The Dynamics of Fiscal Decentralization in Development Financing in Indonesia

Indonesia’s fiscal decentralization framework has evolved substantially since the 1998 Reformasi era; however, its capacity to ensure equitable and sustainable development remains debatable. This study analyzes the intricate dynamics of fiscal decentralization within Indonesia’s development financing system using a mixed-method approach that integrates policy analysis and regional case studies. Findings indicate persistent structural challenges: (1) dependence on central government transfers despite formal autonomy, (2) enduring vertical and horizontal fiscal imbalances, and (3) limited institutional capacity at subnational levels. The analysis identifies three core paradoxes— formal autonomy versus practical dependence, abundant fiscal resources versus weak absorption capacity, and policy innovation versus limited implementation capability. Comparative insights from Sumedang Regency and North Sulawesi Province illustrate how local political–economic contexts influence decentralization outcomes. The Village Fund (Dana Desa) program exemplifies both progress and pitfalls, emphasizing the role of targeted technical assistance in improving local governance. To strengthen fiscal decentralization, four policy reforms are proposed: rationalizing conditional transfers, broadening progressive local revenue bases, institutionalizing tiered capacity development, and establishing intergovernmental fiscal councils. These strategies reflect Indonesia’s archipelagic diversity.