Day 4: Indonesia Rebounds


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Graduate School of Asia and Pacific Studies
Waseda University, 16 February 2007

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Day 4: Indonesia Rebounds

  1. 1. Reinventing Indonesia Day 4 Indonesia Rebounds Graduate S h l f A i G d t School of Asia and Pacific Studies d P ifi St di Waseda University, 16 February 2007
  2. 2. Macroeconomic Update
  3. 3. Positive Growth Trajectory Sustained economic growth despite difficult environment Economy is on a steady E i t d > 7% upward trend. Indonesia’s 6-7% performance is very much 5-6% comparable in the region 5.25 % Over the medium term, this 4% acceleration process should continue assuming that all reform programs are implemented. i l t d 2001-2003 2004-2005 2006 2007 - 2009 2010 - beyond Source: CBS . GSAPS-2007-Day4 3
  4. 4. Macroeconomic Update p Indonesia: Economic Growth 1998-2006 Growth steadily recover 2006: reached 5.6%; government 006 a d 5 6%; go consumption and expert driven; 6.5 6.5 5.7 6 5.6 5.6 5.2 4.9 5.1 4.9 4.9 5.1 4.4 investment remains weak. 5 3.8 0.9 1.2 0 Medium Term Percen p.a 1998 1999 2000 2001 2002 2003 2004 2005 2006 – 2007 2009 : 6-7 % p.a 2007-2009 6 7 pa nt -5 – After 2010 : 7+% % p.a -10 Confidence has been restored after -15 15 - 13 8 14.1 13.8- fuel price adjustment. GDP Non Oil and Gass Stock prices are historic high Exchange rates are stable M a rk e t c o n fid e n c e s tre n g th e n Reserves stronger and still increasing R p /U S $ 83=100 11000 1800 10500 s to c k in d e x (R H S ) 1700 Ratings upgraded. 1600 10000 1500 Macroeconomic Stability has been 1400 achieved 9500 1300 1200 Y o y i fl ti inflation d down f from 17% l t last 9000 1100 year to 6% or less this year 8500 E x c h a n g e ra te s (L H S ) 1000 Over Medium Term: 3-4% is the target 900 8000 800 J a n -0 5 M a y-0 5 S e p -0 5 J a n -0 6 M a y-0 6 S e p -0 6 GSAPS-2007-Day4 4
  5. 5. Manufacturing Sector Shows Signs of Recovery Non Oil/Gas Industrial Growth 2005-2006 20.0% 15.0% 10.0% 5.0% 5 0% 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 2005 2006 -5.0% Non Oil/Gas Industries Food Textile Fertilizer Cement GSAPS-2007-Day4 5
  6. 6. Other Macroeconomic Development Fiscal sustainability has been reestablished. D e c lin in g B u d g e t D e fic its (% o f G D P ) Budget deficits has been contained 0% around 1% of GDP -1 % -2 % public debt ratio down to about 40% at -3 % the end of 2006 and will continue falling -4 % R e vis e d b u d g e t to below 30% of GDP in 2011. R e a liz a tio n -5 % B udget -6 % -7 % -8 % FY98 FY99 FY00 FY 01 FY02 FY03 FY04 FY05 FY06 FY07 On spending side (9 m ) Public spending now back to the pre crisis level around 7-8% of GDP but with Public Investment different composition. 8% (% of GDP) Sub-national gov’t control more than 7% Central gov't District 50% of total 6% Province Education spending on the rise and now 5% comparable to the peer countries around 4-5% of GDP 4% Spending on health and infrastructure a 3% also increasing. 2% Commitment for PPP development. 1% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (E) (P) (P) GSAPS-2007-Day4 6
  7. 7. Sustainable Macroeconomic Stability A positive outlook on macroeconomic stability should translate into a reduction of cost of finance 17 % 7% 6.5 % Stabilization of rupiah at stronger 3-4 % level support declining inflation thus providing room for policy rates to decline. CPI inflation: 6.6% 12000 2005 2006 2007 2007-2009 20 Inflation easing toward targeted level 18 10000 16 8000 14 Risks for destabilizing inflation still high: rice price has been increasing 12 6000 10 4000 8 6 since last December. 2000 4 0 2 2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06 Source: Bloomberg & BI IDR/USD Inflation rate yoy SBI 1 month - BI Rate SBI 1 month - BI Rate GSAPS-2007-Day4 7
  8. 8. External Position Remains Promising Current account position has Rise in FX reserves turned around Months USDbn USDbn FX reserves (LHS) ( ) 50% 3 50 Months of import and official debt 9.0 repayment (RHS) 45 8.0 2 7.1 30% % 40 6.6 66 7.0 70 35 5.5 1 6.0 10% 30 5.9 5.0 4.5 5.0 0 25 2001 2002 2003 2004 2005 2006 4.0 -10% 20 36 36 35 -1 32 43 3.0 15 28 -30% 30% 2.0 20 10 -2 5 1.0 Current Account (LHS) Export (RHS) Import (RHS) -50% -3 0 0.0 Source: Bank Indonesia 06* 2001 2002 2003 2004 2005 200 GSAPS-2007-Day4 8
  9. 9. Continued Improvement in External Debt Position External Debt Key highlights 45.0 45 0 80.7 90 0 90.0 40.0 80.0 Debt to GDP ratio decline from 65.7 35.0 70.0 4 2 .1 81% in 2001 to 47% in 2005, and 3 8 .6 56.8 54.2 30.0 60.0 expected to reach 39% in 2006. 3 7 .3 46.0 46 0 25.0 50.0 3 3 .9 3 1 .9 38.6 2 8 .4 2 2 .8 41.4 33.1 There was a significant drop of 2 2 .2 20.0 2 6 .6 40.0 1 9 .5 2 1 .3 15.0 25.8 30.0 DSR in 2005 since there was 32.2 10.0 27.1 20.0 Paris Club moratorium due to 1 4 .6 22.1 22 1 5.0 10.0 tsunami disaster in Aceh. - 0.0 2001 2002 2003 2004 2005 2006* Govt Ext Debt / GDP (LHS) Private Ext Debt / GDP (LHS) Total Ext Debt / GDP (RHS) DSR (LHS) Note : External debt consists of central government, central bank and private debt government Source: Bank Indonesia GSAPS-2007-Day4 9
  10. 10. Improving Ratio of Short T Sh t Term Debt to Reserve D bt t R 35000 120.00% 112.6% 30000 100.00% 25000 73.9% 80.00% 62.0% 57.4% 20000 59.3% 60.00% 15000 45.9% 10000 23.89% 20 74% 20.74% 18.72% 40.00% 40 00% 6.42% 11.29% 20.00% 5000 4.70% 0 0.00% 2001 2002 2003 2004 2005 Jul-06 Short term debt (OM) Short term debt (RM) Short term debt (OM) to Reserve Short term debt (RM) to reserve Note : OM = Original Maturity RM = Remaining Maturity GSAPS-2007-Day4 10
  11. 11. Exchange Rate Modest Appreciation - Low Volatility Average Exchange Rate Highlights Rupiah t bili d d R i h stabilized and average exchange g h g rate during Q3 2006 was Rp. 9,125. Relatively unchanged from Rp. 9,115 in the preceding quarter p gq Average exchange rate in October depreciate 0.26% to Rp. 9174 from Rp 9153 Volatility stable at 0.5% GSAPS-2007-Day4 11
  12. 12. Fiscal Consolidation Outcomes Sovereign Debt to GDP Ratio 100% 90% Compare to Other Emerging Countries 80% Domestic 70.0 63.1 70% 60 0 60.0 59.0 54.4 60% 50.0 46.5 46.5 45.3 45.4 47.3 45.1 42.4 40.9 % dari PDB 50% External 40.0 37.5 2005 2006 40% d 30.0 30 0 2007 30% 20.0 20% 10.0 10% 0.0 Indonesia Malaysia Philippines Thailand 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, World Economic Outlook, Sept 2006 GSAPS-2007-Day4 12
