Promoting Good Governance

Promoting Good Governance

Purbaya Yudhi Sadewa
Senior Economist
Danareksa Research Institute
Jakarta

The Indonesian community at large has agreed that creating
good governance is one of the main agendas of Reformasi. It
seems, however, that the implementation of good governance is
still far away. And in the open economy era, which creates
stiffer competition among nations, Indonesia will experience huge
losses if it fails to move toward creating good governance.

Good governance is sometimes defined as the process whereby
elements in society wield power and authority, and influence and
enact policies and decisions concerning public life, economic
matters, and social development.

With good governance, all three supporting pillars (the state,
civil society, and the market/business community) intertwine
synergistically in political, economic and administration
activities. In addition to the legislature, civil society and the
business community provide checks and balances to monitor the
work of the government, which push the government to carry out
its tasks effectively. As such, it is hoped that the country's
social and economic resources can be managed efficiently, which
will ultimately lead to high and sustainable economic growth.

Indonesia has taken several measures in its efforts to create
clean government and good governance. For example, regional
autonomy, antimonopoly, bankruptcy and anticorruption laws have
been passed. Decentralization is expected to make public
administration more responsive to the people and their needs,
since regional governments are closer to their citizens than the
central government is. As such, decentralization should bring
about greater efficiency and effectiveness in the delivery of
public services.

Meanwhile, both the government and national legislature
established an independent commission (KPKPN) to serve as a
repository for the records of assets of government officials, to
audit these assets, and, in general, to investigate allegations
of corruption among government officials.

In addition, the media and NGOs have been granted more freedom
to scrutinize and criticize policies, programs and the actions of
both central and local governments. For example, Indonesian
Corruption Watch acts as a watchdog in respect of government
policies. All these steps are promising moves toward the
improvement of governance and a reduction in corruption.

So far, however, these efforts have not resulted in
significant improvements in governance. For example, it is widely
believed that decentralization only involves the decentralization
of corruption. And money politics (read: bribery) often taints
the election of governors and mayors. Furthermore, regional
governments have been concentrating too much on increasing their
revenues without realizing that sometimes they have created
regulations that are not friendly to business.

Also, illegal wood exports and illegal logging are still
widespread. These activities are flourishing as the officials
concerned are bribed to look the other way, or even provide
protection for the illegal activities. These activities have not
only reduced government revenues but also inflicted great damage
on the environment.

Why are we failing so badly? One major reason is that
Indonesia has failed to enforce the rule of law, which has
crippled the checks and balances function of the press, the
private sector and civil society. As such, wrongdoers can get
away with their crimes.

For example, very few of the individuals who misused Bank
Indonesia liquidity loans were convicted, let alone given jail
terms. Meanwhile, Akbar Tandjung has not yet started serving his
prison sentence even though he was sent to jail for 3.5 years.
And neither has the Supreme Court ruled on his appeal, even
though the Supreme Court rules provide for speedy decisions in
cases of major public importance, which the Akbar case
undoubtedly is. Both cases send the wrong message -- namely that
corruptors and embezzlers can get away scot-free.

Meanwhile, the inability of the central government to spin off
Semen Padang has sent a clear message to the international
community that the Indonesian government is facing huge
difficulties in regard to decentralization. The international
business community and multilateral agencies are using this case
as a litmus test to determine whether the Indonesian government
is able to uphold the rule of law. And apparently Indonesia has
failed the test.

The inability of Indonesia to uphold the rule of law raises
questions regarding the seriousness of Indonesia in its stated
desire to create good governance. And it suggests that the fight
against corruption is merely well publicized rhetoric.
Implementation and practice, by contrast, are both very weak.

And the international business community is well aware of
these woeful conditions. According to Transparency International,
Indonesia is one of the most corrupt countries in the world
(ranked 122 out of 132). Compared to other ASEAN countries
surveyed, Indonesia has the lowest ranking. Indonesia's
Corruption Perception Index (CPI) is also significantly below the
indices of Singapore, Malaysia, Thailand, the Philippines, and
even Vietnam (table 1).

Table 1. 2003 Corruption Perception Index (CPI)

This negative perception of Indonesia has had an adverse
impact on the Indonesian economy. First of all, on the back of
difficulties in calculating the cost of conducting business due
to corruption, multinational companies have become more reluctant
to set up production facilities in Indonesia. Some have even
relocated their existing production facilities overseas, which
has hampered job creation and pushed up unemployment. It is worth
noting here that Indonesia is currently the only country in the
region that is still experiencing negative flows of direct
investment; that is, more direct investment is flowing out of the
country than flowing in.

In addition, because conducting business in Indonesia is
considered to contain higher risks, international investors
require a higher premium in extending loans to Indonesian
companies. This has made it more expensive for Indonesian
companies to access funds from the international financial
markets.

Furthermore, in the AFTA era, most of the barriers to trade
have been or will shortly be eliminated, and companies in each
ASEAN country can export most types of merchandise to other ASEAN
countries with significantly lower import tariffs than before. As
a result, multinational companies can choose one country as a
production base for the ASEAN market. And it is more likely that
multinational companies will set up their production facilities
in a country that has better governance and a better investment
climate. This means that without improvements in governance, AFTA
will lead to the exploitation of Indonesia's market by
multilateral companies operating from neighboring countries.

Unfortunately, in the free trade era, protecting industry is
not as easy as before. Government support for a specific industry
under the WTO system is not allowed or is subject to
countervailing duties imposed by other countries. The government
can only implement industrial policy as far as it aims to promote
industrial competitiveness. And, currently, bad governance is one
of the main obstacles that is hampering the competitiveness of
Indonesian products on world markets.

Against this backdrop, if the problem of poor governance is
not rectified, then Indonesia will end up as a loser in the open
global economy.

The rule of law must be enforced more seriously if Indonesia
wants to have better governance. The formation of the KPK
(Anticorruption Commission) brings new hope to the fight against
corruption. Besides being vested with the functions of its
forerunner, the KPKPN, this commission has the authority to
investigate and to prosecute officials suspected of corruption.
With this additional authority, it is hoped that the KPK will
produce better results in enforcing the law against corruption.

Meanwhile, to alleviate the problems arising from
decentralization, Indonesia has to establish a rating system for
local governments. This rating system needs to be based on fair
market mechanisms that will create incentives for local
governments to pursue good governance practices and to create
conducive investment climates. The rating system would be very
useful for would-be investors to understand the characteristics
of the localities and their development potential. The ratings
should be updated regularly so as to allow regions with low
ratings to improve their governance and catch up with the highly
rated regions based on transparently assessed criteria.

Promoting good governance is a must if Indonesia wants to
emerge as a winner in the open global economy and experience a
faster rate of economic growth.