Examining Indonesian Corruption Through the Leadership Lenses

Karaniya Dharmasaputra
Dept. of Political Science, the Ohio State University
Autumn, December 6, 2006

William Liddle offers an alternative framework of what he terms leadership or individual actor approach to explain and analyze socio-political phenomena. This approach differs from the prevailing frameworks in political science. The cultural approach, for instance, views that political actor’s behavior is shaped by belief and norm system. The other is structural framework. This argues that institution determines political dynamics and constrains actor’s choices. Personality is the third paradigm that places psychology at the center of analysis. According to this, psychological processes construct individual characteristics, cognitions, motivation and personality. These attitudinal factors, in turn, shape political actor’s behaviors and decision making processess. The last one is the rationality approach. This theorem sees political actors as a rational individual who always try to maximize their best interest. Thus, according to this framework, politics is a rational-benefit maximizing game.

In contrast to those, Liddle’s novel approach focuses on “individual political leaders in making choices to build and maintain support in varying situations of constraint and opportunity” (1996, 7). The main concept focuses its attention on the actions of individual agent that in Liddle’s view has long been ignored by structuralists. Political actor, in this framework, is able to make autonomous and consequential decisions and actions. Constrained by structure, shaped by culture, and bounded in the context of time, agent can formulate tactics and mobilize resources to make changes.

It is important to note Liddle’s emphasis that this approach is not meant to deny the impact of the four existing frameworks on political behaviors. In his view, virtu is the mediator of fortuna, leadership is “an intervening variable between structure and culture,” and thus the role of political actor is highly significant as well (Liddle 1996, 11). In my opinion, the individual actor approach offers benefits in explaining social phenomena and designing reforms. On the followings, I will try to show them, one by one, by examining Indonesian corruption as the study case.

First, the explanatory power of the leadership theorem. Using the traditional approaches in finding a remedy for Indonesian corruption, one would end at a cul-de-sac. In the country that is currently placed by the Transparency International index as the tenth most corrupt state in the world, analysts have long concluded that corruption have been being systemized and institutionalized; from the high rank bureaucrats to the low level officials, from the palace to the village. Fraudulent practices contaminate all institutions. Unlike Hong Kong, Malaysia, or South Korea where the anti corruption campaigns can rely on the integrity of highly professional legal apparatus, Indonesian judiciary system even functions as one of the major sources of extortion. In brief, institutionally, Indonesia is hopeless.

The rationality approach does not offer a brighter view, either. The common argument of this framework is that the high level of corruption is an expected result of the low civil servants’ salary and the low risk in corruption detection. So, the answer offered to addressing corruption is pretty straight forward: to raise the remuneration and to increase the cost of corruption. Unfortunately, these advices can not be further from the truth.

Those factors closely relate to the structural obstacles. Indonesian economy is still crawling and the resource for wage increase is limited. Moreover, empirical evidence has shown us that this sole factor does not guarantee corruption reduction. Even though applying high remuneration on a head-to-head level with that in private corporations, BPPN (the Indonesian bank restructuring agency) and BI (the central bank) still suffer corruption severely. As well, raising the sanction side is heavily constrained by the current high level corruption in the judiciary system. And, last but not least, the deep institutionalized corruption forces civil servants to be involved in this illicit practice to survive their careers and even just to get their jobs done. So, like the structuralist approach, we see the inadequacy of the rationality framework.

How about the cultural paradigm? It leads us to the same frustration. This approach argues, for instance, that Indonesians perceive corruption permissively due to the culture. It is not uncommon we heard an argument that asking and receiving money as a gift is a part of certain, even religious, traditions. Others view that, in line with the phenomenon of the institutionalized corruption, corruption embodies and forms its roots in the culture. However, here we are again dissatisfied in suddenly seeing a very wide variation. We, for example, immediately see a contrast between two infamous NU kyais, Nur Iskandar S.Q. and Mustofa Bisri. They are both ulamas and were raised in the NU pesantren culture, but why do they behave very differently in regard corruption?

And without needed to discuss any longer we also see the weak explanatory power of personality approach. If various personalities result in a similar drive to be involved in corruption, thus we see the inadequacy of this approach. And due to these inabilities, it is not surprising that the cultural and personality frameworks would not satisfy our need to find a panacea for examining Indonesian corruption.

In such analytical dead-end, I see the potential of Liddle’s virtu approach. Autonomous political leaders, no matter his cultural and personality background, could make autonomous and consequential breakthrough on the institutional and rational choice cul-de-sac. And the results of such decision and action might in turn shaping structure and reward system toward good governance. To make the point clearer, consider the following empirical evidence.

Right after Suharto fell in 1998 almost every prominent actors of reformasi cried the importance of anti-corruption war. Held in the same year, the Special Assembly of People’s Consultative Assembly (MPR) passed the Decree No. 11 on Good Governance and Anti-Corruption. A year later, the House of Representatives passed the powerful Anti Corruption Law and in 2002 established the independent Corruption Eradication Commission. We see the structural changes here.

The political liberalization also brings the constituency’s demand on a firm anti corruption campaign to the fore of national political stage. A nation-wide survey conducted by the Partnership for Governance Reform in Indonesia (PGRI) in December 2001 found that nearly 70 percent of respondents perceived corruption as a serious problem, as “a disease to combat.” Assuming that political actors are rational, here we view a change in the political reward system by waging anti-corruption issue.

Culturally, except the recent rigorous campaign initiated by KPK, I see no substantial changes. At this point I also omit the personality factor since it offers a little relevance to our discussion.

During this period of change in regard the anti-corruption issue (from 1998 to present), Indonesia have four presidents, B.J. Habibie, Abdurrahman Wahid, Megawati Sukarnoputri, and now Susilo Bambang Yudhoyono. The question is why only Yudhoyono who chose anti-corruption as his major campaign theme and then, after elected, he firmly decides and rigorously pursues anti-corruption drives? Why did not Habibie, Abdurrahman, or Megawati take the same route? As shown above, the anti corruption institutions and huge demand for anti corruption campaign have been established and presented when they all took the office. That is not an available option for Yudhoyono only.

We also question the efficacy of the culturalist and personality framework in explainin this phenomenon. The culture of corruption among Indonesians, I would argue, has not changed significantly. I can also hardly find a sound reason to judge the significant role of Yudhoyono’s personality on the back of his decision in launching a firm anti-corruption campaign. Nor can I apply the method of difference to rule out his predecessors’ psyche for not doing so. The point is if culture and personality remains constant, why we are now seeing a change in the anti-corruption campaign? Why during Yudhoyono’s administration? Why not before?

At this point, I see the usefulness of leadership as a method of analysis. The aforementioned phenomenon provides a proof of how the role of individual political leader does matter. Through the lenses of virtu we clearly see of how the change in anti-corruption drives is pushed and molded at the first place not by the institution, rationality, culture, or personality, but by autonomous and consequential President Yudhoyono’s decisions and acts.

I speculate one of the major reasons behind such Yudhoyono’s decision resorting to a constraint he faces. Supporting by a weak Democratic Party, Yudhoyono’s political position is vulnerable. Anti-corruption measures, on the other hand, offer a plenty resources and coercive means to balance out his political weakness. A further systematic study is needed to check the merit of this speculation. Yet, if such wild guess is proven, we see how the role of leaders in employing tactics and resource can change the constraint factors he has to deal with.

My second point, the leadership approach acquire us to change our priority in designing the Indonesian reform and might explain the reason behind the recent slow-paced progress. In my view, the efforts to reconstruct a new Indonesia are heavily relied on the structuralist and the rationality approach. New laws, institutions, and reward system alteration has been introduced and established. We can easily enlist them, as I have shown some of them in the anti-corruption field. However, I would argue, the result is not entirely satisfactory.

Liddle’s leaderaship offers a base to question whether the source of the problem is the failure of the reformer to put the importance of agency’s role at their top priority. Here, I question the inadequacy of today’s recruitment system in placing and encouraging individuals with high integrity and professional skills to take over the rein of the country. This reminds us to a dramatic breakthrough in recruiting the non-career supreme judges. Though the net impact is debatable, the public sees how Artidjo Alkotsar and Abdul Rahman Saleh have courageously dissented from their colleagues in numerous high-profile corruption cases. We are also aware of the important role of two current KPK’s commissioners, Erry Riyana Hardjapamekas and Amien Sunaryadi. Unlike three other commissioners who are former police official, prosecutor and auditor; Erry and Amien were also the founders of a respected anti corruption NGO, the Indonesian Transparent Society (MTI).

However, a note must be underlined. As we have seen above, the role of individual actor is eventually relied back on the recruitment system. Thus, at this point, it seems that we should start the reform on the institutional level that has been shown above does not offer a satisfactory solution. A further study might be needed to examine the emergence of social forces and critical junctures that had opened window opportunity for the entrance of leadership variable. Comparing Indonesian and Korean reform, Liddle in this regard points out the important impact of “pressure from below.”

Kim, Liddle, and Said write that virtu “is the skill of the human agents who shape and are shaped by structure” (n.d., 2). As well, this notion also demands a more detail investigation to answer the question that in a failed system what factors could induce the recruitment of skillful agent who is in turn capable to transform the institution to the one with a better quality?

