Review of governance issues for Indonesia Presentation to Senior Officials from Indonesia’s Coordinating Ministry for Economic Affairs Ross H. McLeod Indonesia Project, Australian National University 12 November 2008 [email_address]

Main Reference: Ross McLeod & Andrew MacIntyre (eds) (2007), Indonesia: Democracy and the Promise of Good Governance , Institute of Southeast Asian Studies, Singapore In particular, chapters 1 & 5: Ross McLeod & Andrew MacIntyre, ‘Introduction’. Ron Duncan & Ross McLeod , ‘The State and the Market in Democratic Indonesia’. Other articles by Ross McLeod: ‘Soeharto’s Indonesia: A Better Class of Corruption’, Agenda , 7 (2), 2000 ‘The Struggle to Regain Effective Government Under Democracy in Indonesia’, Bulletin of Indonesian Economic Studies , 41 (3), December 2005. ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies , 44 (2), August 2008.

The Reform Era in Indonesia Widely agreed that much has been achieved post-Soeharto by way of reform in the political/electoral field But little has been achieved at the level of the public sector institutions as yet i.e. bureaucracy, judiciary, military/police, parliament, state-owned enterprises All are still characterised by both endemic corruption and weak performance

Widely agreed that much has been achieved post-Soeharto by way of reform in the political/electoral field

But little has been achieved at the level of the public sector institutions as yet

i.e. bureaucracy, judiciary, military/police, parliament, state-owned enterprises

All are still characterised by both endemic corruption and weak performance

The Reform Era in Indonesia ‘ The high level of corruption under Soeharto still exists, and is arguably even more damaging these days, because it is fragmented, incoherent and no longer under the careful control of a dominant president.’ This is one reason why economic performance has been weaker during reformasi…

‘ The high level of corruption under Soeharto still exists, and is arguably even more damaging these days, because it is fragmented, incoherent and no longer under the careful control of a dominant president.’

This is one reason why economic performance has been weaker during reformasi…

The Reform Era in Indonesia The performance of governments in terms of delivering social and economic advancement is critical for legitimacy and political survival . Prolonged failure to meet minimal public expectations invites the possibility of … the breakdown of democracy … . ‘ Performance legitimacy’ is essential to the survival of governments, and systems of government—including democracy itself.

The performance of governments in terms of delivering social and economic advancement is critical for legitimacy and political survival .

Prolonged failure to meet minimal public expectations invites the possibility of … the breakdown of democracy … .

‘ Performance legitimacy’ is essential to the survival of governments, and systems of government—including democracy itself.

‘ The government is here to help you’(?) Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good.

Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good.

‘ The government is here to help you’(?) Economic rationale for government (1) Improving economic efficiency Doing what the private sector cannot do See chapter by Duncan and McLeod Dealing with cases of market failure Public goods (especially legal system) Externalities (especially environmental management) Natural monopolies (including infrastructure) Exploitation of natural resources These are areas where it is possible to make the average citizen better off: aggregate gains exceed aggregate losses

Economic rationale for government (1)

Improving economic efficiency

Doing what the private sector cannot do

See chapter by Duncan and McLeod

Dealing with cases of market failure

Public goods (especially legal system)

Externalities (especially environmental management)

Natural monopolies (including infrastructure)

Exploitation of natural resources

These are areas where it is possible to make the average citizen better off: aggregate gains exceed aggregate losses

‘ The government is here to help you’(?) Economic rationale for government (2) Income redistribution In practice, this gets much more emphasis The payoffs to politicians and bureaucracy are higher If undertaken by private sector, this may be either Charity, or Theft, extortion If undertaken by public sector, this may be either To help the poor To help the powerful (including groups with a lot of votes)

Economic rationale for government (2)

Income redistribution

In practice, this gets much more emphasis

The payoffs to politicians and bureaucracy are higher

If undertaken by private sector, this may be either

Charity, or

Theft, extortion

If undertaken by public sector, this may be either

To help the poor

To help the powerful (including groups with a lot of votes)

‘ The government is here to help you’(?) Economic rationale for government (2) Income redistribution often doesn’t show up in the budget Rather, by intervention in markets These are areas where some citizens are made better off at the expense of others—and the gains to gainers are less than losses to the losers e.g. former monopoly on clove imports (shared by Salim and Probosutedjo) e.g. ban on rice imports helps relatively wealthy farmers at expense of poorer people who own little or no farming land

Economic rationale for government (2)

Income redistribution often doesn’t show up in the budget

Rather, by intervention in markets

These are areas where some citizens are made better off at the expense of others—and the gains to gainers are less than losses to the losers

e.g. former monopoly on clove imports (shared by Salim and Probosutedjo)

e.g. ban on rice imports helps relatively wealthy farmers at expense of poorer people who own little or no farming land