  13. 13. Banking Indicators: Banks Maintaining Reasonable Performance Main Banking Indicators Highlights Average CAR Gross NPL Net NPL 14.0 NPL ratios decline during the course of 23 2006 % 22.4 % 22.5 12.0 Banks ll it li d ith B k well capitalized with CAR at around t d 22 12.1 21.7 21% as of August 2006, far above the 21.5 21.0 10.0 required level of 8% 9.4 8.3 21 8.1 8.7 87 LDR1 relatively stable during 2006 at 8.2 8.5 20.5 20.5 8.0 around 64-65 %. In September 2006 LDR 19.9 5.8 recorded at 65%. 20 19.5 6.0 19.4 19.4 9 Net interest income (NII)2 in September 19.5 19 5 5.1 51 4.8 5.6 4.9 2006 was Rp 6.2 trillion, similar to 19 4.0 December 2005 figure, despite slowing 18.5 3.6 credit expansion 3.0 2.0 18 2.1 RoA stable at around 2.6% with significant 2 6% 1.7 rise in total assets. 17.5 0.0 Qi'06 Q2'06 2001 2002 2003 2004 2005 'Sep 06 1 Loan calculations include channeling loans 2 Calculated as NII for the particular month divided by earning p y g Q assets for the corresponding period GSAPS-2007-Day4 13 Source: Bank Indonesia
  14. 14. Economic Update In 2006 Indonesia settled the remaining debt to IMF amounting $ 7 billion, 4 years ahead. In January 2007, GOI announced the dissolution of CGI. GSAPS-2007-Day4 14
  15. 15. The Problems M Macroeconomic d l i development h not b t has t been f ll followed b d by improvements in the microeconomic (real) sectors; major constraint for economic development. p Lagging investment. Social Impact: increase of p p poverty from 16 % to 17.75 % y (equivalent to 19.1 million poor households in 2006) and 10.85 million unemployed. Tax Policy. Policy GSAPS-2007-Day4 15
  16. 16. The Problems . . . Manpower: labor law, low income, euphoria of freedom of expression (demonstrations and strikes). Infrastructure: inadequate infrastructure constitute a major constraint to economy as well as social life. Unstable and high oil prices in international markets had given impact to socioeconomic life of the people people. Political and security instability impact on economic development, particularly to investment. GSAPS-2007-Day4 16
  17. 17. Outlook 2007 Tabel Projected Economic Growth 2004 2005 2006 2007 W ld O t t World Output Developed Countries 5,3 53 3,2 49 4,9 2,6 5,1 51 3,1 4,9 49 2,7 Global economy US Jepang 3,9 2,3 3,2 2,6 3,4 2,7 2,9 2,1 slowing down Euro Area 2,1 1,3 2,4 2 Asia 8,8 9 8,7 10 Domestic demand China 8 8,5 8,3 7,3 India 5,8 5,1 5 5,6 should be the driver Asean-4 5,5 5,7 5,8 5,4 for economic growth g World Trade Volume 10,6 7,4 8,9 7,6 Impor Public investment Developed Countries 9,1 6 7,5 6 Expor and private Developed Countries p 8,8 , 5,5 , 8 6 investment Inflation Developed Countries 2 2,3 2,6 2,3 Private consumption Emerging and Developing Countries 5,6 5,3 5,2 5 LIBOR on USD 1,8 3,9 5,4 5,5 on Yen 0,1 0,1 0,5 1,1 on Euro Deposit 2,1 2,2 3,1 3,7 Source: IMF GSAPS-2007-Day4 17
  18. 18. Outlook 2007 . . . Economic Growth: 6 – 6,5% (Budget: 6.3%; Consensus around 6 %) Inflation: 6-7% I fl ti 6 7% Policy Rate: 8-9,5% (Budget: 8,5% in current pace; policy rate to go down to becomes 7 5% at the end of 7,5% 2007); a stimulus for reducing bank’s lending rate. GSAPS-2007-Day4 18
  19. 19. Outlook 2007 . . . The Th problem of purchasing power can b bl f h i be compensated in 2007 by: increase of civil servant’s salary servant s salary, minimum wage, consumption credits, good control of inflation and lending rate by Bank Indonesia. The goal of economic development for 2007: reducing unemployment to 9.9 % and number of poor p p people to 16,4 %. GSAPS-2007-Day4 19
  20. 20. Three Policy Packages 1 Investment Law & Procedure Investment 2 Tax & Custom Reform Climate Improvement 3 Labor I L b & Immigration i ti 4 Trade Licenses 5 Cross Sector Strategic Policy Reform 6 Sector Restructuring, Corporatisation and Policy Reform Infrastructure 7 Regulation on monopoly & investment protection 8 Clear separation on the role of policy maker, regulator, contracting agency and operator agency, 9 Coordination Monetary & Fiscal Authority Financial 10 Financial Institution (Banking & Non Banking) GSAPS-2007-Day4 11 Capital Market and SOE Privatization 20
  21. 21. New Reform Packages and Special Programs SME Policy Reform Package Focus on particularly four areas: − Access to Finance − Access to Market − Human Resource Development and Entrepreneurship − Regulatory Reform and Deregulation Poverty Reduction Program Focus 1: Mainstreaming Budget for Poverty Focus 2: Integration and expansion of KDP (Kecamatan Development Program) and P2KP (Urban Poor) into PNPM (National Program on Community Empowerment) Focus 3: Shifting Cash Transfer to Conditional Cash Transfer Focus 4: Others like Biofuel, Housing and Rural Infrastructures Crash Program for Electricity Expansion Crash Program for Energy Conversion LPG for Kerosene Gas for Gasoline Coal and Gas for Power Generation Bioenergy Note : KDP = Kecamatan Development Program P2KP = Program Penanganan Kemiskinan Perkotaan PNPM= Program Nasional Pemberdayaan masyarakat. g y y GSAPS-2007-Day4 21
  22. 22. Socio-Political Development Socio- Indonesia i emerging f I d i is i from llong period of authoritarian i d f th it i rule to consolidate its status as one of the world’s largest democratic country. y Indonesia’s political and economic development after the REFORMASI (1998) seems to be on the right track. Socio-political development: amendment of 1945 Constitution, improvement of checks and balances system, system direct presidential and regional executives elections, legal reform and decentralization, human rights, freedom of the press, bigger role of civil society. Peace in Aceh. GSAPS-2007-Day4 22
  23. 23. Major Problems 1. Institutions: 1 I tit ti ambiguity between presidential and parliamentary systems; establishment of quasi-government institutions, and confusion of role and f f i f l d function i th j di i l b ti in the judicial branch h of government. 2. Political ethics and behavior: institutionalization of political acts versus personification of political figures; money politics, liti manipulation of masses. GSAPS-2007-Day4 23
  24. 24. Major Problems . . . 3. Major problems in governance includes: Reform of the bureaucracy. Quality of civil servants. Corruption. Inefficiency. Low salary. Impact of problems in bureaucracy on socio- economic domains. GSAPS-2007-Day4 24
  25. 25. Major Problems . . . 4. New phenomena in political life: Internalization of political issues by g p y grass root. politicians: weakening of government’s position in international forum. Ethno-nationalism: as negative impact of decentralization policy (euphoria: from special autonomy to independence). GSAPS-2007-Day4 25