The leadership framework needs to address this puzzle to round off its efficacy.

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Political Competition and Corruption in Indonesia: A Research Design

Karaniya Dharmasaputra
Dept. of Political Science, the Ohio State University
Autumn, December 5, 2006

Background

The primary concern of this study is examining the correlation between political competition and level of corruption in Indonesia.[1] The country has long been positioned by various well-known indices as one of the most corrupt states in the globe. This year’s Corruption Perception Index of Transparency International (TI), for instance, places Indonesia, the world’s largest Muslim country, on its top-ten list (TI website).

This focus is led by two intriguing developments that have emerged since the country gained its democracy back in 1998. For over 40 years, the Indonesian democracy was suppressed under President Sukarno’s and Suharto’s authoritarian rules. In a stark contrast, today’s Indonesia has been experiencing a free-fight political competition induced by two milestones of the 1998 reform.

Political liberalization is the first one. After the parliament lifted the barrier of entry in establishing political party, the number has risen dramatically; from the three tightly restrained parties under Suharto’s regime, to 48 and 24 parties in the 1999 and 2004 general election, respectively.

The second force emerges from the decentralization policy implemented since 2001. The law mandates the central government to surrender a substantial amount of its authorities and to transfer a quarter of the national budget to 465 local governments, namely district (kabupaten) and municipality (kotamadya) (Liddle 2006). Not only does the decentralization affect the fiscal field, it has also changed the political game significantly. In the past’s authoritarian system, the governors, mayors, district heads, and local parliament members were in fact appointed by the central government. Formally, the local parliaments were required to approve the candidates proposed by the central government. Yet, in reality, the legislators played no more than a rubber-stamp role.

Today, the game runs differently. Local politics flourishes and does matter in determining the end-result. Moreover, while members of parliament compete through the open-list proportional representation electoral system, the decentralization law mandates heads of local governments to be directly elected by the people.[2] In brief, the two forces of reform have been pushing a significant increase in the degree of political competition at the Indonesian local scene.

Simultaneously, along with those developments, the country has also experienced an intriguing development in corruption. On one hand, the trend of corruption has been steadily decreasing since the political wave of reform hit the country in 1998. The TI’s corruption perception index scores the country from 1.7 in 1999 to 2.4 this year, with 1 indicates the most corrupt state. However, the most recent score is still lower than that of in Suharto’s era, 2.72 in 1997 (TI website). The International Country Risk Guide - Corruption Index shows a similar pattern. Indonesia’s score has worsened from 3.0 in 1997 to 1.0 during the era reform of 1999-2003 (World Bank website).

The ambiguity continues. Observers are frequently astonished seeing a dramatic increase of corruption trials against politicians, especially those have been occurring at the local stage. According to the Ministry of Home Affairs record, between 2004 and 2006 67 heads of local government or their deputies and 1,062 local parliament members has been indicted on corruption charges. Most interesting, in reaction to such developments, a group of legislators at the national level have petitioned government to stop the wave of trials against their local colleagues. They accuse that the prosecutions are merely the product of political fight and are skewed by the narrow interests (Komisi II-III DPR-RI 2006).

On the other hand, however, there is also an indication that the magnitude of local budget misuses have increased in this very period. The national coalition of anti-corruption NGOs reports that during 1999-2004 the corruption upon local government budgets in 18 provinces has reached Rp.454 billions or equivalent to $45.4 millions.[3]

These backgrounds then direct us to ask: What kind of role the current political liberalization has been playing on corruption? Does it create an impediment or impetus for fraudulent practices? To answer the puzzle, the research question of this study is formulated as follows: What is, if any, the relationship between the increasing political competition and the corruption level in Indonesia?

In line with that effort, this study aims to contribute its findings to fill a hiatus in the corruption study on Indonesia. As warned by Thee Kian Wie (2002), a prominent Indonesian economy historian, corruption—the primary cause of the collapse of Indonesia’s economy after the Asian financial crisis of 1997—has long been neglected by the country’s academia. More importantly, while numerous corruption studies has been conducted upon the context of the developed, the post-Communist or Latin American countries, the research on new democracies in Asia is scarce. In this regard, the twin backdrops we have seen, Indonesia as one of the most problematic country in corruption and as a new-born democracy, offer another contribution of this study to a further theory building that are currently rather underdeveloped.

Theoretical Framework

In this study corruption is delineated along the World Bank’s parsimonious definition, i.e. the use of public office for private gain.

Thus far we have observed the indication of how the current political competition and decentralization might affect the level of corruption in Indonesia. A substantial number of scholarly works done in this particular area have also underlined the significant impact of those two factors on corruption. However, the prevailing theorems are far from reaching an agreement.

First, let us consider the relationship between political competition and corruption. Scholars have found that the strength of political competition tends to reduce the likelihood of corruption by raising the risk of detection and electoral cost. Competitive political environment will constrain politicians’ choices in acting against constituent’s interest on the presence of less corrupt circumstances, whereas the absence of competition will provide a space for political actors to increase the magnitude of extortion by launching a threat of proposing damaging legislations (Rose-Ackerman 1999).

In line with that argument, examining 83 countries by regressing the TI Corruption Perception Index against the index of political competitiveness derived from the Polity III database, Michael Johnston (2002) finds a significant negative correlation between those two variables. Doig offers County Durham of England as another example where the most entrenched corruption is found in the locality with low political competition.

The impact of cartel-party system is the next proof of this point of view. Mair and Kartz have warned that inter-party collusion would prevent the participated parties to check each other’s abuses and could establish an auction of bribery that would result in a higher pay-off (in Johnston 2002). Another confirmation comes from the mainland China. Investigating the failure of country’s anti-corruption campaign, Melanie Manion (2004) concludes that the major impediment should be attributed to the Chinese monolithic party system. In Indonesian context, observers tend to believe that today’s political reform has been enabling ordinary citizen to sanction political actors at some degree and hence it has been increasing politician’s risk to engage in corruption practices (Hamilton-Hart 2001).

Other scholars argue the reverse. The rise of political competition might contribute in increasing corrupt activities and donors’ influence to political actors and parties. Examining corruption in Italy, Golden and Chang (2001) found a strong positive connection between competition among Christian Democratic MPs in haunting campaign funds and the degree of political corruption. However they fail to obtain a significant contribution of the inter-party competition variable.

Susan Rose-Ackerman (1999) proposes a middle way. She argues that the theoretical dispute reveals the importance for researchers to be more precise in measuring the degree of competitiveness to be able to capture its true impact on corruption. She argues that the correlation between the variables is based on what she terms “paradox of stability;” the too-stable political environment could increase the likelihood of corruption, but a very volatile circumstance would also produce a similar result.

Type of electoral system also matters. Scholars have argued that certain types of electoral rules tend to force elected officials more accountable than others and hence to reduce the incentive of corruption. They argue that party list mechanism leads to more corruption than plurality or other political systems in which individuals compete against each other. However, the opposite argument contends that the latter system is prone to more corruption, higher rents and less accountable. This finding is relevant to be considered since Indonesia is currently adopting the open-list proportional representation system in which previous works have detected the existence of a significant correlation between intra-party competition and level of corruption.

The second important explanatory factor we need to discuss is decentralization. Thus far, like political competition, most scholars have reach agreement about a close linkage between decentralization and corruption. However, there is still much disagreement of how the former would predict the latter. Some argues that decentralization can not be generalized across countries due to its nature that is highly context-dependent.

At the optimistic camp, scholars believe that decentralization brings check and balance mechanism closer to citizens and hence it enables them to closely evaluate and then reward or sanction elected officials based on their performances. Put another way, as local democracy flourishes corruption shrinks. Inter-jurisdictional competition among localities provides another force toward that direction. Others at the opposite side argue that decentralization promotes corruption. The power diffusion to the local level might also be followed by the distribution and multiplication of fraudulent practices in a less controllable manner. Less professional local officials with a much larger discretion of authorities then only exacerbates the problem (Bardhan and Mookherjee 2005).

These two different views have been supported by evidence provided by the respective studies. Fisman and Gatti (1999), for instance, find a strong negative correlation between fiscal decentralization and corruption level across countries. They run a statistical analysis over the aggregate data analysis derived from the International Monetary Fund’s Government Finance Statistics in the period of 1980-95.

In contrast, reviewing previous studies on this subject, Bardhan and Mookherjee (2005) conclude that most cross-country empirical studies fail to show strong evidence of the significant impact of decentralization on corruption reduction. The most widely cited study in this line of argument was conducted by Shleifer and Vishny (1993). They conclude that centralized polities are less prone to corruption than systems where power and authority are more diffused. In parallel with that, the 1993 report of Great Britain Audit Commission indicates that the country’s decentralization policies “have increased the risk of fraud and corruption occurring” (in Klitgaard et al. 2000, 10).

In the case of Indonesia, Ari Kuncoro surveyed 1800 corporations across the country and he found a decline of the level of bribery (as a percentage to total production cost) reported by the local business leaders after the decentralization law enacted (2002). However, he notes that the finding should be reserved and need to be further examined due to a suspicion that the decline of bribery might related to a drop in corporation’s profit due to the crawling economy following the 1997 Asian financial crisis. It should be noted that another Kuncoro’s finding shows the impact of decentralization on the increase of business uncertainty. In regard that this study will be focusing on political competition as its independent variable, I take decentralization into account as a control variable, explained later.

