SBY and good governance in Indonesia

SBY and good governance in Indonesia

Fauzi Ichsan

When Susilo Bambang Yudhoyono was elected president, many in
the country were elated. They thought Indonesia had finally
chosen the right man to clean up the country's biggest problem --
widespread corruption.

Fighting corruption has been SBY's campaign motto ever since
he began running for president. He has a huge task. Corruption
has long been a structural, if not a cultural issue, something
even schoolchildren accept as a way of life.

Corruption has become the single biggest obstacle to
investment and economic growth. And SBY, as he is known, has few
options. To accelerate economic growth to 7 percent by 2009 --
his election promise -- his government could either increase its
spending or promote private investment.

The government, with its already-high budget deficit, cannot
easily increase its spending without worsening the country's
financial situation and upsetting the markets. To accelerate
economic growth meaningfully, private investment therefore has to
accelerate. And the surest way to accelerate private investment
is by reducing corruption.

However, far below the highfalutin' political rhetoric, there
is a world of reality. Any president -- no matter how clean --
cannot easily combat corruption if, like in this country, it is
endemic. Corruption has infected the government, legislature,
legal system and the corporate sector.

Analysts often say that in the government, low salaries cause
corruption. But top government officials, who are certainly not
poor, are known to have taken lucrative illegal kickbacks from
big government contracts. Furthermore, despite all its virtues,
regional autonomy has also decentralized corruption, from central
down to local governments. Corruption has hence become "equitable
and egalitarian".

In the legal system, many investors can only see corruption in
both the district and high courts, and believe the only way they
can get justice is to appeal all the way to the Supreme Court,
which is a problem given the court's backlog of thousands of
cases.

And corruption goes beyond these courts -- the Attorney
General's Office and the police are frequently accused of graft
or other malpractice. When law enforcers are themselves seen as
corrupt, the situation becomes untenable.

The fall of former president Soeharto and the rise of the
democracy movement gave people hope that corruption would be
dealt with seriously, especially through the empowerment of the
legislature. But like an advanced cancer, corruption has already
spread to all the legal organs.

And when graft is so widespread the corporate sector, which
often claims to practice good governance, is also affected.

Indonesian conglomerates have used weaknesses in the legal
system to default on billions of US dollars in debt. This
compelled the government in 1998/1999 to carry out the most
expensive bank rescue in history, worth US$65 billion, which
Indonesians are still paying for. Furthermore, the banking sector
today remains reluctant to lend money to the corporate sector
precisely because of that trauma of widespread debt defaults, a
reason why private investment is slow.

Corruption can only be seriously reduced if tackled
comprehensively and consistently across all segments of society
-- a challenging task -- but not impossible. For a start, for
many Indonesians SBY does have a relatively clean slate -- unlike
some of his ministers.

He is saying the right things and making the right symbolic
gestures; visiting the National Police Headquarters, the tax
office. His choice of Abdul Rachman Saleh as Attorney General has
also been praised. Some of Abdul's legal initiatives have also
given people hope.

And even symbolic gestures can have results. In government
offices commonly known for malpractice, there is already a sense
of restraint among civil servants who usually "charge fees" for
their public services.

While the issues are very complex, eventually there are three
complementary ways to tackle corruption; the good behavior of
government and political leaders, taking legal action against
wrongdoers and introducing the right government policies.

The good behavior of the country's leaders sets the tone. If a
leader shows a good example, their subordinates are likely to
follow suit, especially in a paternalistic society like
Indonesia's. Good behavior must then be followed by legal action
not only to punish the wrongdoers but, more importantly, to build
certainty of law for the future.

Legal action, however, will be difficult, especially when the
attorney general's office and the courts themselves are accused
of being riddled with graft. Furthermore, even if law enforcers
can get their acts together, they will at some point go up
against the country's ever-powerful vested interests.

These vested interests, including those who have been enjoying
strong political influence for more than 20 years, are likely to
defend themselves with everything at their disposal. They will
not go down without a fight.

Should the government take the legal path, it could become
mired in complex legal battles that could slow down the
implementation of needed political and legal reforms.

A good example of this is the Indonesian Bank Restructuring
Agency that, with its extra legal powers, never won a single
court case against the large bad debtors. The complexity and
costs of the legal option leave good government policies as the
next viable option to reduce corruption. This option includes
four possible actions:

Firstly, by further deregulation and liberalization. For
investors, excessive regulations create bureaucratic
inefficiencies and room for corruption. These in turn create a
"high-cost economy" that makes Indonesian companies less
competitive in a globalized market.

By selectively abolishing unnecessary regulations and
simplifying existing ones and avoiding contradictions between
regulations, the government would not only improve Indonesia's
investment climate but also reduce the unnecessary powers of
officials that accommodate graft. Simply put, if you reduce the
opportunity for corruption, you will reduce corruption.

Secondly, by ensuring fair and transparent government
procurement and a competitive bidding processes. Every time the
government buys or builds something, it creates concerns that it
is intentionally paying too much to benefit corrupt government
officials and the product suppliers.

Even former economic minister Kwik Kian Gie said that a third
of development funds are "stolen" through project mark-ups. By
ensuring a more transparent process of government purchases, the
room for graft would be reduced.

Thirdly and most controversially, the privatization of state
enterprises. There are concerns that many state-owned companies
operate carelessly for the personal benefit of their top managers
and the political elite who appoint them, knowing that company
losses would be subsidized by the government.

Certainly there are valid arguments that some state
enterprises (especially those providing public goods, such as the
state electricity board PLN) should remain in public hands.
However, the government should privatize its assets (commercial
banks, hotels, plantations) that are best-managed by private
investors.

The government could then concentrate on regulating and
collecting taxes from the privatized assets. There are at least
four reasons why privatization is needed, especially in a
globalized economy where even former communist states, such as
Russia and China, have privatized state assets:

First, the government gets a lot of cash up front, which it
could spend to fund its budget deficit. