Decentralization of powers or corruption?

By Santi W.E. Soekanto

JAKARTA (JP): At the bottom of greater demands for regional autonomy is the wish for power to be dispersed in order to overcome the central government's incapability of ensuring smooth delivery of goods and services.

Some people believe that decentralization of power often leads to "decentralization of corruption."

The 1999 Law No. 22 and 25 on regional autonomy and fiscal balance, respectively, were introduced amid mounting pressure in the resource-rich provinces of Aceh, Irian Jaya and Riau to break away from Jakarta rule over what was perceived as decades of plundering of their vast natural resources with little given in return.

Under the new rulings, the provinces now control affairs of education, health, land rights and transport policies, as well as investment approvals.

The local government will also now have control over general mining activities (including gold and copper) but not over oil, gas and radioactive substances. The rulings also exclude affairs in foreign policy, defense, religion, law, fiscal and monetary affairs.

While the move has been welcomed across Indonesia's political spectrum, it has raised concerns among foreign investors that local authorities might be ill prepared to handle their new responsibilities. Investors also worry that decentralization will open up avenues for corruption among local authorities vested with the responsibility to handle greater amounts of funds.

Is this always the case?

For Indonesia, which has been repeatedly described as "the most corrupt country in Asia", it may not always be the case.

Indonesians will by now have accepted the institutional needs for devolution of power and the establishment of public enterprises in order to deliver services and goods efficiently.

What is to be discussed further, however, is why such structure encourages corruption in the country where corruption dogs a person from birth until his death.

Although the stated agenda for both devolution of power and public enterprises is the same -- namely to provide people with efficient delivery of goods and services, the two are actually operating on different principles. The first is dispersal of power, while the second is relatively marked with state intervention.

However, countries often are unable to choose between a) the inefficiency of central governments or b) corruption, but in fact have to face the double problems simultaneously.

There are exceptions to this observation. South Korea may be a case in point. Under President Park Chung Hee (1963-70), the country's economy developed enormously and corruption was thought to be productive as favors were not granted solely on the basis of political patronage but on economic performance. The cost, however, were civil liberties and political freedom.

In Indonesia, corruption features heavily at various stages of power administration. Corruption was present when power was heavily centralized in Soeharto's hands and public enterprises were turned into monopolies that benefited only a few Indonesians. It was also present when Soeharto made gestures to devolve economic powers onto private enterprises.

A broad definition of corruption would be misuse of public posts for private gain (Fiona Robertson-Snape, 1999). This covers practices of collusion and nepotism rampant in Indonesia.

Here, a large number of people are resigned to the fact that it is frequently necessary to pay a bribe when registering the birth of a baby, or applying for a driving license, or a marriage certificate or when obtaining a compulsory identity card. The so- called "petty corruption" is a daily reality that is invariably explained away by the low wages of Indonesia's civil servants.

Many scholars believe corruption is symptomatic of other causes, and that opportunities for corruption on a large scale arise in particular political, economic and cultural conditions.

Among the political factors identified are a lack of accountability, transparency, and weak democratic institutions.

Among the cultural factors are centuries-old dominant Javanese culture -- the offering of gifts by subjects to their rulers, for example, is said to explain why bribery is rife.

According to such an explanation, gift-exchange is a business norm in Indonesia and should not be considered corrupt. Nepotism and collusion can similarly be explained. In a traditional culture where family loyalties are stronger than state loyalties, a public official's duty to his office is secondary to that towards his family or community.

Any opportunities to further the economic or employment opportunities of that family will therefore be considered legitimate in terms of the official's priorities.

For years, corruption in Indonesia was perpetuated by Soeharto's need to secure his position by enabling key figures in the bureaucracy and the military to benefit economically from their loyalty. Adam Schwartz once wrote: "To Soeharto, this is not corruption, rather it is the spoils of office. Big corruption ... has its roots in ancient cultural traditions, and from Soeharto's perspective the dispensing of government largesse is one of the personal prerogatives of the Javanese ruler."

Among the economic factors identified and blamed for the rampant corruption is extensive government intervention in the economy because of the rents that this intervention creates.

This factor also was present under the previous president, Sukarno. Then, the government was omnipresent in the economy, which was dominated by state enterprises and tied up in bureaucratic red tape, providing ample opportunities for corruption.

When Soeharto came to power in the late 1960s, inflation was running over 600 percent. Indonesia had a negative growth rate, a huge foreign debt and almost fully depleted foreign reserves.

Soeharto then embarked on a highly pragmatic economic policy -- opening up the economy in order to attract foreign aid and investment, reducing the size of government and the level of government subsidies.

The period of liberalization, however, did not last long. Over the course of his rule, Soeharto's economic policies vacillated between liberal and outward looking economic policies promoted by Harvard-trained technocrats and inward, interventionist policies advocated by economic nationalists.

According to Robertson-Snape, during the 1970s and early 1980s the economic pendulum swung away from liberalism and there was a resurgence of nationalist and interventionist ideas. During this period of protectionism, economic policies turned inwards while restrictions were placed on foreign investments and a state-led drive for import substitution industrialization was initiated.

By the mid-1980s the state owned over 200 enterprises, ranging from tea plantations to steel manufacturers. Indigenous industries were protected from external competition and imports were controlled through a sole-importer policy.

Soeharto managed the situation into one that benefited his closest allies. The monopoly on the import of plastics, for example, was given to a company controlled by Soeharto's cousin Sudwikatmono and two of his sons: Sigit Haryoyudanto and Bambang Trihatmodjo.

Following the end to the oil boom in the 1980s, Indonesia again shifted its economic policy-making as oil revenues could no longer subsidize inefficient domestic industries and inward looking, interventionist policies became untenable.

Indonesia needed to encourage private enterprise, to cut production costs across industries and create an industrial base that could compete on world markets. Deregulation and economic liberalization -- often emphasized as important anti-corruption policies -- were given urgent attention.

Banking reforms, taxation reforms and customs reforms were introduced successively in 1983, 1984 and 1985. Each reform removed certain opportunities for collusion. Banking reforms, for example, put a stop to the practice of command loans whereby banks were instructed by political leaders to lend money to favored individuals and companies, without undertaking the usual commercial evaluation process.

The approach was meant to shift power from the government to the private sector, to break key monopolies and ease the growing public outcry against corruption.

The regulatory responsibilities of the state remained strong, as did Soeharto's power of patronage. His family and favored supporters again benefited from the liberalization -- political connections made it easier for them to secure licenses and other contracts and to expand their business interests into most of the vital sectors of the economy including roads, car manufacturing and telecommunications.

When what was thought to be the world's largest deposit of gold was discovered in Indonesia, the battle for exploitation rights "worth billions of dollars" inevitably involved members of the Soeharto family.

A small Canadian company called Bre-X discovered the deposits, but was later bogged down in bureaucracy while waiting for official approval to exploit the find.

The company also had to contend with a rival bid from international mining giant Barrick Gold Corporation. In order to secure the rights, Barrick formed a partnership with Soeharto' s eldest daughter, Siti Hardijanti Rukmana.

In response, Bre-X signed on the eldest son, Sigit Haryoyudanto. His fee was 40 million rupiah up front, and a 10% stake in the mine -- a deal potentially worth $1 billion. Both sides essentially bought a member of the president's family in order to secure the deal.

In conclusion, countries are not always in the position to choose between inefficiency of a decentralized power or corruption. In the case of Indonesia, the two go together.