Given the theoretical disputes we have seen, this study would make a contribution in a theory testing on the interaction among those variables in the context of Indonesia, one of the most corrupt countries in the world as indicated previously.

Hypotheses

Based on the background and theoretical framework elaborated above, I state the hypotheses as follow:
a. The increase of political competition induces a net effect of the decrease of corruption at local level.
b. The correlation stated on (a) occurs only when decentralization taken into account;
c. Considering (a) and (b), the largest decrease of corruption would present at the district/municipality level.

Unit of analysis

There are two units of analysis of this study, i.e.:

a. For the aggregate data analysis: The entire 33 provinces and 465 districts and municipalities in Indonesia. District and municipality are the same level government. They differ in term of type of area coverage. The former pertains to the rural area while the latter to the urban. The decentralization law renders autonomy to the municipality and district and positions provincial government as the arm of central government in coordinating and monitoring the implementation of local governance. However, this study takes province into account since the political competition and the dynamics of corruption at this level also shows a significant development. Moreover, a comparison between the dynamics in provinces (that functions as the central government’s arm) and municipality/districts (as the unit of decentralization) would provide a useful insight to reveal the net effect of decentralization.

b. For the survey: Corporations in 33 provinces. These corporations will be selected with the systematic random sampling method from a list provided by the company index provided by the Ministry of Justice. In Indonesia, every corporation entity should be legally registered in this department.

Period of study

The time span of this study is a period from 1999 to 2009 that covers three elections of 1999, 2004, and 2008 after reformasi, the era reform marked by the fall of the authoritarian Suharto’s regime in 1998.[4] This period encompasses the two major shifts in Indonesian political system this study concerns; the political liberalization in 1999 and the decentralization policy in 2001. The problem of data availability prevents this study to include the era of Suharto’s regime. However, I would also take this period into account when I employ a historical analysis to shed light on the current pattern.

Variables and Source of Data

a. Independent Variable:
Political competition, as measured by two following estimators:

a.1. VOTE-INTRA: This variable is employed to capture the intra-party competition that has a significant impact on corruption. Indonesia’s recent political system is multi-party presidentialism. In term of electoral system the country, as I have mentioned previously, is adopting the open-list proportional representation in which theories has indicated that intra-party competition might play a significant effect on level of corruption. For this purpose I will be examining the candidate lists in the three general elections and will select three top MP candidates from each three top parties in every locality, including at the provincial level. The degree of competitiveness will be judged by the number of votes they obtained. The closer number of votes obtained by each candidate the higher level of intra-party competition. Such judgment will be coded into an index of competitiveness (coded 1 to 5 in which 1 indicates the lowest level of intra-party competition).
Data source: KPU (The National Election Commission).

a.2. VOTE-INTER: Vote share at provincial and district/municipality level per election cycle. This variable aims to capture the dynamics of inter-party competition. In every region, only three top parties at the respective parliaments are taken into account. A close difference of the proportion of vote share would determine the higher level of competitiveness. This variable will also be transformed into an index with a similar method with the one of VOTE-INTRA.[5]
Data source: KPU.

a.3. TURNOVER: Turnover rate of local government head (governor, mayor/district head) in the respective localities.[6] This is defined as number of changes of local government heads accumulated in the period of study, from 1999 - 2009 (adapted from Przeworski et al. 2000).
Data source: KPU.

b. Dependent Variable:
The level of corruption at the provincial and municipal or district level, as measured by two following estimators:

b.1. INDICTMENTS: Number of indictments on corruption charges against local government heads and parliament members during the period of study. This includes any charges relating to the anti-corruption law and/or to the anti-corruption provisions in the criminal penal code.[7] For these study purposes, the number of indictments is preferable rather than the number of verdicts due to the latter is more likely distorted by the high level corruption in the Indonesian judiciary system.
Data source: Ministry of Home Affairs and the national coalition of anti-corruption NGOs (GERAK).

b.2. CORRUPTED BUDGET: The amount of local budget loss in corruption or other malfeasance practices as concluded in the audit report of BPK (the Supreme Audit Agency).
Data source: BPK’s quarterly publications.

b.3. BRIBERY: The amount of illicit payment and/or gifts rendered by corporations to the bureaucracy, member of parliaments, and/or the political parties.
Data source: Survey.

b.4. PERCEPTION: The corporate executive’s perception toward the level of corruption in relations with the level of political competition and decentralization. Gunnar Myrdal (2002) underlines the importance of public perception in anti-corruption drives. Examining corruption in South Asia, Myrdal argues that “the folklore of corruption,” people’s belief of how corruption can or can not be combated, significantly determines the level of corruption and the success of anti-corruption campaign.
Data source: Survey.

c. Control Variables:

c.1. DECENTRALIZATION: Total expenditure of local government (province and district/municipal) over total spending of all levels of government (national, province, district/municipality) per annum. I choose expenditure rather than revenue, since the former could better capture corruption than the latter. This variable is adopted from Fisman and Gatti’s study (1999).
Data source: BPS (the National Statistics Agency).

c.2. ECONOMY: The level of economic development and affluence of each locality measured by the respective income percapita. This is an important control variable since most prior studies have reached an agreement that the economic wealth is a strong predictor for a less corrupt society. The importance to control level of economic development has been shown by Johnston (2002). His study displays that by including GDP percapita into the regression-equation, the GDP becomes a strong negative predictor of corruption and changes the political competition variable as a not significant explanatory variable.
Data source: BPS.

c.3. EDUCATION: Literacy rate at each localities as determined by the national demographic survey.
Data source: BPS.

c.4. CIVIL ASSOCIATIONS: Number of civil society associations (NGOs, religious and other secondary organizations). Dinissa Duvanova (n.d.), for instance, has shown the positive correlation between level of bureaucratic corruption and business association formation in 25 post-communist countries.
Data source: The Ministry of Justice.

c.5. RELIGIOSITY: Level of religiosity of each locality’s population. This study will borrow the findings of LSI and other’s surveys in Indonesia (Mujani and Liddle, forthcoming)
Data source: LSI survey (Indonesia Survey Institute).

c.6. REGION: This is the dummy variable to distinguish localities in Java, coded by 1, and they are in outer Java (0). Kuncoro’s study (2002) points out the importance to capture the Java-outer Java variances due to a wide socio-economic disparity between two regions. Examining the correlation between corruption and decentralization in Indonesia, he found the significant differences between two regions.

Methodology

Data validity and bias of measurement are the two common major challenges of study on corruption in regard to its secretive and illicit nature. Moreover, due to the institutionalized nature of corruption in Indonesia, such threat is even more prominent. These circumstances are recognized as the major limitation of this study. To overcome those obstacles I will generate four different methods of data collections. This multi-stage method would provide an advantage in which the validity of each resulted data can be checked one against to another. By doing this I expect to be able to mitigate the threat to a minimum level.
I will conduct the data collections with the following steps:

a. In-depth interview.
I will initiate the whole process of data collection with in-depth interviews with the key national figures in this field. For this purpose the semi-structured interview technique will be utilized. The sources are including, but not limited to: major political party leaders and legislatures, the commissioner and commissioner deputies of the Corruption Eradication Commission (KPK), head and staff of the Presidential Unit for Reform Management, the attorney general and his staff, the chief of police force and his staff, and leaders of corruption-watch NGOs, such as Transparency International - Indonesia. The main purpose is to obtain an accurate picture of the variables and their interactions that will then be utilized to examine and refine this research design and to determine the direction of the aggregate data analysis and survey.

b. Aggregate data collection pertaining to the relevant variables as described above.

c. Nation-wide survey.
I will be focusing the survey on local business leaders across the country. The corporations are selected as the unit of analysis relating to the three primary objectives of the survey. First, it tries to estimate the magnitude of corruption with measuring the amount of illicit payment to local bureaucrats, parliament members, and political party leaders. I suspect they play two pivotal roles in the scope of corruption concerned by this study; as the major bribe providers and also the victims of political extortion. I expect that surveying the giving side of corruption would result in a greater reliability than asking those in the taking side.[8] Secondly, the survey will try to measure the perception towards the current level of corruption and its relations to political competition and decentralization. The two areas of findings can not be captured by the aggregate data analysis. More importantly, the survey will also function as a validity-check to the aggregate data that are threatened by corruption within the national audit agency and judiciary system.

The survey will be conducted through face to face interviews with one executive or their representative in each firm. Corporations surveyed here are the ones that fall into two size categories defined in Kuncoro’s study (2002), i.e. medium corporations for those having annual sale amount of Rp.1-10 billion and large corporations for those with the annual sale of more than Rp.10 billion. Small firms are not included since they are not significant players in regard the political corruption this study concerns.

d. Contextual study.
At the final stage, I will employ this type of study in two districts and municipalities, each in Java and outer Java. To avoid the threat of selection bias, the two localities are selected randomly from those having high number of corruption indictments and budgetary irregularities. In-depth interviews with political and business actors will be employed to capture the dynamics among the variables of this study that can not be entirely portrayed by the two preceding methods.

