The economic policy shift towards trade liberalization and decentralization has occurred globally. State restructuring should be viewed as a window of opportunity to promote regional development balance. However, presently there is a widening gap in regional developments due to the varied levels of local capacities. There were severe regional disparities between the eastern, western, and central regions. It is a reflection of the central government's imbalanced development policies which were put in place ever since the New Order regime had come into power.

This chapter documents the process of establishing institutions and looks at the transition period between the New Order regime and the decentralization period. This chapter explores institutional arrangements at the national level and between the central and regional hierarchies for the New Order regime. Consequently, the chapter elaborates on the politicaleconomic changes towards the end of the New Order and the critical juncture at which institutional change could be seen as a possibility. Apart from examining the institutional arrangement for regional development in the New Order regime, this chapter argues that institutional arrangements between the central government and regions have influenced the economic divergence in terms of regional development as well as variations in the growth rate for the current regime. The long-standing authoritarian institutional arrangements have been institutionalized into the bureaucracy and political landscape, and this has altered the way politicians pursued policymaking at both the national and local levels. It is for this reason that the last part of this chapter expounds on the paradox of state restructuring decentralization processes. The paradox is that even as the government underwent decentralization, a certain level of centralized coordination was required in order to capitalize on AFTA agreements as a way to accelerate regional development.

THE LINEAGE OF REGIONAL CRITICAL ANTECEDENT INSTITUTIONS: THE NEW ORDER REGIME

Following the socio-political riots of 1965, the new regime ruled Indonesia for more than thirty years (1966–98). The authoritarian New Order regime under President Suharto was enveloped by a political image which evoked a free pluralistic society, symbolized by the parliamentary (Dewan Perwakilan Rakyat or DPR) general elections every five years (Canonica-Walangitang 2004). The general election became a political theatre as the MPR re-elected President Suharto by acclamation in six consecutive elections.