Review Of Governance Issues For Indonesia

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

‘ 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 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.

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

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)

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

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 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

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)

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…

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

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

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…

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

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.

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.

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

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

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

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

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

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

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

Review Of Governance Issues For Indonesia

by rossmcle on Nov 12, 2008

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Review Of Governance Issues For Indonesia — Presentation Transcript