To examine the net effect of political competition on the corruption level, I will conduct the following analysis:

a. Statistical analysis upon aggregate and survey data.

This analysis will be performing three main tasks. First, it will compare the variances inter municipality/district data to examine the differences between municipalities/districts. Secondly, it will investigate any contrast between data obtained in the provincial level versus the ones in municipalities/districts. This comparison would provide a benefit in investigating the individual impact of decentralization. As explained before, the decentralization law is implemented at the district/municipality level, not at the provinces. Therefore, by comparing the data of the latter against those of the former, we could inspect how the decentralization intervene, or not, the correlation between political competition and corruption level. And the third is to measure the magnitude of corruption using the aggregate and survey data.

b. Qualitative analysis.

I employ this type of analysis upon the data resulted in the in-depth interview and contextual study in order to get insights on the dynamics shaping the correlation, if any, among corruption, political competition, and other relevant variables. Including this type of analysis is the historical analysis on the path of Indonesian corruption.

* * *

References

Bardhan, Pranab, and Dilip Mookherjee. 2005. “Decentralization, Corruption and Government Accountability: An Overview.” Revised draft for Susan Rose-Ackerman and Edward Elgar, ed. Handbook of Economic Corruption. Forthcoming.

Duvanova, Dinissa. n.d. “Bureaucratic Corruption and Collective Action: Business Associations in the Post-Communist Transition.” Department of Political Science, the Ohio State University.

Fisman, Raymond, and Roberta Gatti. 1999. “Decentralization and Corruption: Cross-Country and Cross-State Evidence. Washington, D.C.: The World Bank.

Golden, Miriam A., and Eric C.C. Chang. 2001. “Competitive Corruption: Factional Conflict and Political Malfeasance in Postwar Italian Christian Democracy.” World Politics, 53, 588-622.

Hamilton-Hart, Natasha. 2001. “Anti-Corruption Strategies in Indonesia.” Bulletin of Indonesian Economic Studies, 37(1), 65-82.

Johnston, Michael. 2002. “Party Systems, Competition, and Political Checks.” In Arnold J. Heidenheimer, and Michael Johnston, eds. Political Corruption: Concepts & Contexts, 3rd ed. New Brunswick and London: Transaction Publishers, 777-794.

Klitgaard, Robert. 1988. Controlling Corruption. Berkeley, Los Angeles, London: University of California Press.

Klitgaard, Robert, Ronald Maclean-Abaroa, and H. Lindsey Parris. 2000. Corrupt Cities: A Practical Guide to Cure and Prevention. Oakland, California: CS Press.

Komisi II-III DPR RI (Commission II and III, the House of Representatives). October 3, 2006. Laporan dan Rekomendasi Panja Penegakan Hukum dan Pemerintahan Daerah (Report and Recommendation of Law Enforcement and Local Government Working Committee). Jakarta: The House of Representatives of the Republic of Indonesia.

KPPOD website (Komisi Pemantauan Pelaksanaan Otonomi Daerah, Monitoring Commission on the Regional Autonomy Implementation). Database Perda (Local Regulation Database). 2006, Nov 18.

Kuncoro, Ari. 2002. “The New Laws of Decentralization and Corruption in Indonesia: Examination of Provincial and District Data.” Presented at the IMF Research Department, Washington, D.C.

Liddle, R. William. 2006. Indonesia. In Shively, ed. Comparative Governance: Political Structure and Diversity Across the Globe. USA: McGraw-Hill Primis.

Manion, Melanie. 2004. Corruption by Design: Building Clean Government in Mainland China and Hong Kong. Cambridge and London: Harvard University Press.

Mujani, Saiful, and R. William Liddle. “Leadership, Party, and Religion: Explaning Voting Behavior in Indonesia.” Comparative Political Studies. Forthcoming.

Myrdal, Gunnar. 2002. “Corruption as a Hindrance to Modernization in South Asia.” In Arnold J. Heidenheimer, and Michael Johnston, eds. Political Corruption: Concepts & Contexts, 3rd ed. New Brunswick and London: Transaction Publishers, 253-264.

Przeworski, Adam, Michael E. Alvarez, Josẻ Antonio Cheibub, and Fernando Lumongi. 2000. Democracy and Development: Political Institutions and Well-Being in the World, 1950-1990. Cambridge, New York: Cambridge University Press.

Rose-Ackerman, Susan. 1999. Corruption and Government: Causes, Consequences, and Reform. New York: Cambridge University Press.

Shleifer, Andrei, and Robert M. Vishny. 1993. “Corruption.” Quarterly Journal of Economics, 108(3), 599-617.

Thee, Kian Wie. 2002. “The Soeharto Era and After: Stability, Development and Crisis, 1966-2000.” In Howard Dick, et.al., eds. The Emergence of a National Economy: An Economic History ofIndonesia, 1800-2000. Australia: Allen and Unwin.

TI (Transparency International) website. TI Corruption Perception Index. , 2006, Nov. 10.

UNODC (United Nations Office on Drugs and Crime). Why a Global Programme Against Corruption? 2005, Nov. 2.

World Bank website. Worldwide Governance Indicators Country Snapshot. 2006, Oct. 5.

End Notes:

[1] I thank Prof. Richard Gunther, Prof. R. William Liddle, and Dinissa Duvanova for their helpful insight and advices.
[2] Law No. 32/2004 on Local Government.
[3] Korupsi Dana APBD Rp. 454 Miliar (Corruption of Local Budget Reaches 454 Rupiahs). Sept 18, 2004. Jawa Pos.
[4] This study is intended as a draft of my dissertation proposal. The end of the period of study, year 2009, is determined by the time when the field-study will be started.
[5] The index has not been precisely constructed and will be developed later by adapting the Ranney’s index into Indonesian context.
[6] Prof. Richard Gunther suggested this estimator.
[7] Law no. 31/1999 on Corruption Eradication as amended by law no. 20/2001.
[8] Personal communication with Dinissa Duvanova, November 22, 2006.

Indonesia’s Democracy, Governance and Economic Development: 1949 to Present

Karaniya Dharmasaputra
Dept. of Political Science, the Ohio State University
Autumn, November 29, 2006

Introduction

At a seminar hosted by the Australian National University, September last year, the now Indonesian coordinating minister of economic affairs, Boediono, represented the wariness of many Indonesians today. He raised an issue that demands a thorough consideration from any advocate of today’s Indonesian democracy.

Boediono writes as follow (2005, 315-316),

“One historical truth is that the dynamics of politics and those of economics are not naturally in harmony with each other and, when they are not, setbacks in both politics and economics eventually result… [E]conomic performance ...depends on whether a supportive political environment exists… Indonesia currently has to deal with economic problems very similar to those of the second half of the 1960s, but within a political environment more akin to that of the 1950s… [I]n contrast with the situation in the 1960s, all this has to be done within the rather chaotic atmosphere of a democracy in the making.”

He argues further that three political environments must exist to secure the country’s economic growth. First is the circumstance that is able to avoid the short term bias of politics. The second factor is the insulation of professional economic policy making process from overweighed political pressure. And thirdly, the presence of a certain political environment in which government could act decisively and responsively in the economic field. More importantly, he also underlines to never again ignoring the importance of institution and good governance development (Boediono 2005).

In this paper, I will try to show that it is the governance the key factor for Indonesian economic development and that its role is more significant than the importance of insulating economic policy making process from the politics as Boediono argues. In securing Indonesian economic development, democracy and good governance must be pursued simultaneously. I hypothesize that in the absence of good governance, or by not undertaking those three tasks simultaneously, government would fail to secure a sustainable economic development.

Here, I separate governance out from democracy in order to enable us examining its individual impact on economic development. I view governance as a bridge linking democracy and economic development. Without a robust governance-bridge, a burgeoning democracy would not transform in a wealthy economy. Another reason, we have also sees how democracy and good governance have their own paths. Nations can have flourished democracy and yet at the same time lag behind in good governance. Today’s Indonesia is the very example of such phenomenon. The country is highly praised for having free elections and promoting press freedom and yet it is still at a very low level in corruption and rule of law.

Most African and several Asian countries’ experiences have well shown the importance to distinguish the role of those two variables. Some African countries have enjoyed a high level of democracy and yet they still fail to achieve a satisfactory economic growth. In contrast, several Asian countries such as Singapore and Malaysia are always positioned at the bottom of democracy index, but they are able to maintain the impressive economic developments. The answer for that empirical puzzle, I would argue, is the level of good governance. Here I define good governance as an effective political framework that is conducive to economic development and that is marked by the rule of law and transparent, accountable, and efficient state administration (Hirst 2000).

In trying to show the merit of that argument, I structure this paper as follow. I will assess the impact of democracy and good governance level on the Indonesian economic development at four distinct periods by borrowing William Liddle’s periodization (2002), i.e. the Parliamentary Democracy (1949-57), Guided Democracy (1957-65), New Order (1965-1999), and Presidential Democracy (1999-present).[1]

The Parliamentary Democracy (1949-57).

