Regions and Countries

	Table of Contents
p. 2 of 33 BACK | NEXT I. Current Development Trends and Issues A. Political Setting B. Economic Growth C. Poverty D. Governance and Institutional Capacity E. Private Sector F. Gender Assessment G. Environment H. Regional Cooperation I. Development Constraints II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : I. Current Development Trends and Issues

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A. Political Setting

3. The Government of President Susilo Bambang Yudhoyono (SBY) took office in October 2004 after the country’s first-ever direct Presidential elections. Earlier that year, direct elections were held for all 550 members of parliament.¹ While the change in the electoral system has enhanced the President’s mandate, the Government continues to remain coalition-based as in the recent past, as there is no single party with absolute majority in Parliament.1 As a consequence, legislation can at times be a drawn-out process.

4. Soon after it took office, despite the challenges posed by the devastating earthquake and tsunami in Aceh, the Government started a series of reforms, most notably the substantial decreases in fuel subsidies in March and October 2005, to address some of the pressing issues facing the country. It also initiated a major anti-corruption drive by giving greater mandate to the Anti-Corruption Commission (KPK), and launched infrastructure reforms beginning with the Indonesia Infrastructure Summit in January 2005. A reshuffle of the Cabinet took place in December 2005, aimed at strengthening the economics team. Since then, the Government has adopted comprehensive reform programs in the areas of investment climate, infrastructure reforms, and the financial sector. All these efforts have given rise to optimism, and reflected in increasing investor confidence. However, the Government faces major challenges, with jobcreation on the decline and real wages not accelerating due to inflationary pressures stemming from the much needed fuel subsidy reduction. This is not helped by the spate of natural disasters that has befallen Indonesia over the last two years. While the Government has been inclusive and consulted a wide-range of stakeholders on many of the reform programs under consideration, it faces an activist Parliament, which may slow reforms. With elections scheduled for 2009, there is an expectation that this will increasingly affect decision-making in the years to come.

5. The rapid “big-bang” decentralization of 1999 has created many opportunities as well as challenges. Unprecedented in its scope and scale, the reform agenda has devolved considerable political autonomy to the regions. However, decentralization was not preceded by the strengthening of the institutional capacity at the local governments. While evidence thus far demonstrates that service delivery generally has not deteriorated, the key challenge is to translate the devolution of authority into greater benefits for the average citizens and how this can be ensured and sustained. Critical in meeting this challenge is the need to achieve greater functional and fiscal autonomy. De-concentration was the main form of delegation in Indonesia before Regional Autonomy, and de-concentrated functions were financed through a separate funding mechanism.² Post-1999, functions are yet to be clearly defined between different levels of governments, and funding allocations do not follow the assignment of functions. In part this has been due to the lack of full clarity in the framework laws on decentralization, which has allowed central ministries to continue without restructuring their operations, changing their way of doing business or reducing their staff. They continue to use the de-concentrated funding mechanisms to exert influence over the regions. As a result, local governments are still heavily dependent on the center for funds as well as technical support.

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