  26. 26. Major Problems . . . Political trust d P liti l t t and social t t problem i l i l trust: bl in law enforcement (frequently constrained by issues of human rights and freedom of expression). g p ) Pluralism: negative impact of pluralism in the form of horizontal conflicts based on religious, ethnics, socio- economic, and political i i d liti l in-groupness f li feelings). ) Terrorism. GSAPS-2007-Day4 26
  27. 27. Major Problems . . . 5. Major ecological problems: Tsunami, earthquakes, volcanic eruptions, mud eruptions, deforestation, illegal logging, forest fires, floods and landslides. 6. Major health problems: avian flu and dengue fever. GSAPS-2007-Day4 27
  28. 28. Japan-Indonesia Relationship Japan- High expectation after the signing of Economic g p g g Partnerships Agreements during the visit of the President of Indonesia to Japan in November 2006. Remaining problems to investment. The trend of reduction in Japan’s ODA. GSAPS-2007-Day4 28
  29. 29. Japan Indonesia Relationship . . . Japan-Indonesia Generally Japanese p p and the Japanese Business y p people p Community are “losing interests” in Indonesia, giving more attention to China and India. Japan is a traditional and natural economic partner and political ally of Indonesia. Good relation and mutual interest between the two countries have to be i t tb t th t ti h t b maintained. GSAPS-2007-Day4 29
  30. 30. Reinventing Indonesia Challenges Ahead
  31. 31. Introduction Although Indonesia has not been on “the road to democracy,” for long, there is much that has been achieved for which many citizens may be proud. The constitutional amendment process having been completed, citizens may observe a “software upgrade” in the difficult system that is their g y government. At the time of this writing, relative economic and social stability has been maintained and the country has completed general elections in 2004 the first under the 2004, amended constitution. Citizens have some reasons to be optimistic. However many problems remain. GSAPS-2007-Day4 31
  32. 32. Introduction . . . In the post transition period the Indonesian polity has to post-transition grapple with two key issues in consolidating its nascent democracy: how best to strengthen the political culture, deepen democracy, and enhance political institutionalization how improve ho to impro e the performance of the ne lnewly established democratic regime The failure in meeting the challenges may result in the disenchantment and reversal in legitimacy of the democratic system of government, or at the least the nation struggling with the negative effects of a low quality democracy. GSAPS-2007-Day4 32
  33. 33. Introduction . . . With th constitutional reform and th general election the tit ti l f d the l l ti based on the reformed constitution, Indonesia has embarked in a second stage of its democratic p g process: Consolidation. The SBY government has been of to a good start, albeit the t th tough challenges it f h h ll faced i it early d d in its l days, such as h the tsunami in Aceh and the shock to the economy caused by the s eep hike in the o p ce Both these e steep e e oil price. o ese hurdles have been overcome, but democratic consolidation still faces enormous challenges that need to be overcome, especially under the leadership of the overcome new democratically elected government. GSAPS-2007-Day4 33
  34. 34. Improving economic performance Ad Adam P Przeworski et al h ki t l have presented some quantitative t d tit ti evidence from their observation of the survival and failure of political regimes in 135 countries between 1950 p g and 1990, as they researched the question, What makes democracy endure? Th f They found empirical evidence th t once a country h a d i i l id that t has democratic regime, its level of economic development has a s o g e ec o the p obab y o the de oc acy to as strong effect on e probability of e democracy o survive; poor countries, however, particularly those with annual income per capita of less than $1,000, are extremely fragile fragile. GSAPS-2007-Day4 34
  35. 35. Improving economic performance . . . Przeworski et al hypothesized that the chances of democracy to survive and be consolidated will increase when the country’s economy grows faster than 5% annually compared with th ll d ith those th t grow more slowly. that l l The faster the economy grows, the more likely it is that democracy will be able to survive. y Economic instability also threatens the survival of democratic regimes. GSAPS-2007-Day4 35
  36. 36. Improving economic performance . . . They concluded that democracies are more likely to survive when the annual inflation rate could be maintained at a level below 6%. They confirmed Albert Hirschman s 1981 hypothesis that Hirschman’s a moderate rate of inflation promotes democratic stability. They also found evidence that democracy is much more likely to i in ti h lik l t survive i countries where i income iinequality i lit is declining over time. There is a virtuous circle in the correlation People expect p p democracy to reduce income inequality and democracies are more likely to survive when they do. GSAPS-2007-Day4 36
  37. 37. Improving economic performance . . . The economy is showing positive signs of recovery recovery. However it is still on slippery ground. The biggest challenge is to restore g gg g growth to a level that can bring the economy more rapidly to its pre-crisis level and to sustain it during the consolidation period. A minimum growth of 6% should be targeted To achieve targeted. that objective, there are certain pre-conditions that need to be established and objectives that need to be attained. GSAPS-2007-Day4 37
  38. 38. Improving economic performance . . . First and foremost is maintaining the hard won but still hard-won still- fragile macro-economic stability. To strengthen macroeconomic stability, the reforms of g y the financial sector should be accelerated. A healthy financial sector is a vital element for both stability and growth of the economy economy. GSAPS-2007-Day4 38
  39. 39. Improving economic performance . . . The banking sector is emerging from the crisis but the crisis, progress needs to be consolidated. GSAPS-2007-Day4 39
  40. 40. Improving economic performance . . . The government needs to work closely with the central bank to address some basic issues in the reforms of the banking sector, such as developing an effective —and moral hazard free moral-hazard free— lender of last resort facility, the replacement of the blanket guarantee with a deposit insurance protection scheme and strengthening governance in the banking sector particularly in state sector, owned banks. Those are among the most important aspects of a strong banking sector that would facilitate sustainable growth and prevent recurrence of another banking crisis. GSAPS-2007-Day4 40