Indonesia started its history as a democratic country. Adopting the continental European-style constitution, the new born state chose parliamentary democracy as its political system and as William Liddle put it, this was a period when the country was led by “a genuinely democratic regime” (2002, 11). However, divided along the deep social-cleavages, the prevailing multi-party system (28 parties gained the parliamentary seats through the 1955 election) resulted in a divisive, unstable, and high turnover of government (Liddle 2002, Feith 1962). The ideological battle was intense and the 1955 election campaign only deepened the socio-religious and ethnic tensions. Over nine years, since Hatta’s administration started in December 1947 until March 1957 when the second cabinet of Ali Sastroamidjojo ended, seven cabinets had taken and left offices interchangeably, posing the threat of government immobilism.

Most interestingly, in line with the flowering democracy, the country enjoyed a fairly high level of good governance. The check and balance mechanism was in place. The central bank was structured as an independent body to the cabinet (Thee 2006). The judiciary system was relatively clean and maintained its integrity. The level of corruption was low. And the press enjoyed their freedom (Feith 1994).

The result was a positive economic development. Notwithstanding it grew modestly, there were major achievements in education, health, exports, control of inflation, and other macro-economic policies (Feith 2004). A sound economic plan was also established since 1956 which was called the Five Year Plan. It was oversight by the National Planning Council, a professional and technical body dominated by Western trained economists (Mackie 1971, Thee 2006). These are a group of what Feith terms “the administrators,” namely “men with administrative, legal, technical, and foreign language skills, such as are required for the running of a modern state” (Feith 1962, 24). In addition to that characterization, Thee Kian Wie views them as “pragmatic men who, while attracted to socialist ideals, did not adhere to any rigid ideological doctrine” (2005, 6). The achievement in this period was attributable to their key role of steering the country.

Despite some variations of the economic advancement within this period, the aforementioned positive valuation holds. Despite the cabinets of 1953-57 were indeed less successful in achieving the administrative and economic tasks than their predecessors did, the overall economic performance in this period was brighter than that of the Guided Democracy, as I will show later (Feith 1962).

However, such modest growth did not sufficient to satisfy the domestic aggregate demand that grew rapidly at the level approximately 10 percent per annum during 1952-1957 (Feith 1962). This became the major cause of the death of the Parliamentary Democracy. According Jamie Mackie’s assessment, the administrators of the parliamentary democracy were “trying to tackle basic administrative, military and economic problems with some degree of success, but not enough to create ‘a new rule-based politics’ and to stabilize the post-revolutionary situation of ferment and high expectations” (1994, 28).

The Guided Democracy (1957-1965)

In this period every thing runs in the reverse direction. The parliamentary crisis of early 1957, the regionalists’ armed rebellions, and the dispute over West Papua provided great momentum for Sukarno and the military leaders to overthrow the new born democracy. Playing the revolution-not-over-yet spirit over the mass public, Sukarno established what he dubbed the Guided Democracy; a euphemism of his personal-authoritarian rule backed by the General Nasution led army. The democracy died young.

In line with the consolidation of Sukarno’s authoritarian regime, good governance collapsed. In February 1960 Sukarno positioned Chairman of the Supreme Court as a member of his cabinet. Six months later he denounced the principle of separation of powers. Press freedom was immediately repressed (Feith 1963). The central bank’s independence came to the end. Bank Indonesia was transformed as a subordinate and a mere financial instrument to support Sukarno’s ambitious mega-projects (Thee 2006). The level of corruption increased significantly and, more adversely, became institutionalized since 1958 (Feith 1963).

The so called “solidarity makers” took over the administrator’s role in steering the country. Herbert Feith (1962) defines these persons as leaders who exercised their roles primarily by combining traditional and charismatic authorities. Belong to this group are political propagandists and military, political parties, regional, or religious leaders. Meanwhile, Benjamin Higgins, the then United Nations economic envoy to Indonesia, categorized them as “communists, nationalist, conservative, and isolationists” (Mackie 1971).

Not surprisingly, the resultant of these forces is an economic calamity. The solidarity makers subordinated almost every economic policy under Sukarno’s political agenda. The Five Year Plan and National Planning Bureau were replaced by the highly political Eight Year Plan and National Planning Council (Mackie 1971).

The economic indicators were suddenly in a free fall. The annual growth of net national product during the period of 1958-65 shrank to only 1.7 percent. In 1965 the inflation reached over 600 percent. While the gross government increased roughly seven times during the period of 1961-1964, the gross revenues rose only less than five times. The blame of this breakdown could be fairly correlated to the ouster of the administrator. As noted by Thee Kian Wie, “was the logical outcome of poor economic policies which had become a major feature of government policy since the late 1950s” (2006, 7).

Comparing the economic development between two periods, 1953-59 and 1960-65, results in a striking contrast. Almost all economic indicators in the latter period were plummeting. Except a slight increase on the manufacturing, the average annual rates per sector entirely crashed.

[Table 1: Average Annual Sectoral Rates of Growth at Constant Prices (1953-65)]

The New Order (1965-1999)

At first, the New Order represented the anomaly of Asian democracy-economy relationship. The level of democracy seemed independent to the Asian Tigers’ booming economies. Suharto’s Indonesia was a continuation, or more aptly the reinforcement, of Sukarno’s authoritarian rule. Labeled his dictatorship with another euphemism, Pancasila Democracy, Suharto transformed the multi-party system into a practically monolithic party system under his political machine, Golkar (the Functional Group). Two other parties, PPP (the Unity and Development Party) and PDI (the Indonesian Democratic Party), were no more than insignificant figurants at the political stage and were tightly co-opted and controlled by the regime.

Despite the low level of democracy, no one can deny the New Order achievement in the economic field. Supported by a team of Western educated economists led by Professor Widjojo Nitisastro the New Order restored the ruined economy. Only within four years, the hyper-inflation of 636 percent in 1966 was stabilized to nine percent. During the same period the average annual growth rate of GDP reached 6.7 percent. This impressive achievement remained in place until the end of the New Order. Between 1992 and 1996, the annual economic growth was recorded at 7.6 percent on average. The percentage of population below the poverty depleted from over 40 percent in 1978 to 11.3 percent in 1996, before it rose again to 24.2 percent in 1998 after the country was hit by a disastrous economic crisis (Kuncoro and Resosudarmo n.d.).

[Figure 1: Population Below the Poverty Line, 1976-98]

The prominent role of Western educated economist and technocrat. The so called Berkeley Mafia was not without competitor. The nationalistic and pro-state protection “technicians” persistently challenged their influence over the economic policy making. However, under a strong Suharto’s political umbrella provided, the technocrats won the overall fight in designing and implementing sound economic policies (Boediono 2005, Kuncoro and Resosudarmo n.d., Liddle 2002). In summary, the greatest contribution of the New Order, as William Liddle concludes, “...was to improve the capacity and autonomy of the state in the area of economic policy formulation and implementation” (2006, 54).

Whereas analysts on Indonesia typically do not pay much attention to the problem of lack of governance, I would contend that that is indeed the key variable of the collapse Indonesian economy. The failure of the New Order in safeguarding good governance provides a proof for my argument.

Besides coercion and persuasion, another major mean the New Order employed to maintain its reign was by patronizing its bureaucracy. This, in turn, induced a rampant corruption. The absence of independent judiciary system, central bank, and other check and balance mechanisms (press censorship was also vigorously applied) aggravated the stadium of the cancer (Kuncoro and Resosudarmo n.d., Liddle 2002)..

And the economic crisis of 1997 was no more than a confirmation of this long neglected symptom. The economic contraction reached to 13.6 percent, much worse than that of 1963 when the economy shrank to three percent (Thee 2006). It became obvious that the major cause of the sudden collapse was the weak institutions, poor governance, and rampant corruption; the fields that had long been ignored by the academia (Boediono 2005). This economic disaster has shown a very expensive lesson that merely insulating economic policy making policy from political disturbances is not enough and more importantly, that good governance does matter.

The Presidential Democracy (1999-present)

The post-Suharto democracy seems to be a half-reincarnation of the 1950s parliamentary democracy. Now taking form the presidential system, the multiparty system reemerges. In 1999 and 2004 general elections 48 and 24 political parties participated, respectively.

Most indices praise the achievement of today’s democracy. The Freedom House Index, for example, since it was firstly launched in 1973 until 2005 only positioned Indonesia as best as partly-free. This year, for the first time, the index inaugurates the country as a completely free state. Three main reasons are behind the judgment: The improvement of political rights and civil liberties, the success of unprecedented 2004 direct presidential election, and the signing of the Aceh peace accord. On similar tone, Asia Democracy Index of 2005 rank Indonesia as one of the developed democracy in the region (ARDA website). The World Bank’s Governance Indicator shows a similar valuation. According to this index, the current level of voice and accountability has risen significantly compared to that in Suharto’s era. However, it still marks the red signs on political stability and violence.

It is widely argued that the current political liberalization has been inducing disturbances to economic development. Economists blame political reform for hampering economic development by diffusing the decision making process and reducing the cabinet cohesiveness. Another milestone of reform, the decentralization policy that was implemented since 2001 exacerbates those problems (Boediono 2005, Kuncoro n.d.).

