Download the Indonesia Human Development Report 2004. - UNDP

Another risk from decentralization is that it couldexacerbate regional disparities. Indonesia already has sharpcontrasts between districts: in 2001, on a per capita basisthe richest local government had 50 times more revenuethan the poorest one. 73 These gaps seem likely to widen.This is first because districts are now allowed to keep ashare of the benefits from oil and other natural resourcesthat are on their territories. Second the richer districtshave a stronger tax base so should be able to gain morerevenue from local taxes. As a result, while the richerregions should have more resources to invest in humandevelopment the poorer regions will be hard-pressed toattain minimum service standards, let alone improve uponthem. As the regions get more taxing authority, this willneed to be offset by equalizing arrangements for revenuesharing.Nevertheless, it seems inevitable that regional disparitieswill remain for the foreseeable future and that someregions will prosper more than others. In thesecircumstances Indonesia needs to arrive at a nationalconsensus on meeting citizens’ human development rightsand should establish a minimum socially acceptableuniversal level of human development and allocate itsresources accordingly.This does not necessarily mean aiming for equality ofincome but rather for equity in the development of humancapabilities. This not only fulfils people’s basic rights, italso brings economic benefits since public investment inhuman development is likely to bring higher returns inrelatively backward regions than in the advanced regions.For example, new schools are likely to attract more newstudents in areas where enrolment is relatively low. 74 Thismay also be true of many small-scale investment projects,such as those for irrigation, where investment can creategreater income-earning opportunities for the poor than ifthey were invested in large-scale manufacturing or serviceindustries.A social sector fund – a means to protect socialspendingHow can the government ensure that social spendingis raised and maintained given tight budgetary constraintsand the implications of decentralization? One way todemonstrate the government’s commitment is to earmarkfunds for designated social spending by creating a SocialSector Fund (SSF). 75There are a number of ways a SSF can be created.For example, it could be built up by taking a certainpercentage of proceeds from the exploitation of naturalresources. Since these resources are ultimately ownedby all Indonesians one of the best ways to ensure that thebenefits are shared equitably is through social spending.Regions with richer resource endowments would thusmake a larger contribution.As the Indonesian economy becomes more marketcentred, fewer public funds will be needed to subsidizestate-owned enterprises, leaving resources that can beredirected to the social sector. Moreover, following theexample of the fuel subsidy compensation fund, 76 the SSFcould also be allocated a percentage of the proceeds fromprivatization and from any savings from reforms andrestructuring. India, for example, uses this system and in2001-02 allocated the equivalent of Rp. 1 billion fromprivatization proceeds to the social sectors. 77 This systemhas the added advantage of creating greater support forreforms. 78Another possibility is to apply a social sector levy oncorporations. This can be justified to corporations on thegrounds that it can help moderate wage claims: workerswho as a result of greater social spending benefit fromsubsidised or free education, health care and other socialservices should have less need to press for higher wages.A social fund levy would not therefore necessarily add tobusiness costs. Businesses also gain since they can takeadvantage of a better educated and better nourished labourforce that will be more productive. 79 A similar levy can beapplied to wealthy individuals. This could also be linkedto Zakat – an obligatory charity for well-to-do Muslims –allowing the SSF levy to be offset against Zakat. Thesemandatory funding sources of SSF can also besupplemented by voluntary contributions through taxdeductible charities and donations.However, this kind of system can only work ifcontributors to the fund, whether compulsory orvoluntary, have confidence in its management. Peoplegenerally comply with such revenue collecting measureswhen they see their money is spent on worthy causes.73 See World Bank (2003a), p.iv.74 To some extent, this may be counterbalanced by the higher costs of providing services in remote areas.75 One may argue that such earmarked funds are fungible. That is, overall spending does not necessarily increase in the earmarked sector, as the government shifts its non-earmarkedspending to other sectors. However, there is very little evidence for this. Most empirical studies find that when funds are earmarked, spending does increase, although it maynot rise by the expected amount.76 In the 1999/2000 budget fuel subsidies amounted to Rp. 40.9 trillion. In the 2001 budget, Rp. 2.2 trillion were allocated to a social compensation fund for education, health,food, transportation, clean water etc. In the 2002 budget the allocation was Rp. 2.85 trillion, including Rp. 570 billion for the health sector to cover free in-patient care for thepoor in 446 public hospitals, free generic drugs for 47.9 million poor and free hepatitis vaccines for 1.5 million poor people. In 2003, Rp. 4.43 trillion were budgeted tocompensate 30 million people for the effects of the 22% increase in fuel prices.77 Prabhu (2003).78 The Australian government successfully generated support for the sale of publicly owned telecommunication corporation, Telstra, by creating a special fund from the salesproceeds to be used for the environmental cause.79 Singapore successfully used a levy on corporations to create a Skill Development Fund (SDF) for financing the training of unskilled workers. This eventually raisedproductivity and hence reduced unit labour costs which helped corporations to enhance and maintain their international competitiveness. Another example of a successfulearmarked levy is the Employment Guarantee Scheme in the state of Maharashtra in India which is funded through resources raised mainly from urban areas to provideemployment for unskilled labour in rural areas.National Human Development Report 2004 55