We have all heard of failed states, but in Indonesia we also have failed local government. A recent UNDP forum revealed an estimated 48 new local government units in Indonesia are spending 70 percent of their budget only on paying civil servants. (Jakarta Post 26.06.09).
The next Indonesian government, to be formed after the direct presidential elections on July 8^th, will have to put a stop to this gravy train, which is paying out taxpayer’s money to new local government units which are apparently doing next to nothing, with little impact on economic development.
More effort has to go into serious reform of low-capacity under-performing local government in poor areas that need development.
This cannot be separated from a big push on public administration reform, and a continuing anti-corruption drive, which the next government must undertake.
Right now 20 more new local government units, including proposals for 7 new provinces, are on the table in the House of Representatives. If this open door to free distribution of state funds and corruption is not closed, this could spin out of control.
Local government units trying to become effective and which do not spend all their money on salaries, could be politically disrupted, subject to manipulation by interest groups and broken up.
This is not what was intended by decentralization and increased democracy at local level after the end of the over-centralized Soeharto regime.
This vast archipelago of 17,000 islands and 235 million people is now divided into 524 autonomous administrative units comprising 33 provinces, 398 regencies and 93 cities.
Home Office Minister Mardianto, speaking on the problems of introducing a new citizenship identity number (NIK) confirmed, "At first [in 2006] we only had 400 regencies and cities nationwide but now we have more than 500."
Political battles to form these new entities have sometimes been ferocious with public disturbances. At least one prominent local politician died of a heart attack after a riot (in Medan) in which he was mobbed by supporters of local government separatism.
The reason for all this misplaced enthusiasm is not unfortunately some genuine new wave of local identity. It is money.
Speaking at a UNDP forum last week Mardiasmo, a senior central government official and director general of financial balance in the Ministry of Finance said central government would spend 14.27 trillion (US$1.4 billion) in 2009 on ¨vertical funds” to set up offices in new local government units (police, customs and excise, courts and tax offices). This rose from Rp.14.02 trillion in 2008 and Rp.8.09 in 2007.   
The Finance Ministry wants a moratorium on new regions and that the House of Representatives delay new proposals.
The incoming government in October, probably to be led by incumbent President Susilo Bambang Yudhoyono, and his squeaky clean Vice Presidential running mate, Boediono, well ahead in opinion polls, must tackle three key problems:
First, widespread corruption in local government , with rolling Corruption Court cases affecting provinces, regencies and municipalities (and related central government ministries) over dirty procurement deals on items like fire engines, bribes on licenses and land zoning, and entire lists of local councilors being locked up for accepting illegal wage increases, bonuses and bribes.
Secondly, decentralization and uncontrolled proliferation of local government units have led to proliferation of local taxes, licenses, fees and illegal charges which are disincentives to inward investment and economic development, and contrary to central government policies to cut red tape. This needs rationalizing and supervising.
Finally home-made, self-proclaimed sharia laws have been introduced in at least 50 local government units, including in big cities, on everything from having local government officials pray more, to restrictions on alcohol and vague laws restricting women´s dress and movements late at night.
Many of these laws may be in breach of the national constitution and could lead to embarrassing human rights cases or Constitutional Court cases.  This needs to be tidied up, before it gets more out of hand.
The integrity and financial sustainability of existing and better-led Indonesian local government units is threatened, until this proliferation is got under control. Failed local government can ultimately be just as destabilizing as a failed state. 

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.