More empirical studies are needed to examine the causal relationship among level of democracy, good governance and economic growth in this reform era. I would hypothesize that the overall outlook is in fact not entirely gloomy. Despite some negative sides, we can see positive indications emerging from numerous sectors. Here we are facing a confusing ambiguity and the net impact is not entirely clear.

Surveying 1800 corporations across the country, Ari Kuncoro (2002) found a decline of the level of bribery (as a percentage to total production cost) reported by the local business leaders after the decentralization law enacted. However, he notes that the finding should be reserved and it needs to be further examined due to a suspicion that the decline of bribery might related to a drop in corporation’s profit due to the crawling economy following the 1997 severe economic crisis. Also noteworthy that another Kuncoro’s finding indicates that the decentralization also results in the increase of business uncertainty.

The World Bank’s governance indicator displays a positive trend, in a quite consistent manner, on the government effectiveness, requlatory quality, rule of law, and control of corruption, in which the last two are the weakest. Nonetheless, all parameters are still below those in the New Order era. In regard corruption, the well known Transparency International – Corruption Perception Index shows a similar pattern. Despite a steady increase during the recent years, the latest index scores Indonesia 2.4 (1 for the lowest), still a bit worse than 2.72 in 1997 (TI website).

[Figure 2: Governance Indicator on Indonesia (1996-2005)]

It is tempting to draw a line between the increase of political competition and the climbing corruption trials against politicians at the local stage. According to the Ministry of Home Affairs record, between 2004 and 2006 67 heads of local government or their deputies and 1,062 local parliament members has been indicted on corruption charges. More interestingly, in reaction to such developments, a group of legislators at the national level have petitioned government to stop the wave of trials against their local colleagues. They charges that the prosecutions are merely the product of political fight and are skewed by narrow interests (Komisi II-III DPR-RI 2006).

On the other hand, however, there is also an indication that the frequency of local budget misuses have increased in this period. The national coalition of anti-corruption NGOs reports that during 1999-2004 the corruption upon local government budgets in 18 provinces has reached Rp.454 billions or equivalent to $45.4 millions.[2]

In general, the economy has been stabilized and starts growing again in a modest rate. From minus 13.13 percent in 1998, after hit by the severe crisis, the economic growth is expected to reach the level six percent this year. Inflation displays a resemblance; from 77.63 percent in 1998 it dropped to only five percent in 2003. Last year, due to the fuel subsidy reduction policy that resulted in a dramatic price increase, the inflation rose again to a two digit level, 15.6 percent. Yet analysts predict that it will be decreasing to eight percent this year.

[Figure 3: Investment 1996-2003 (% GDP)]

Despite those positive outlooks, as Herbert Feith assessed the inadequacy of the Parliamentary Democracy elaborated previously, William Liddle reminds us that today’s economic advancement also might not be high enough to satisfy people’s need (Usindo 2006).

The clearest indication for Liddle’s warning comes from the investment statistics. Dropped steeply after the economic calamity in 1997, the investment spending in 2003 remained at the lowest bound, at the same level of that in 1999. Overall, the actual investments grew only by a small 2.2% and the investment-to-GDP ratio has fallen to its lowest level since the early 1970s. It declined from 18.2% in 2002 to 17.8% in 2003, and further to 17.4% in the first quarter of 2004 (Kuncoro and Resosudarmo n.d.). As well, the poverty rate is still high, above 15 percent during 2000-02 and is expected to rise again in 2006 following the high inflation post the fuel price hike.

[Figure 3: Investment 1996-2003 (%)]
[Figure 4: Population Below the Poverty Line, 1996-2002 (%)]

Lessons from the History

We have seen the wisdom of history. During the Parliamentary Democracy era, the economy grew when democracy and good-governance were in place. However the failure to achieve a sufficient level of economic development and to establish a stable polity had created a momentum that brought Indonesian democracy to its end. From the New Order period we learn that a stable tightly restrained democracy could not guarantee a sustainable economic growth. The 1997 economic disaster was an expensive lesson that has taught us the substantial role of governance and institution development. Without nurturing democracy and good governance, the success of New Order’s economy only ended in a fatal crash and dragged the country’s economy back almost to the level of thirty years ago. Must also be underlined, these two periods reveal the importance of Boediono’s demand of a sufficient room for administrator to play its professional role. However, merely insulating and providing a strong political umbrella for economic policy making is not sufficient.

[Table 2: Democracy, Governance, and Economic Development per Period]

Indonesia therefore can not follow the anomalous Singaporean and Malaysian model. The two countries enjoy a strong economic growth and good governance without having a high quality of democracy. Indonesians should have learned that the country lost its good governance along when it surrendered democracy. And, without these two foundations, the economy was always at high stake. Democracy, good governance, and economic development should be pursued simultaneously.

In line with that argument, Yudhoyono’s administration seems to have been on the right track. His two predecessors failed in fulfilling those three joint tasks. In the era of President Abdurrahman Wahid, politics detracted economic policies and there was not adequate space for administrators. Instead, he promoted the nationalistic-anti Western economists to several key portfolios in the cabinet. The libertarian professional economists gained their place again when President Megawati Soekarnoputri took over the office. During this era, politics was much more stable. However, her lack of commitment on good governance and anti-corruption resulted in a failure in maximizing economic growth.

President Yudhoyono, at least until today, pursues those three aspects simultaneously. His administration launches a rigorous anti-corruption campaign that has shown its deterrent effect, nonetheless has also revealed numerous side effects. The technocrats are still in place and the overall economic picture is promising. Politics, for the time being, is relatively stable, thanks to the success of Vice President Jusuf Kalla’s maneuver in taking over Golkar Party. However, in the long run Yudhoyono is always in a vulnerable position in securing parliamentary support. The recent retraction of the labor bill shows the picture very clearly. Despite the fact that the bill is badly needed in attracting investment and capital inflow to the country, Yudhoyono’s administration chose to bow out before the strong pressure from the parliament and interest groups.

End Words

Searching political and governance format that would promote economic development is indeed a critical task in securing Indonesia’s new democracy. Adam Przeworski (2004) has shown its significance. Examining 141 countries from 1950-1990, he concludes that democracy is more vulnerable to economic crisis than dictatorship. When economy grows, the average of life expectancy of democracy is 68 year and that of dictatorship is 53 years. However, the life span of democracy is only 18 years, compared to 40 years for dictatorship, when economy is gloomy.

Does it apply to Indonesia? Public opinion studies indicate most Indonesians do not satisfy with today’s economic development. Numerous nation-wide surveys conducted between 1999 and 2006 reveal that the vast majority of respondents, over 60 percent, believes that economy has been getting worse from year to year (Mujani 2006). Recently, between November 2004 and September 2005, public dissatisfaction on the economic condition jumped from 21 percent to 47 percent (Liddle and Mujani 2006).

Nonetheless, the support on democracy is persistently high. The same surveys display that 68-74 percent of respondents has been overwhelmingly stating their belief that democracy is the best system for the country. Another survey focusing on Indonesian Muslims shows a consistent pattern (LSI 2006). The 82 percent of respondents stands on the similar belief.

However, I would argue, upon those positive scene a more careful interpretation should be taken. The figure could be highly inflated due to the pro-democracy bias among Indonesians. Despite living more than 40 years in the authoritarian rules, most Indonesians have always been taught that democracy a la Indonesia is the best political system in oppose to the evil of dictatorship or liberal democracy. We can not also forget that Sukarno and Suharto labeled their authoritarian rule in the name of democracy; the Guided Democracy and the Pancasila Democracy. Thus, most Indonesians hardly perceive democracy negatively. This might mean that the true correlation between economic efficacy and democracy support is still not conclusive.

Taking that into account, we should finally consider William Liddle’s warning. Liddle argues that the country’s democracy will depend on economic success (Usindo 2006). The stake is high. The economic failure, he concludes, would provide the military a legitimacy to reverse the today’s democracy.

* * *

References

Alliance for Reform and Democracy in Asia. 2005. Asia Democracy Index Report 2005. <http://www.asiademocracy.org/content_view.php?section_id=1&content_id=566> 2006, Nov. 10.

Boediono. 2005. “Managing the Indonesian economy: Some lessons from the past.” Bulletin of Indonesian Economic Studies 41: 309-24.

Feith, Herbert. 1962. The Decline of Constitutional Democracy in Indonesia. Ithaca and London: Cornell University Press.

Feith, Herbert. 1963. “Dynamics of Guided Democracy.” In Indonesia, ed. Ruth T. McVey. New Haven: Southeast Asia Studies, Yale University. 309-409.

Feith, Herbert. 1994. “Constitutional Democracy: How Well Did It Function?” In Democracy in Indonesia: 1950s/1990s, eds. David Bourchier and John Legge. CSEAS, Monash University. 16-25.

Glassburner, Bruce. 1971. The Economy of Indonesia. Ithaca and London: Cornell University Press, 70-98.

Hirst, Paul. 2000. “Democracy and Governance.” In John Pierre, ed. Defining Governance. London: Oxford University Press, 13-35.

Kuncoro, Ari. 2002. “The New Laws of Decentralization and Corruption in Indonesia: Examination of Provincial and District Data.” Presented at the IMF Research Department, Washington, D.C.