  41. 41. Improving economic performance . . . As the cost of bank restructuring constitutes a large item on the government budget to ensure fiscal sustainability, every effort should be made to maximize asset recovery y y and minimize the fiscal cost of banking restructuring. The economy has passed from the stage of fiscal stimulation to fiscal sustainability. Maintaining fiscal sustainability will be one of the biggest challenges t th I d h ll to the Indonesian economy i th years i in the ahead. GSAPS-2007-Day4 41
  42. 42. Improving economic performance . . . Long-term fiscal sustainability could only be ensured by Long term continued fiscal consolidation and improvement in tax administration. The challenge is to increase tax revenue by 20 to 25% 25%, from 12% of GDP in year 2002, to 15 to 16% of GDP within five years. Th focus should b on th l The f h ld be the large t taxpayers, who f h from past experience have proven to be the source of the greatest leakages in tax revenues. GSAPS-2007-Day4 42
  43. 43. Improving economic performance . . . Growth should not only be rapid to regain momentum and cover ground lost during the crisis, but should also be sustainable for the long term. The nascent growth of recent years was produced by increased consumption. But investment is still lagging. GSAPS-2007-Day4 43
  44. 44. Investment Climate Among the biggest challenges faced by the SBY government is to restore Indonesia’s climate for investment. Although there are some indications of renewed FDI interest in Indonesia, new investment has been lagging far behind compared with coming to Indonesia s Indonesia’s neighboring countries. GSAPS-2007-Day4 44
  45. 45. Infrastructure Future investment is also constrained by major bottlenecks in infrastructure, particularly power infrastructure power. There is now already a power scarcity in some regions in which a rotating p g power supply has become necessary. pp y y Growth in power continues to outpace supply, and building power generating plants and the related distribution networks requires time time. Other infrastructure needs also have to be addressed, like roads and bridges, which were neglected during the crisis, crisis as well as harbors water supply infrastructure and harbors, telecommunication. GSAPS-2007-Day4 45
  46. 46. Education The development of skills that are needed in the new economy, with its heightened competition due to globalization and opening of markets, and the arrival of new entrants in low skilled manufacturing industry, are a challenge to Indonesia’s education and skill training programs. GSAPS-2007-Day4 46
  47. 47. Equity Growth is not an end in itself. Through growth, new jobs will be created, the country’s debt would be better serviced, serviced macroeconomic stability would be strengthened and most importantly, poverty would decline. It is important to ensure that growth will not result in increases in inequality, as often occurs in many developing countries. GSAPS-2007-Day4 47
  48. 48. Equity . . . During the New Order growth was pursued religiously. Although the results were remarkable in transforming the economy, there was a strong feeling of injustice at the pattern of development. There was the perception of a widening gap between the rich and poor, among income groups, ethnic groups and regions. regions Populist rhetoric aside, it is important to ensure that the positive lessons should be taken from the experience of the N th New O d not the mistakes. Order, t th i t k GSAPS-2007-Day4 48
  49. 49. Equity . . . The pattern of growth is just as important as the rate of growth. Growth should not only aim for a vertical trickle down effect, effect but should allow for the horizontal flows of benefit benefit, i.e. broad-based, employment intensive and non- compartmentalized growth. GSAPS-2007-Day4 49
  50. 50. Interaction between politics and economics One of the key issues in democratic consolidation is how to improve the performance of the newly established democratic regime. Regime performance can be seen as both liti l t t b th political outputs and th character of th regime as d the h t f the i well as the material conditions it generates; in short political as well as economic performance (see di i d discussion on democratic consolidation i Di ti lid ti in Diamond, d 1999; 64-116). There is a d e e e s dilemma. O the o e hand, to bu d a viable a On e one a d, o build ab e democracy with all its essential elements—basic security, rule of law, responsible political parties, a well informed citizenry, a professional bureaucracy and so on – will take a long time. On the other hand, people expect improvements in their living standards now. GSAPS-2007-Day4 50
  51. 51. Interaction between politics and economics . . . Experience in the developing economies suggests that democracy may constrain good economic policy in at least three ways. First, the political process in a democracy tends to have an inherent bias toward the short term. Politicians put a premium on policies that deliver results now and postpone costs until later. Second, too much politics can result in distortion of economic policy th i li through th undue i fl h the d influence of f sectional and narrow interests. Pressure from political parties, business and other trade lobbies, loud noises in the t t i th streets or soft whispers in the president’s or a ft hi i th id t’ minister’s ear, and other devious forms of pressure can and do have distorting effects on economic policy. GSAPS-2007-Day4 51
  52. 52. Interaction between politics and economics . . . Third, Third democracy as we see it in practice seldom goes together with decisive, swift action when such action is required. One could find several examples of this in I d i d th Indonesia and other countries, although i some cases ti lth h in lack of leadership and bureaucratic inertia may also have contributed to the problem. GSAPS-2007-Day4 52
  53. 53. Strengthening the political institutions Indonesia’s march on “the road to democracy” has only started and many problems remain. F t i th ti Foremost, is the question of how best to strengthen the fh b tt t th th political culture, deepen democracy, and enhance political institutionalization. institutionalization A strong political culture supports adherence to de oc a c p ocedu es, a g democracy e o y democratic procedures, making de oc acy the “only game in town.” GSAPS-2007-Day4 53
