Good governance does matter for the reduction of poverty

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.