Kuncoro, Ari, and Resosudarmo, Budi P. n.d. “Understanding Indonesian economic reforms: 1983-2000.”

LSI (Indonesian Survey Institute). 2006, October. “Prospek Islam Politik (The Prospect of Political Islam).” Jakarta: LSI.

Liddle, R.William. 2002. “Indonesia.” In Comparative Governance, ed. Phillips Shively. Primis/McGraw-Hill. 3-70.

Liddle, R. William, and Saiful Mujani. 2006. “Indonesia in 2005: A New Multiparty Presidential Demoracy.” Asian Survey, 46(1), 132-139.

MacIntyre, Andrew and Resosudarmo, Budi P. 2003. “Survey of Recent Developments.” Bulletin of Indonesian Economic Studies 39 (2): 133–56.

Mackie, Jamie. 1971. “The Indonesian Economy, 1950-1963.” In The Economy of Indonesia, ed. Bruce Glassburner. Ithaca and London: Cornell University Press. 16-69.

Mackie, Jamie. 1994. “Inevitable of Avoidable? Interpretations of the Collapse of Parliamentary Democracy.” In Democracy in Indonesia: 1950s/1990s, eds. David Bourchier and John Legge. CSEAS, Monash University. 26-42.

Manning, Chris and Roesad, Kurnya. 2006. “Survey of Recent Developments.” Bulletin of Indonesian Economic Studies 42 (2): 143-70.

Mujani, Saiful. 2006. “Menkonsolidasikan Demokrasi Indonesia: Refleksi Satu Windu Reformasi (Consolidating the Indonesian Democracy: The Reflection on Eighth Year of Reform).” Jakarta: LSI (Indonesian Survey Institute).

Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub, and Fernando Limongi. 2004. Democracy and Development: Political Institutions and Well-Being in the World, 1950-1990. New York: Cambridge University Press.

Usindo. 2006. “How Much is Enough? Assessment of the SBY Administration Two Years Later.” Conference Summary. Washington, D.C.

Thee, Kian Wie. 2006. “Indonesia’s Three Economic Crises in the Twentieth Century.” Leiden: KITLV Press. Forthcoming.

Transparency International. TI Corruption Perception Index.

End Notes:

[1] Liddle categorizes the two year period between 1957 and 1959 as a transition period from the parliamentary democracy and the guided democracy. In this paper, to simplify the periodization, I include the two year into the guided democracy due to the consideration that Sukarno and the military had played a dominant role in the then Indonesian politics.

[2] Korupsi Dana APBD Rp. 454 Miliar (Corruption of Local Budget Reaches 454 Rupiahs). Sept 18, 2004. Jawa Pos.

How Corruption Distorts Welfare Economic Policy: A Case of the Cash Transfer Program to Compensate the Kerosene Subsidy Reduction in Indonesia

Karaniya Dharmasaputra
Master of Public Policy Program, the George Washington University, US
Autumn, December 1, 2005

Introduction

Why does the free market economy fail to replicate its success in many developing countries? This question has been haunting developmental economists for many years and the answer is still inconclusive. Nonetheless, it is clear enough today that the traditional economic models are insufficient and that they were built on assumptions that are too good to be true for the Third World context. In underdeveloped economies information is far from free and transaction costs are mostly high. In other words, institution matters.

Within this framework, as I will argue later, another determinant factor should also be taken into consideration: corruption. As evidence clearly shows how corruption hinders economic development, one who focuses his or her works on developing economies must be stunned seeing how economists place corruption merely as a marginal variable. I will try to show the magnitude of how corruption distorts the welfare economic policy by using a case of the cash transfer program in Indonesia.

In this paper, corruption is defined as "the behaviour of private individuals or public officials who deviate from set responsibilities and use their position of power in order to serve private ends and secure private gains" (Lebanon Anti-Corruption Initiative Report 1999 in UNODC website). Thus, the scope of corruption is wider than moral hazard.

The Reform Failures and the Role of Institutions

Evidence has shown how the reform toward a free market economy in Russia and Eastern Europe functioned poorly. Gerard Roland (2002) pointed out that even though those economic systems have been liberalized, success could not be guaranteed. The massive privatization in Russia only wound up in another inequality. Roland concludes that several other factors beside the presence of the free-market also determine the economic success. One of those is the preexisting robust social networks as shown by the pivotal roles of the Catholic Church and the trade unions in Poland’s economic reform. Meanwhile, Robert Nelson (2001) views the lack of social capital, as represented in dishonest and corrupt transactions, as the primary causes of the failure.

In that context, institutional economics offers a more compelling framework. Nobel laureate Douglas North (1994) challenges the standard paradigm saying that institutions do not matter and equilibrium was simply determined by the laws of supply and demand. He emphasizes how low transaction costs are very essential for a productive economy. Yet, most world economies, in fact, are imperfect and are characterized by high transaction cost, and “when it is costly to transact, then institutions matter” (p. 360). In North’s eyes it is not only competition that could reduce transaction costs, but also institutions. Coercive enforcement by a judicial system is one of its important features. As institution grows in a time function through the adaptive-efficiency framework rather than the allocative efficiency, the stagnating economies then can not be automatically transformed only by simply plugging in the free market model.

Parallel with North’s argument, Joseph E. Stiglitz (2001), another Noble laureate, challenges the second too-wonderful assumption of the competitive equilibrium paradigm, free information. He argues that in the real world of economy, where there is no perfect and free information, none of the traditional theorems are relevant. The economies with information imperfections would not ever achieve Pareto efficiency, even though the cost of obtaining the information is taken into account. Transparency, he emphasizes, is one of the determinant factors in economic development.

Institutional reforms therefore become a significant issue. And as listed by Besley and Burgess (2003), promoting accountability of the government is one of the six reforms needed for reducing poverty and inequality.

How Corruption Defects Welfare Economy

Corruption is indeed a clear and present danger for economic development. It blocks information, raises transaction costs, and hence distorts welfare economic policy substantially. A study of the World Bank Institute (2004) estimates more than $1 trillion is paid in bribes every year worldwide, in both developed and developing countries. This figure does not include embezzlement of public funds or theft of public assets and does not mention the losses in investment and the delays this causes in the development of poor countries. A model developed by Paulo Mauro (2005) concludes that a one standard deviation (2.38) improvement in corruption index is associated with over a 4 percentage point increase in its investment rate and over a 0.5 percentage point increase in the annual growth rate of per capita GDP.

Indonesia, the sixth most corrupt country in the world according to the 2005 Corruption Perception Index of Transparency International (CPI-TI), suffered a 30 percent loss, equivalent to Rp.118 trillion, of the total of its national budget in fiscal year 2003. According to the Indonesian Supreme Audit Agency, between 2001 and 2003, irregularities and leakages have affected some $60 billion of the administration and state enterprises’ budget (Bappenas, n.d.).

Corruption also adversely affects income distribution and increases poverty (Gupta et al., 2002). Roughly cross-examining the level of corruption with the poverty rate reveals an interesting insight. For this purpose, this paper uses CPI-TI as the measurement of countries’ corruption and PovcalNet-World Bank for the poverty rate assessment. The 2002 data is used since this is the latest data available in the PovcalNet database. Not all countries indexed by the CPI-TI are also found in the PovcalNet database. Then, only twenty countries found in the PovcalNet database are ranked by the CPI-TI within two groups: the ten most corrupt countries (Tanzania – Bangladesh) and the other ten least corrupt countries (Chile - Lithuania). The CPI indexes the countries from 0 to 10, with 0 representing the most corrupt country. The PovcalNet measures the poor-head percentage of the total population using the “$1 a day” poverty line, the default poverty line of $32.74 per month at 1993 Purchasing Power Parity.

Figure 1 shows the result. Despite several intriguing outliers, in general the graph indicates a positive relationship between corruption and poverty—the less corruption, the less poverty. A more thorough study is certainly needed to examine this rough finding.

[Figure 1 is here]

Theory says that competitive economies leads to a Pareto-efficiency and that Pareto-efficient resource allocation can be reached by compensating variation. The compensating variation for a price change is the size of the budget change under the new conditions that is necessary to compensate the consumer loss and to restore the consumer to the initial utility level. In other words, the amount of compensation must equal the loss in consumer surplus (Friedman, 2002, and Weimer et al., 2005). Yet, as I will show in the following section, corruption would significantly threaten this theorem.

Evidence from the Indonesian Compensation Program

Forced by the skyrocketing international price of oil, on September 30, 2005, the Indonesian government announced a dramatic increase in domestic fuel prices. As of October 1, 2005, the fuel prices were raised by a weighted average 114 percent (World Bank, 2005). The highest increase was on household kerosene price which has risen by 186 percent to Rp.2,000 per liter, up from Rp.700 per liter.[1] This paper focuses on kerosene since in Indonesia, kerosene is a necessity for the poor, especially for cooking and lighting, and thus a dramatic increase will certainly hit their economic conditions.

Those price increases were a result of the government policy that substantially reduced the subsidy on the fuel price. In Indonesia, the fuel prices are administered by the government. As the oil world price hikes, the subsidy burden threatens the country’s monetary and fiscal sustainability. With the fuel price in a range of $60 to $70 per barrel, if the price adjustment was not made, the government fuel subsidy would have reached more than Rp.113.7 trillion or more, and the budget deficit would have expanded to as much as Rp.46.3 trillion or 1.7 percent of GDP (Menneg PPN, 2005; World Bank, 2005).