  54. 54. Strengthening the political institutions Deepening democracy demands: g greater executive accountability to the law, to other y , branches of government, and to the public; a reduction in the barriers to political participation and mobilization by marginal groups; decentralization of power to facilitate broader political access and accountability; vigorous independent action by civil society; and more effective protection for the political and civil ff ti t ti f th liti l d i il rights of citizens. GSAPS-2007-Day4 54
  55. 55. Strengthening the political institutions Political institutionalization calls for the strengthening of the three areas of political institutions: the institutions of democratic representation and p governance (political parties, legislatures, and the electoral system), horizontal accountability, constitutionalism and the rule of law, and the State administrative apparatus (the bureaucracy). GSAPS-2007-Day4 55
  56. 56. Strengthening the political institutions . . . Diamond surmises that democracy will not become broadly valued, and thus consolidated, unless it also becomes more liberal, transparent and institutionalized. Because of the disappointment at the performance of the democratic governments, there is a movement to return to the original 1945 Constitution. g GSAPS-2007-Day4 56
  57. 57. Strengthening the political institutions . . . A 2006 survey conducted b G ll I t d t d by Gallup International on ti l behalf of Transparency International showed how big is the challenge to improve the image of the p g p g political institutions in democratic Indonesia. With the sharp swing of power from the executive to the legislative branch of government, th l i l ti b h f t there i also a growing is l i disillusion among the people toward the parliament. The survey discovered that Indonesians regarded the parliament as the most corrupt institution in the country. GSAPS-2007-Day4 57
  58. 58. Strengthening the political institutions . . . Diamond describes the role of political elites in post democratic transition succinctly, saying that “In many of the third-wave democracies, competitive elections do not ensure liberty, responsiveness, and a rule of law.” law. The wide spread impression among the polity that short- term political ends were more dominant than the long- term interest of the country and the quality of its democracy. It does not speak well of the quality of the political elites at the very critical moment of crafting a new and truly t th iti l t f fti dt l democratic political system. GSAPS-2007-Day4 58
  59. 59. Strengthening the political institutions . . . Indeed, Indeed one very serious issue that had to be addressed is corruption. While corruption is not peculiar to Indonesia, various reports suggested that corruption in Indonesia was a serious problem that led to a waste of resources and inhibited the economic impact of many government programs. GSAPS-2007-Day4 59
  60. 60. Strengthening the political institutions . . . Diamond suggest that in such circumstances, “of entrenched corruption and repression, the elites who come to govern have a stake in the existing system and system, those who favor real reform are too weak to accomplish it by themselves. y Only the mass public can generate the political pressure and power necessary to bring about reform.” GSAPS-2007-Day4 60
  61. 61. Civil Society The question is, Who are the public? “The public like The public” “the people” is the term often used by politicians for their own ends, and demagogues manipulate it in attempts to grab power. Thus without organization, structure, and principles, the public may not matter for democracy or its impact may be negative. negative Democracy requires a public that is organized for democracy, socialized to its values and norms, and committed not just to its owned myriad narrow itt d t j t t it d i d interests—although they are important and are the raison d’etre for their existence—but to a larger, common g set of civic ends. And such a public is only possible with a vibrant “civil society. society ” GSAPS-2007-Day4 61
  62. 62. Civil Society . . . Indonesia’s civil society has grown in recent years and has played a role in the political change. However, as a real countervailing force to the state, it is g still weak. Not only is it a relatively new concept in Indonesia’s polity, polity and thus yet to mature the quality of the people mature, who are attracted to join it does civil society little good. Only recently has civil society attracted better-qualified people from among the graduates of top universities and among the top ranks. In the past, this class of y p young p p was more g people attracted to the bureaucracy, the academia, business and even the military. GSAPS-2007-Day4 62
  63. 63. Civil Society . . . The existence of such a civil society is particularly important to Indonesia at the present stage of democratic consolidation, as clean, open, transparent , , p , p and accountable governance has yet to be established. The general opinion of the public, as reflected in various polls and the media is that democracy has not produced media, better governance. The efforts to uphold the principles of democracy and rule of l l f law cannot be l ft to the politicians alone, f th i t b left t th liti i l for their visions may be overshadowed by short-term political interests. The country needs an active, informed, selflessly motivated civil society to strengthen the institutions of g governance, for checking, monitoring and restraining the , g, g g exercise of power of the state, its institutions and office holders and holding them accountable to the law and public expectations of responsible government. GSAPS-2007-Day4 63
  64. 64. Political Leadership It is evident th t currently there is a l d hi d fi it li k d t i id t that tl th i leadership deficit linked to the persistence of so many of the problems faced by the country. The debate t th t i l d Th d b t at the centre is played amid complex and shifting id l d hifti power relations—factionalism even within the main parties, some along ideological lines and others just based on political opportunism. opportunism To explain the disunity and fragmentary nature of its current politics, one might hypothesize that Indonesia lacks individual leaders with the right combination of vision character and vision, character, political savvy. There may be positive effects to this lack of charismatic leadership beca se as Haggard and Ka fman asserts o er the because, Kaufman asserts, over long term “executive authority must eventually be depersonalized”. H the i However, th experience of I d f Indonesia at th past few years i t the tf show that inept leadership have led to more failures of policy than successes, more instability and “wasted” energy in political conflict than peaceful progress and coherence coherence. GSAPS-2007-Day4 64