‘ The government is here to help you’(?) In reality, government is largely/mainly about theft (income redistribution) which explains how the Soeharto family became so wealthy and why prosecuting Soeharto would have been a waste of time (theft can be done legally by way of government policies) and why the people wanted a new government

In reality, government is largely/mainly about theft (income redistribution)

which explains how the Soeharto family became so wealthy

and why prosecuting Soeharto would have been a waste of time (theft can be done legally by way of government policies)

and why the people wanted a new government

‘ The government is here to help you’(?) The bureaucracy was crucial to the Soeharto system of government, but with a few exceptions … it did far too little to devise policies that would serve the public interest. Rather, its function was to implement policies that would benefit companies owned by Soeharto’s cronies and family members, together with a relatively small number of large foreign firms. Benefits to the general public were incidental

The bureaucracy was crucial to the Soeharto system of government, but with a few exceptions … it did far too little to devise policies that would serve the public interest.

Rather, its function was to implement policies that would benefit companies owned by Soeharto’s cronies and family members, together with a relatively small number of large foreign firms.

Benefits to the general public were incidental

‘ The government is here to help you’(?) Government may be there to help only the powerful elite And there is always a tendency for it to help the few at the expense of the many (e.g. bailouts for politically connected large companies/banks)

Government may be there to help only the powerful elite

And there is always a tendency for it to help the few at the expense of the many (e.g. bailouts for politically connected large companies/banks)

‘ The government is here to help you’(?) Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good. At the same time, however, the coercive power of government has very often been used for the benefit of those who exercise that power, rather than the general public they supposedly represent.

Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good.

At the same time, however, the coercive power of government has very often been used for the benefit of those who exercise that power, rather than the general public they supposedly represent.

Where Does the Balance Lie in Indonesia Now? Is government mainly about improving economic efficiency, or redistributing income at the expense of the general public (and efficiency/growth)? Let’s look at Ministries under the Coordinating Minister for Economic Affairs…

Is government mainly about improving economic efficiency, or redistributing income at the expense of the general public (and efficiency/growth)?

Let’s look at Ministries under the Coordinating Minister for Economic Affairs…

How many economic ministries really only cater to narrow interests? Finance Energy & Mineral Resources Industry (i.e. manufacturing) Trade Agriculture Forestry Transport Sea and Fisheries Labour & Transmigration Public Works Communications and Informatics Research and Technology Cooperatives and SMEs SOEs

Finance

Energy & Mineral Resources

Industry (i.e. manufacturing)

Trade

Agriculture

Forestry

Transport

Sea and Fisheries

Labour & Transmigration

Public Works

Communications and Informatics

Research and Technology

Cooperatives and SMEs

SOEs

How many economic ministries really only cater to narrow interests? Finance Energy & Mineral Resources Forestry Sea and Fisheries Communications & Informatics Transport Public Works Research & Technology Labour & Transmigration Trade Agriculture Industry (i.e. manufacturing) Cooperatives & SMEs SOEs

Finance

Energy & Mineral Resources

Forestry

Sea and Fisheries

Communications & Informatics

Transport

Public Works

Research & Technology

Labour & Transmigration

Trade

Agriculture

Industry (i.e. manufacturing)

Cooperatives & SMEs

SOEs

Coordinating Government would be Easier if Government were Smaller Musyawarah menuju ke mufakat … or maybe not: ‘ Political frameworks that disperse decision-making power widely tend to suffer from chronic problems of indecisiveness or gridlock : that is, it is very difficult for them to make decisions on major policy questions in a timely fashion, because not all constitutionally empowered actors are in agreement.’ So: how many parties should be inside the governing coalition? Trade-off between inclusiveness and decisiveness…

Musyawarah menuju ke mufakat … or maybe not:

‘ Political frameworks that disperse decision-making power widely tend to suffer from chronic problems of indecisiveness or gridlock : that is, it is very difficult for them to make decisions on major policy questions in a timely fashion, because not all constitutionally empowered actors are in agreement.’

So: how many parties should be inside the governing coalition?

Trade-off between inclusiveness and decisiveness…

Over-emphasis on Inclusiveness? Source : Anies R. Baswedan (2007), ‘Indones i an Pol i t i cs i n 2007: T he Pres i dency, L ocal E lect i ons and the Future of Democracy’, Bulletin of Indonesian Economic Studies , 43 (2)

A Hypothetical, More Effective, Workable Majority?

