Good governance does matter for the reduction of poverty

Alex Arifianto, Researcher, The SMERU Research Institute, Jakarta
Aarifianto@smeru.or.id

The 1997/1998 Asian economic crisis reminded us all that the issue of poverty reduction is very crucial. High economic growth during the previous three decades was successful in reducing absolute poverty in the country. However, the poverty rate doubled after the crisis began, wiping out many years of progress in this area and putting the issue of poverty back into the national policy agenda.

In searching for the causes of the crisis, the issue of governance was brought into the limelight. The hypothesis put forward was that bad governance -- popularly known as KKN (corruption, collusion, and nepotism) -- had weakened the economy and was one of the key causes of the economic crisis that had thrust millions of people back into poverty.

After the crisis, there were efforts to initiate various anticorruption reforms. However, these were short-lived. This could be seen from the fact that many prominent government officials indicted for corruption during the past few years either received very light sentences or were exonerated completely.

This is an indication that corruption has become so entrenched within the government apparatus that the current leaders are unwilling to implement an effective anticorruption strategy, since doing so would only hurt their rent-seeking interests.

Corruption affects poor citizens the most because they occupy the weakest social position and are the most powerless in influencing decisions that affect their lives. They are the most vulnerable group and are the most affected by bad governance practices.

For instance, when the government decided to create various marketing boards for agricultural and plantation commodities that only benefit certain government cronies, the poor farmers were seriously harmed. However, they had no choice but to live with it. Occasional protests fell on deaf ears or, even worse, were met with harsh suppression done by government security forces.

Economic theories on governance and poverty reduction strongly suggest that they are interrelated. Bad governance makes poverty reduction efforts ineffective, while poverty reduction programs provide a fertile ground for corruption. The consensus that emerges from this line of thinking is that efforts to promote lasting poverty reduction can only be achieved through the adoption of good governance practices.

Good governance is necessary if all aspects of poverty are to be reduced, not just through an increase in income, but also through empowerment and greatly increased economic, political and social opportunities for the poor. At the same time, corruption has made poverty reduction efforts ineffective.

This is sometimes very direct, for instance in cases where funds for poverty reduction are diverted to the pockets of corrupt officials; or indirectly through the increase in the prices of staple consumer goods that the poor cannot afford due to the prevalence of semi-legal and/or illegal fees and taxes.

There has been no quantitative study done on the impact of corruption and bad governance on poverty reduction in Indonesia so far. However, a recent study conducted by the SMERU Research Institute entitled Governance and Poverty Reduction: Evidence from Newly Decentralized Indonesia attempts to find links between corruption, governance and poverty in several of the country's districts.

The district governance index data in the study were obtained from the Regional Autonomy Implementation Monitoring Committee (KPPOD) and the Institute for Social and Economic Research of the University of Indonesia (LPEM-UI), while the district poverty rates were obtained from the Central Statistics Agency (BPS).

On average, the districts in the sample had a lower poverty rate in 2002 compared to the 1999 rate. However, districts with a defective bureaucratic culture (i.e., bad governance) have a lower poverty reduction rate compared to districts with a better bureaucratic culture.

Poverty reduction in the latter group doubled that of the former (3.41 percent and 6.95 percent respectively). Districts with a very good bureaucracy experienced further doubling in the rate of poverty reduction; such districts, on average, experienced a 15 percent reduction in their poverty rates.

The study also found that economic growth tends to enhance poverty reduction, but government spending tends to stifle it. This indicates that districts that strive for higher economic growth will achieve poverty reduction at a faster rate. On the other hand, there are indications that higher taxes and government spending are counterproductive to the efforts to reduce poverty, or at least they do not contribute to poverty reduction. Thus, it is concluded that there is a positive relationship between the adoption of good governance practices by regions and a faster poverty reduction rate.

The policy recommendations of this study are that clear standards need to be established at the national level to promote good governance by local authorities. This should be followed by incentives and systemic reforms that will encourage government officials with both rewards and credible threats -- the carrot and the stick -- both at national and local levels, in practicing good governance.

At the same time, civil society needs to establish a consensus and build a coalition to combat bad governance, through media campaigns, class-action lawsuits and evidence-based publications.

To conclude, in order to achieve lasting poverty reduction, it is essential for the government (both national and local), with encouragement from civil society groups and other stakeholders, to adopt good governance practices and to implement meaningful anticorruption reform initiatives. It is the poor that bear most of the consequences of bad governance practices and corruption in this country, and they will be the ones who gain the most from good governance.

The views expressed here are solely those of the author.