an accountant and lecturer at the University of Sam Ratulangi, Manado in North Sulawesi, agreed that the program offers rigorous training. "It is different from my background, so I've been studying a lot. It will be useful for us in order to help the development of my country, especially my province."

The ultimate goal is to train more than 100 masters level economists to work in Indonesia, said Martinez. Alm hopes that the program is opening an extended pipeline between the school and Indonesia. He said it is not unusual for students to get their degrees, go back to their country and promote their good experience at the school via word-of-mouth.

What is the future? "We're hoping to parlay this program into expanded technical assistance in a variety of dimensions of decentralization, but also on tax reform, also on grant design," said Alm. "It would be nice if we go out there and find our former students disbursed throughout local governments, not simply the central government, but throughout, in positions of authority so they can really have an impact on the way the country evolves."

Hosting a prominent Indonesian economist

Among many benefits the Andrew Young School is enjoying in hosting the Indonesian students is its association with Sri Mulyani Indrawati, one of Indonesia's chief economic advisors. She is spending the academic year as a visiting professor and scholar at the school. Indrawati has held a number of top posts in her country, most recently as secretary of the National Economic Council and advisor to the president of the Republic of Indonesia. Dean Bahl said that Sri Mulyani is one of the leading economists in Indonesia. "It will be no surprise to anyone to see her filling a Cabinet post someday soon."

Indrawati said she has built her career in various structural positions in Indonesia. After earning her Ph.D. in economics at the University of Illinois in 1992, she went home to eventually become the associate director, then director for research at the Institute for Economic and Social Research at the University of Indonesia. In 1998 she was assigned to establish the university's graduate program of public policy and planning. Since 1997 she has been in a unique position to follow her country's reforms closely.

"I've been deeply involved in our country's radical economic and political change," said Indrawati. "It has been interesting and exciting and frightening." She mentioned the importance of public education and joint research programs she did in cooperation with the Andrew Young School and others early in its time of great change. "Our work was related to destabilization, banking restructuring and competition policy, or what you would call 'antitrust,' to reduce monopolies."

Indrawati said that since the country has adopted an open and democratic system, Indonesians have high expectations of change and improvement. Her concern is public disappointment if improvements do not occur as fast as expected. Expectations must be managed. "Indonesia is adopting extremes in its decentralization policy," said Indrawati, "and the reform process needs the full support of the people. Many local governments are not yet ready to assume a larger roll. The functioning of government is quite disruptive."

Indrawati credits Indonesia's new president, Megawati Sukarnoputri, with trying to put the country in order. "She will try to improve the process, putting in more consistent programs and requiring all lines of government to go in this direction. With our extreme changes, she cannot afford to be moderate."

She says the Andrew Young School's Indonesian Masters Program is essential in helping the country improve its public policy process and outcomes. "The core problem is how to improve education and information for our people," Indrawati said. "To get a good result, our people must prepare themselves. The students in Atlanta can get a better higher education. They are expected by our country to give more back when they return."

Indrawati has come to Atlanta eager to help the students as well as to further her research, said Jim Alm. Indrawati added that after living in an exciting period of crisis and change in her country, she is now recharging. "This year will be like a sabbatical, a time I can use to read and do research to improve my understanding of how economies work and how people interact." She said she will spend her time discussing policy issues with Andrew Young School experts, "all of whom are a very important resource."

Indonesia
Profile of an AYSPS Client Country

Geography

• 17,000 islands, 6,000 inhabited
• Stretches 3,000 miles east to west
• 70% of area is water

People

• 230 million, 1.6% annual growth
• Religions: Muslim 88%, Protestant 5%, Roman Catholic 3%, other 4%

Official language

• Bahasa Indonesia

Literacy

• 83.6% (age 15+ can read and write)

Government

• Capitol: Jakarta, Java
• Administrative divisions: 34 provinces, 357 districts
• Suffrage: 17 years of age universal

Economy

• GDP: $654 billion
• GDP per capita: $2,900
• Population in poverty: 20%
• Inflation: 9%
• Unemployment: 15%-20%
• Budget: revenues $26 billion, expenditures $30 billion
• External debt: $144 billion
• Economic aid: $43 billion from IMF & others
• Currency: Indonesian rupiah

Source: The World Factbook

Read more on the Indonesian Masters Program.