Post-Decentralization Regional Economies and Actors: Putting the Capacity of Local Governments to the Test." The Developing Economies XLIII(1

Decentralization in Indonesia was introduced institutionally in 2001, with a democrati-zation drive promoted by international donors and by the intention of the new govern-ment to clear away the centralistic image of Soeharto. Decentralization has had some effects on regional economies and on local government administration. Compared to the period before decentralization, the share of GRDP and local government finance has increased in Java, though investment and bank borrowing have expanded to the outer islands. In qualitative aspects, decentralization has transferred not only administrative authority but also many new vested interests from the center to regions. Local govern-ments have become more extensive economic actors in regional economies. Regional economic actors now compete actively for such vested interests and have missed the opportunity to create market-friendly regional economies. The government sector should not be a mere rent-seeking economic actor, but should play a role as a facilitator promot-ing private sector activities in regional economies