The principal-agent problem Members of large, complex organisations (‘principals’) need to delegate control of operations to managers (‘agents’) But managers have incentives to cheat the members to serve their own interests Including acting to benefit some members at the expense of others To be successful, organisations need to find ways of dealing with this principal-agent problem That is what ‘good governance’ is about

Members of large, complex organisations (‘principals’) need to delegate control of operations to managers (‘agents’)

But managers have incentives to cheat the members to serve their own interests

Including acting to benefit some members at the expense of others

To be successful, organisations need to find ways of dealing with this principal-agent problem

That is what ‘good governance’ is about

The principal-agent problem The challenge for society is to design systems of government that will ensure that the interests of society as a whole are promoted effectively, while the conflicting interests of the individuals charged with implementing government are kept in check.

The challenge for society is to design systems of government that will ensure that the interests of society as a whole are promoted effectively, while the conflicting interests of the individuals charged with implementing government are kept in check.

The principal-agent problem In the public sector, one mechanism of good governance is regular elections Bad managers (politicians/agents) can be replaced by voters (citizens/principals) Like AGM of shareholders in public companies ‘ It is this check on managerial incompetence and capricious and arbitrary rule that ultimately favours the implementation of sound economic policies over time.’ Hence the long-established democracies tend to have high p.c. incomes.

In the public sector, one mechanism of good governance is regular elections

Bad managers (politicians/agents) can be replaced by voters (citizens/principals)

Like AGM of shareholders in public companies

‘ It is this check on managerial incompetence and capricious and arbitrary rule that ultimately favours the implementation of sound economic policies over time.’

Hence the long-established democracies tend to have high p.c. incomes.

The principal-agent problem But there is a second layer of the principal-agent problem: Public sector officials (bureaucrats/agents) These are very difficult to replace (in Indonesia) if they perform poorly No large organisation performs well if its top people perform poorly Dealing with this institutional weakness is a key element of meaningful reform

But there is a second layer of the principal-agent problem:

Public sector officials (bureaucrats/agents)

These are very difficult to replace (in Indonesia) if they perform poorly

No large organisation performs well if its top people perform poorly

Dealing with this institutional weakness is a key element of meaningful reform

Public sector reform Key to Indonesia’s future Very patchy progress Military still not funded through the budget Little reform of the judiciary In the bureaucracy, focus is on catching and punishing corrupt officials But little understanding of root causes of the problem, which is endemic Ministry of Finance pilot reform project

Key to Indonesia’s future

Very patchy progress

Military still not funded through the budget

Little reform of the judiciary

In the bureaucracy, focus is on catching and punishing corrupt officials

But little understanding of root causes of the problem, which is endemic

Ministry of Finance pilot reform project

Ministry of Finance Aim of bureaucratic reform: to create a civil service whose personnel are ‘clean’ (non-corrupt), professional and accountable and which is efficient and effective in carrying out its functions NB: Not just fixing corruption, but also improving performance

Aim of bureaucratic reform:

to create a civil service whose personnel are ‘clean’ (non-corrupt), professional and accountable

and which is efficient and effective in carrying out its functions

NB: Not just fixing corruption, but also improving performance

Ministry of Finance Two main components of this reform effort improving the way the Department goes about its business Organisation structure Task processes improving the way human resources are managed The latter is of far greater fundamental importance

Two main components of this reform effort

improving the way the Department goes about its business

Organisation structure

Task processes

improving the way human resources are managed

The latter is of far greater fundamental importance

Ministry of Finance Human resources management detailed job descriptions for each position identifying training needs quantifying surpluses and deficits of skills grading each position determining a corresponding structure of remuneration developing a system for monitoring performance and rewarding or penalising individuals accordingly

Human resources management

detailed job descriptions for each position

identifying training needs

quantifying surpluses and deficits of skills

grading each position

determining a corresponding structure of remuneration

developing a system for monitoring performance and rewarding or penalising individuals accordingly

Ministry of Finance Human resources management Opening up vacant positions to (internal) competition Reward for good performance is rapid promotion to high level positions that are very well paid Penalty for poor performance is no promotion, hence relatively low pay

Human resources management

Opening up vacant positions to (internal) competition

Reward for good performance is rapid promotion to high level positions that are very well paid

Penalty for poor performance is no promotion, hence relatively low pay

Ministry of Finance Competition for promotion and promise of high remuneration probably the key features of reform But there’s a long way to go… KPK raid on Tanjung Priok Customs Office NB: at request of MOF

Competition for promotion and promise of high remuneration probably the key features of reform

But there’s a long way to go…

KPK raid on Tanjung Priok Customs Office

NB: at request of MOF

Review of governance issues for Indonesia Ross H. McLeod Indonesia Project Australian National University 12 November 2008