  65. 65. Political Leadership. . . As such, not only should reforms install an effective and transparent set of rules-based institutions, they should l l l b also evolve rules-based mechanisms b which th b t d h i by hi h the best of each generation are brought into the political leadership. Put in simplistic terms: a good system is nothing without good people to run it. It is not to say that the system is less important than the persons who run it, on the contrary democratization entails first and foremost establishing the system—the institutions, institutions the processes and procedures procedures. However, at the end of the day, a system is as good as the people who run it. It may help to recall Huntington’s aphorism, that economic development makes democracy possible, but it is “political leadership that makes it real. political leadership” GSAPS-2007-Day4 65
  66. 66. Keeping the country together One f th h ll O of the challenges f i I d facing Indonesia i k i is keeping th i the country united. The threat of separation has always plagued the country since the first days of independence. One of the main grievance is income and regional g g disparity. It is a complex problem and would take time and effort to resolve, but at the heart of the problem was the overly centralized government structure and decision making process. Devolvement of central authority should be the first step y p toward addressing the problem. GSAPS-2007-Day4 66
  67. 67. Keeping the country together . . . As discussed above decentralization constitutes one of above, the most important aspect of “reformasi” in Indonesia. Decentralization enhances the efficacy, quality and y q y legitimacy of democracy; hence decentralization is a necessity for democracy. It is even more so for large—and particularly multiethnic large and and multicultural— countries such as Indonesia, as decentralization will close the distance between the citizens, citizens the stakeholder and the power and the process stakeholder, of policy making. GSAPS-2007-Day4 67
  68. 68. Decentralization Decentralization is not merely political expedience t D t li ti i t l liti l di to deal with rebellious regions. It has more basic value to democracy and democratic consolidation. y Many scholars have presented argument that decentralization enhances the legitimacy and hence stability of d t bilit f democracy. Decentralization is not just a political necessity to keep the country from falling apart or to foster democracy; if managed well decentralization can bring important benefits to the communities and the economy as a whole. However if managed b dl it could h H d badly ld harm th people and the l d squander resources and bring instability instead. GSAPS-2007-Day4 68
  69. 69. Decentralization . . . Many observers h d worried about th effect of fi M b had i d b t the ff t f fiscal l decentralization on the still fledgling economy. With decentralization some rich regions are doing fine decentralization, fine, in fact they have more money that they can spend; there is a danger, and there are already some indications of the th revenues not being used effectively and efficiently. tb i d ff ti l d ffi i tl On the other hand, poor regions are chafing under the new responsibility that co es with au o o y e espo s b y a comes autonomy. And as pointed by the World Bank (2001) the risks of an increase in corruption following decentralization are high. It has been widely observed th t so f th t not only h b id l b d that far that t l power and revenue that have been decentralized but also corruption. GSAPS-2007-Day4 69
  70. 70. Decentralization . . . It seems that Indonesia is not the only country faced with this problem when it attempted to decentralize. On the basis of their observation of experience of some p Latin American countries, some analysts comment that decentralization has strengthened the position of the local elites and their clientelistic networks (Huber, ( , Rueschemeyer and Stephens, 1999: 182). Furthermore, many regions had increased local taxes and imposed new levies that have become a significant concern for investors. GSAPS-2007-Day4 70
  71. 71. Decentralization . . . There is a need to clarify the rules and regulation regarding decentralization that would affect the investors. There have to be clear guidelines on the authority and responsibility of the central government the provincial government, government and the district or city government with regard to investment. It is important to clarify th extent to which the i i t t t l if the t t t hi h th government has the right to intervene in the conduct of private business. GSAPS-2007-Day4 71
  72. 72. Decentralization . . . Both regional autonomy and direct regional elections are also expected to put an end to the unbalanced relationship between the central and local g p governments, as well as to promote political equality among all citizens, regardless of their background, giving them a sense that they th are not being l ft out of a process that has in the t b i left t f th t h i th past been dominated by the elite in Jakarta. In most parts of the country, the elections went smoothly country and peacefully, in some parts local elections did not go as well as could have been hoped. GSAPS-2007-Day4 72
  73. 73. Decentralization . . . Reports of vote buying power plays poll fraud and buying, plays, problems with voter registration, combined with a lack of accountability and credibility showed by some local y y y elections commissions, surfaced in media, tarnishing the legitimacy of the long-awaited regional elections. The limited time allowed for campaigning --making it difficult for voters to truly measure the quality and platforms of the candidates as well as a lack of candidates-- available media outlets to educate the public about substantive campaign issues, were among the factors blamed for the elections' shortcomings. GSAPS-2007-Day4 73
