Adaptive governance in fiscal decentralization: Insight from institutional reform in Banyuwangi Regency, Indonesia

In developing countries, adaptive responses to policy reform are crucial for ensuring that national mandates can be effectively localized within diverse and often resource-constrained governance environments. This study examines how local governments in developing countries adapt to national fiscal reform through an integrated institutional response. Drawing on the case of Banyuwangi Regency in Indonesia, this research investigates subnational governance adaptation following the enactment of Law Number January 2022 on Intergovernmental Fiscal Relations (HKPD Law). This study employs a descriptive qualitative approach using a single case study design. Findings demonstrate that Banyuwangi's proactive adaptation, including anticipatory legal reforms, cross-agency coordination, and empathetic engagement with taxpayers, reflects a pragmatic form of governance that aligns national policy with local socio-cultural realities. The study contributes to the literature on fiscal decentralization by proposing a context-sensitive framework of institutional adaptation and offers actionable insights for policymakers seeking to strengthen subnational governance capacity in response to reform dynamics. These findings hold particular relevance for developing economies aiming to bridge national fiscal mandates and local governance realities. • Fiscal reform aims to establish more efficient and equitable fiscal relations. • Local governments face institutional challenges in aligning the new fiscal framework. • The success of fiscal reform dependent on the local institutional capacity. • The Adaptive-Humanistic Approach Reflects Soft Power in Local Fiscal Policy.