This study examined the current decentralized system in Indonesia for increased disparities in educational expenditures across districts. It also examined the impact of these on the quality of education at public junior secondary education. The study used the most recently available data from the Ministry of National Education (MONE) and Central Bureau of Statistics (BPS) covering 1999/00 and 2002/03. These data measured district level school expenditures, demographic and socio-economic variables.

The study found that the current decentralized system in Indonesia increased fiscal capacities for education at districts. Unfortunately, increases in the fiscal capacities for education led to increased disparities in education expenditures per student, creating growing gaps in fiscal capacities for education across districts. Districts which received larger general allocation funds (DAU) per capita were also more likely to allocate more funding for education, whether or not they were poor or wealthy districts. This fact was reflected by the finding that district GRDP per capita in sub-national regions of Java-Bali and Sumatera had no impact on districts’ education expenditures per student. In addition, the sub-provincial districts of the Kota (more urban) and Kabupaten (less urban) also differed in the way that they allocated funding for education. The Kota in the Sumatera region tended to allocate significantly more for education than did the Kabupaten. At the same time, the Kota in Java-Bali did not allocate significantly more for education than the Kabupaten.

Teacher compensation was national, so funding variance was measured by locally controlled variables. The most significant impact on student achievement were teaching and learning process expenditures (textbooks, libraries, labs, field trips, etc.).

The study concluded that increased funding, combined with more efficient budget allocations, were keys to quality improvement. Policy recommendations include: (a) targeting DAU transfers to reduce the gaps in fiscal capacity for education across districts; (b) rewarding districts with effective budget allocations that support improved student achievement; and (c) placing education closer to the center of development and security policy. Better government monitoring and district transparency is needed for this major investment. Improved policy research and reporting capacities are needed, including annual reports on decentralization policy implementation.