A New Intergovernmental Capital Grant for Indonesia: A Polemic in Support of Economic Growth

Increasing economic growth is a national priority in Indonesia. One of the ways in which central government hopes to stimulate output growth is by increasing consolidated public capital spending, especially on traditional infrastructure. This paper proposes a new intergovernmental capital grant to support increases in subnational infrastructure investment—and therefore growth—at both the provincial and district levels. As the grant is sketched out here, provinces and districts would compete for separate and limited pools of finance. Grant funds would be awarded to a relatively small number of subnationals based on objective growth-oriented performance criteria. Central government would monitor the performance of provinces in spending the capital grant money; provinces would assess district outcomes. Overall the system would provide strong incentives for subnationals to invest funds wisely and, more generally, to adopt policies that support economic growth. The objective and arrangements for the proposed capital grant contrast sharply with those of transfers currently comprising Indonesia’s intergovernmental fiscal system, which focus on equity. Nevertheless, the grant put forward here is strongly supported by theory and best practices and merits serious consideration by government reformers, especially given the nation’s renewed focus on stimulating higher levels of economic growth.