  74. 74. Decentralization . . . Physical clashes occurred in some areas, including in Kaur regency in Bengkulu province where some 10 000 province, 10,000 people went on the rampage and set fire to government offices and houses in July to express their disappointment with the regency election results. In North Sumatra province, a mob attacked the General p , Elections Commission office in Central Tapanuli regency in October after the commission refused to allow a candidate f regent contest the election because of did t for t t t th l ti b f questions over the legitimacy of her high school diploma. In the city of Sibolga the election was delayed at the last Sibolga, minute for three days because voter cards had not been distributed. GSAPS-2007-Day4 74
  75. 75. Decentralization . . . Another example of the troubles faced by elections was a high profile case involving a long legal battle in Depok city, near the capital Jakarta, where one of the p y p political parties that came out on the losing end of the election challenged the results in court. In its lawsuit, the losing party claimed th l t l i d the local elections commission h d l l ti i i had committed violations in implementing the election process. process In Papua there are dispute between the two provinces (Papua and Irian Jaya Barat) about the validity of general elections in the two provinces, in relation to the special status given to the provinces. GSAPS-2007-Day4 75
  76. 76. Decentralization . . . Therefore it is a challenge for the Indonesian democracy to take hold in the grass level that the nation is able to undertake elections in the regions peacefully, cleanly, and democratically. GSAPS-2007-Day4 76
  77. 77. Keeping the country together . . . The threat to the unity and integrity of country has recently been perceived as not only to come f from ethnic or regional separatism but also from fundamental and p political Islam. Many authors have speculated about the political implication of the rise of the social standing of Islam in Indonesia. Indonesia GSAPS-2007-Day4 77
  78. 78. Keeping the country together . . . In actuality, however, Indonesian Islam is embedded in a culture of tolerance that can be traced back to the history f of Islamization of the archipelago. GSAPS-2007-Day4 78
  79. 79. Keeping the country together . . . Islam originally came to Indonesia and religiously “conquered” the people not through war, but through “ ” trade, marriage and education. Hence the absorption of Islam by the societies in this vast archipelago was generally peaceful and involved little coercion. In fact, in the propagation of Islam there was a tendency fact to adjust the new religion to older beliefs that resulted in moderate and tolerant—some may say syncretic— attitudes among the majority of Indonesian Muslims Muslims. GSAPS-2007-Day4 79
  80. 80. The Role of Islam It is true that fundamentalist Islamic groups some of groups, them militant, do exist in Indonesia, but they are marginal and have little popular support. Despite the recurrence of incidents involving some Islamic extremists, for many years, Indonesia, the country with the largest Muslim p p y g population in the world, , has been well known as a pluralistic society characterized by religious moderation and tolerance. GSAPS-2007-Day4 80
  81. 81. The Role of Islam . . Islam. With the constitutional amendments completed, the debate on the inclusion of the Jakarta Charter into the f C constitution has been more or less been concluded. The votes against it were overwhelming, cutting across political fault lines. Although the possibility of future attempts to reintroduce the Jakarta Charter is ever present the political support present, for such a move would be confined to a small minority. Not only are the secular nationalist parties against it, many parties with I l i credentials are also not ti ith Islamic d ti l l t supporting it. GSAPS-2007-Day4 81
  82. 82. The Role of Islam. . . Even if the Jakarta Charter does not pose an immediate threat to the unity of the country, adjusting to and coping with a deepening religious awareness and religious piety within the Muslim population is still a challenge for Indonesia Indonesia. Although Indonesia is a predominantly Muslim Country, Islamic political parties in Indonesia has never been able to attain more than 40% of the votes, since the election of 1955 up to the last election in 2004. Therefore, most Indonesian Muslim voted for parties not based in religion religion. The different from one election to another is the composition of the votes garnered by the Islamic p g y parties, which constantly y changes reflecting the political mood and environment of the time. GSAPS-2007-Day4 82
  83. 83. The Role of Islam . . Islam. In the short run, however, the revival of Islamic values in the minds and lives of the population, most importantly f among the intelligentsia and the political elite, and the y young, may affect attitudes or responses to p g y p political issues that involve Islam such as international terrorism. The September 11 act of terrorism against the US was almost unanimously condemned by organized Muslims and by the public in general. Except for a few very vocal fanatics, Indonesia’s Muslims were outraged by with happened in New York York. GSAPS-2007-Day4 83
  84. 84. The Role of Islam . . Islam. The feeling of outrage against terrorism that had taken the lives of innocent people was heightened when f Indonesia also became a victim of international terrorism with the bombing in Bali on 12 October 2002, the more g recent Marriot bombing in Jakarta on 5 August 2002, and the second Bali Bombing in 2005. For many Indonesian Muslims terrorism had only Muslims, succeeded in creating the wrong image of Islam and Islamic values. GSAPS-2007-Day4 84
  85. 85. The Role of the Military Observers of Indonesia have paid much attention to the role of the military in post-New O f Order politics and how the military perceive its role in democracy. Events surrounding the fall of Suharto showed that the military had been supportive of political change. Its role was crucial in the peaceful transition from an authoritarian regime to real democracy democracy. GSAPS-2007-Day4 85
  86. 86. The Role of the Military . . . In the transition during the Habibie period, the military lent its political weight to the institutionalization of f democracy by supporting the creation of laws and rules that dismantled the old authoritarian structures and replaced it with a democratic system. The military has shown its commitment to democracy when it accepted the consensus of the polity that it should no longer take an active role in politics and therefore no longer hold seats in the elective political institutions. institutions Under Wahid, the military had been steadfast in refusing to be used as an instrument to subvert the constitution and resisted the pressure to reverse to authoritarianism. authoritarianism GSAPS-2007-Day4 86