Realizing the dramatic increase will adversely affect the income of the poor, at the same time the government also launched a cash compensation program. With this unprecedented program, the government projects the compensation program would make the poor to be better off. The government provides a cash transfer of Rp.100,000 per quarter to each of 15.5 million poor households or to 62 million individuals; they who earn Rp.175 thousand per month or Rp.700 thousand per household. The total budget spent for this program is Rp.1.55 trillion per month (Menneg PPN, 2005). According to the 2002 National Socio Economic Survey, the poor consume kerosene 83.3 percent of their total fuel consumption. Thus, proportionately to this, the cash transfer fund to compensate only the kerosene price increase equals Rp.83.300 per month or Rp.1.29 trillion per month in total.

The other main objective of the compensation program is to create a better income distribution scheme. The previous fuel subsidy system heavily benefited the rich rather than the poor. As shown in Table 1, 75 percent of the kerosene subsidy in 2002 went to the middle and wealthy households. This implies that the kerosene subsidy was poorly targeted and tended to increase inequality.

[Table 1: Fuel Subsidy Distribution by Household Group and Figure 2: Impact of the Reduction of Kerosene Price Subsidy]

The impact of the kerosene subsidy and the cash compensation program is depicted on Figure 2. Since the supply price is regulated by the government, the Indonesian kerosene supply is almost perfectly elastic and hence its schedule could be assumed to be a horizontal line. The price increase shifts the supply schedule from S0 to S1.

On the demand side, according to the government’s estimate, every poor household consumes, on average, 30 liters kerosene per month (Menneg PPN, 2005). It means the aggregate monthly consumption of poor and near poor household is approximately 465 thousand kiloliters per month. A World Bank study, using the 1996, 1999 and 2002 Indonesian National Socio Economic Survey (Susenas) data, estimates the price elasticity of demand of the household kerosene in Indonesia is -.602.[2]

The demand function is defined through the slope estimate and the linear approximation methods (Boardman et al., 2001). Knowing the price elasticity of demand is -.602 and considering the analysis is dealing with a large change in kerosene price, from Rp.700 to Rp.2000 per liter, the quantity demanded after the October increase is computed by the Arc formula. The new quantity demanded resulting from the October price hike, holding all else constant, thus would be approximately 220.14 thousand kiloliters per month. Given the price and quantity data computed above, the function of the inverse demand curve equals: P = 3,168.8 - 0.0001 Q.

At this point, our main question emerges: Could the compensation program pay off the consumer loss? Compensating theory says that the Pareto efficient allocation is reached if and only if the consumer loss caused by the policy could be restored by the compensation provided (Friedman, 2002). Thus, the amount of compensation necessary to restore the consumer to the initial utility level must be at least equal to the loss in consumer surplus under the compensated demand curve as represented by the area BCED.

The cash transfer program induces an income transfer among the poor households and thus shifts out the initial demand schedule, D0, and forms a compensated demand schedule, D1. The amount of the cash subsidy pushing out D0 is discounted by the kerosene price increase contribution to the inflation rate. The inflation rate in October 2005 (one month) is 8.7 percent per year (BPS, 2005). Yet, one could fairly suspect that this figure was overstated because of some other interfering factors such as Eid ul-Fitr, the Muslim holiday celebrated on November 3 that always significantly increases the inflation rate. Previous studies also conclude that the fuel price increases would only create a temporary shock on inflation (Ihsan et al., 2005; LPEM-UI, 2005).

Econometric evidence suggests that inflation rate may rise by 0.5 to 0.6 percent a year per 10 percent increase in administered fuel prices (World Bank Jakarta, 2005). Thus, the kerosene price increase, which contributed 49 percent of the total October fuel price increases, would approximately increase the monthly inflation rate by 0.2 to 0.25 percent. The mean value 0.225 percent is used in this analysis.

The net present value of the poor household’s income (after compensated by the government) would be Rp.781.542 per month (= {700,000 + 83,300} / {1 + .225%}). The increase of the real monthly income equals 11.65% (= {781.542 – 700.000} / 700,000). Thus, it could be assumed that the compensated demand function is Q = 596,844,501.4 (1 + 11.65%) -188,349.3 P or P = 3,494.2 - .00001 Q. The new quantity demanded hence would be 289.67 thousand kiloliters per month, the kerosene prices at point A equal Rp.3,538 and the quantity at point E would be 598.19 thousand kiloliters per month. Thus, the estimate of the consumer loss under the compensated demand schedule (BCED) is about Rp.577.1 billion per month. Given the total amount of the cash transfer, Rp.1.29 billion per month, the result would be a net consumer surplus of Rp.711.14 billion per month.

However, corruption threatens that result. Corruption suddenly occurred as soon as the compensation program started. The press reported many complaints by the recipients of how they were forced to give 10 – 50 percent of the aid fund to the local officials in advance as a precondition to obtain the program identification card (Kompas, 2005, October 5-6). Targeting and registration errors exacerbate this problem. Just before the program started Coordinating Minister of the Social and Welfare Affairs admitted that 5-10 percent of the identification cards of the compensation program are not reliable (Kompas, 2005, September 29). The government projected such errors and calculated that corruption would affect at most 28.4 percent of the program beneficiaries (Kompas, 2005, November 1).

Based on this estimate, the potential loss of the cash transfer program is about Rp.365.86 billion per month (= {28.4% * Rp.1.29 trillion}/{1+.225%}). The net consumer surplus then significantly drops to be only Rp.345.3 billion per month or 48.6% less than the initial level (without corruption).

This finding strengthens a study conducted by the Institute for Economic and Social Research, Faculty of Economics, University of Indonesia, or LPEM-UI (2005). LPEM-UI even concluded that the corruption in the compensation program would hit the poor harder than the impact of the previous fuel price increase in March 2005 (only for gasoline and diesel oil). Running a simulation, they concluded that 25 percent leakage of the compensation program to the poor would result in an increase in poverty by 0.55 percent. Meanwhile, the fuel price increase by itself is projected to increase the poverty by only 0.24 percent.

Conclusions

Institutional economics provides a more compelling framework in reforming developing economies. Yet, corruption should be taken into consideration due to its adverse impact in distorting access for information and increasing transaction costs, the two main assumptions of the competitive equilibrium model. Cross examining the level of corruption and poverty in 20 countries reveals an intriguing pattern that corruption positively corresponds to poverty level.

The compensation program in Indonesia shows the magnitude of the distorting effect of corruption to the welfare economic policy. The cash transfer program would result in a net consumer surplus and make the poor households better off even though they have to face a dramatic kerosene price increase. Yet, the current level of corruption and errors (28.4%) is significantly eroding the result and distorting the Indonesian government’s effort to redistribute the fuel subsidy from the high-income household to the poor and establish a better income distribution. ***

Readings:

Bappenas (The Indonesian National Development Planning Agency) (n.d.). Rencana Nasional Aksi Pemberantasan Korupsi 2004 – 2009 (The National Action Plan of Anti Corruption). Jakarta, Indonesia.

Besley, T., and Burgess, R. (2003). Halving global poverty. Journal of Economic Perspectives, 17(3), 3-22.

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BPS (The National Statistics Agency) (2005, November 1). Perkembangan indeks harga konsumen/inflasi (Progress of consumer price index/inflation). Berita Resmi: 52,VIII. Jakarta, Indonesia.

Friedman, L.S. (2002). The microeconomics of public policy analysis. New Jersey: Princeton University Press.

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Ikhsan, M. (2005, October 3). Kebijakan penyesuaian BBM: Mengapa perlu dilakukan? (Why the fuel adjustment policy is needed?). Pacific Link website. Retrieved October 4, 2005 from: http://kolom.pacific.net.id/ind/lain-lain/mohamad_ikhsan/kebijakan_penyesuaian_bbm:_mengapa_perlu_dilakukan.html

Ikhsan, M., Sulistyo, M.H., and Usman, T.D. (2005, March 21). Kajian dampak kenaikan harga BBM 2005 Terhadap Kemiskinan (A study of the impact of the fuel price increase in 2005 toward poverty). Jakarta: LPEM-UI.

Kompas Daily (2005, September 29). 5-10 persen kartu kompensasi BBM salah sasaran (5-10 percent the fuel compensation card are not valid). P.1

Kompas Daily (2005, October 5). Protes warga miskin berlanjut: Dana kompensasi BBM dipungli (Protests of the poor continue: Fuel compensation fund corrupted), p. 24.

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[1] Based on the Indonesian Presidential Decree No.55/2005, the gasoline price was also increased by 88 percent to Rp.4,500 per liter, and the automotive diesel prices by 105 percent to Rp.4,300 a liter.

[2] The author obtained the data from Director of Poverty Reduction, the National Development Planning Agency (Bappenas), Pungky Sumarno, through an email correspondence on November 10, 2005. The coefficient is referred to Molyneaux, J. (2002). Sectoral elasticity in Indonesia: energy. World Bank Office of Jakarta.