Oct 25, 2012 | 10:45 GMT

4 mins read

Indonesia Struggles With Political Decentralization

Indonesia Struggles With Political Decentralization

Indonesian President Susilo Bambang Yudhoyono visited East Kalimantan province from Oct. 23 to Oct. 24, the Jakarta Globe reported Oct. 22. During the visit, Yudhoyono inaugurated eight infrastructure projects as part of the country's "master plan" for economic development through 2025, known as MP3EI.

After former President Suharto's fall, Jakarta spent the next decade decentralizing political power in an effort to preserve the nation's integrity. Now, as Indonesia looks to transform itself from a natural resources exporter to an industrial manufacturing hub (as called for in MP3EI), a degree of recentralization is likely needed to facilitate long-term strategic planning. However, in pursuing centralization, the government will have to grapple with divergent local interests.

Modern Indonesia has been shaped by periods of political centralization and decentralization. These periods reflect the struggle — in many ways hardwired into Indonesia's geography — between the interests of Java (the archipelago's economic, political and population core) and those of the resource-rich but culturally and religiously diverse periphery.

During his visit to East Kalimantan province, the heart of Indonesia's coal industry and one of six official economic corridors under MP3EI, Yudhoyono signaled the start of construction on eight infrastructure projects. These included the Kariangau container terminal in Balikpapan, upgrades to the Sepinggan International Airport, a port and industrial complex in East Kutai district and a fertilizer factory in the city of Bontang.

But behind the fanfare of Yudhoyono's visit is an ongoing struggle between central, provincial and local governments for control over the issuing of mining permits — and, in effect, over the sector as a whole. The struggle dates back to 1998, when Suharto's fall brought an abrupt halt to Indonesia's mining sector as well as to the investment regulatory regime that had been in place since Suharto came to power in 1967. That system, based on centrally administered contracts, no longer functioned in post-Suharto Indonesia because provincial and local governments viewed control over mining assets as fundamental to their political and economic autonomy.

Throughout the early 2000s, uncertainty over laws and regulatory enforcement severely hampered foreign investment into Indonesia's mining sector. Then, in 2009, Jakarta passed a law that transferred control of permits from central and provincial bodies to local governments. In two years, the number of mining permits issued nationwide skyrocketed from 579 to more than 10,000. Over the same period, foreign direct investment into Indonesia grew by 20 percent or more year-on-year.

But without stronger central oversight and coordination, the rapid boom in mining investment and activity gave rise to graft and corruption. Local governments hungry for investment issued thousands of overlapping permits to state-owned, private domestic and foreign firms. Of 10,566 permits issued by August 2012, nearly 6,000 overlapped with other permits or with protected forest areas. Before long, these redundancies triggered legal — and in some cases violent — land disputes. By May 2012, 1,029 legal cases had been filed.

The Difficulty of Reform

In an August 2012 statement, Yudhoyono, referring to the mining law situation as a "ticking time bomb," said he intended to give provincial governors greater oversight over mayors and regents in selling mining rights. His statement echoed repeated calls from East Kalimantan Gov. Awang Faroek Ishak to revoke thousands of overlapping permits and reform the 2009 investment laws.

But as Yudhoyono approaches the end of his term in 2014, his administration's ability to reshape the relationship between central, provincial and local governments has been severely constrained. Following his re-election in 2009, Yudhoyono lost institutional support from the powerful Golkar Party, heir of Suharto's national bureaucratic apparatus. Golkar, now controlled by Aburizal Bakrie (a scion of PT Bakrie & Brothers Tbk, which owns Indonesia's largest coal miner, Bumi Resources), has instead moved to undermine Yudhoyono's Democratic Party in hopes of securing victory in the 2014 presidential election. Lacking a strong parliamentary coalition, Yudhoyono has little room to maneuver, especially given that his administration set in place the very policy it now seeks to amend.

By itself, the issue of overlapping mining permits is not likely to dissuade continued foreign investment or derail MP3EI. But it is emblematic of the political challenges Jakarta now faces as it looks to transform the Indonesian economy.

Post-Suharto Indonesia necessitated moderate devolution of power from Jakarta to the provinces. In the same way, creating the physical and regulatory infrastructure needed to bring a plan such as MP3EI to fruition by 2025 may require some degree of recentralization or at least reform of the relationship between Jakarta, provincial and local governments and the military (which maintains a strong role in the country's business affairs). But as Yudhoyono's second term shows, the structure of contemporary Indonesian politics makes long-term strategic planning difficult. Given that no candidate currently slated for the 2014 race has anywhere near the broad popular or institutional support Yudhoyono enjoyed in 2004, it is by no means guaranteed that Indonesia's next administration will be able to overcome the myriad local interests that threaten the MP3EI plan.

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