  87. 87. The Role of the Military . . . Although many retired senior officers were against changing the constitution, the serving military establishment fully supported the amendments that have become the foundation for a stronger and more stable g democracy. Therefore it is safe to say that the military is not a threat but an asset to Indonesia s democracy Indonesia’s democracy. GSAPS-2007-Day4 87
  88. 88. Political Reconciliation . . . More needs to be done in order for the country to be able to live with and be proud of its past and not be f burdened by it. Efforts to reconcile the past should transcend ideology and politics. GSAPS-2007-Day4 88
  89. 89. Conclusion Much has been achieved, but even more remains to be achieved done. The past few y p years have been extremely eventful for y Indonesia. Following the maelstrom of political, economic and social crises, crises economic stability has now returned though the economy has not returned to the heady levels of the boom years. GSAPS-2007-Day4 89
  90. 90. Conclusion ... To overcome the challenges ahead whether from ahead, political corruption, violent communal strife and terrorism in the name of God or external economic shocks, the new t l of government and democratic governance will tools f t dd ti ill face their definitive test. GSAPS-2007-Day4 90
  91. 91. Reinventing Indonesia Governance
  92. 92. Governance Questions: Do governments know what they are doing? Why should we trust them? The demand for good governance has a long history. But seldom have the forms of governance been under g greater challenge. Dissatisfaction and disillusionment about political solutions are rife. l ti if GSAPS-2007-Day4 92
  93. 93. Governance . . . Problem of modern governance is not so much an insufficiency of instruments relative to the changing on y g g objectives, but rather the degree of incompatibility between objectives . Why Wh governance, and not merely government? d t l t? Governance is a broader and more fundamental concept than that of government alone alone. The concern is with the links between parts of the political system as with the institutions themselves. GSAPS-2007-Day4 93
  94. 94. Governance . . . The Th concept of governance is broader th government, t f i b d than t covering non-state actors (Rhodes 1997). It accepts that the management of the nation s affairs nation's might need more than government to ensure effectiveness; it sees parties, courts and interest groups t bl that not as problems th t governments must overcome but as t t b t part of the broader process. Governance is the exercise of political power to manage a nation's affairs (The World Bank, 1992). GSAPS-2007-Day4 94
  95. 95. Governance . . . The current Public Governance debate places a new emphasis on ‘what matters is not what we do, but how people feel about what we do’ and that ‘processes do processes matter’ or put differently, ‘the ends do not justify the means’. GSAPS-2007-Day4 95
  96. 96. Governance . . . Whereas the governance discussions in the public sectors is relatively recent, the term governance is much more common in the private sector where a debate about Corporate Governance has been going on for quite some time time. Corporate Governance refers to issues of control and decision-making powers within the private (corporate) organizations. GSAPS-2007-Day4 96
  97. 97. Governance . . . 'Corporate Governance’ is the watchword of those who wish to improve the accountability and transparency of the actions of management, but without fundamentally altering the basic structure of firms. (Roe, 1994) GSAPS-2007-Day4 97
  98. 98. Governance . . . Another development is the globalization of the economy and the growing importance of transnational political institutions like the European Union (EU) World Trade (EU), Organization (WTO), Association of South East Asian Nations (ASEAN), and North American Free Trade ( ), Agreement (NAFTA). GSAPS-2007-Day4 98
  99. 99. Governance . . . The deregulations of capital in the 1980s set in train a massive restructuring of both domestic economies and the international economic system. What seems to be the main consequence of globalization in the present context is the erosion of traditional, d t diti l domestic political authority. ti liti l th it International forces appear to override the ability of national governments to solve their own problem. GSAPS-2007-Day4 99
  100. 100. Governance . . . New demands of accountability to international markets and standards may clash with the traditional lines of accountability accountability. Some commentators (Rhodes 1994, 1997; Davis 1997) have characterized these trends as a 'hollowing hollowing out of the state', in which the combined effects of globalization, international obligations, privatization and reduced regulation d l t th capacity of d d d l ti deplete the it f government to shape and organize society. GSAPS-2007-Day4 100
  101. 101. Governance . . . Pessimist suggest that globalization means that t h government everywhere h have bbecome powerless and l d that managing globalization is impossible, since globalization is shaped by markets, not by government. Some have suggested that this powerlessness is reinforced by the coming of the internet age –that there is no governance against the electronic herd (Friedman, 2000). Global Governance h th b Gl b l G has then become very t i l topical. In a nutshell, global governance is about how to cope with problems which transcend the borders (such as air pollution, narcotics, terrorism or the exploitation of child workers) given the lack of a world government. GSAPS-2007-Day4 101
  104. 104. Governance . . . Above figure presents a conceptual framework that sees public administration taking the central role or stage in a broader political system (the conversion process in the systems model). The model emphasizes the interrelated nature of the parts and how change in an external environment (cultural, economic, political, social) causes change in the structures and internal processes of p p public administration. These changes, in turn, influence the outputs of the b that i h t bureaucracy; th t is, what goods, services, policy d i li programs, rules, and regulations are implemented by bureaucracy. bureaucracy GSAPS-2007-Day4 104
  105. 105. Governance . . . As in any system, a feedback loop develops in which the outputs affect the environment, which causes further change and often new demands from the environment to continue, increase or decrease, modify, or occasionally even cease a public policy or program program. GSAPS-2007-Day4 105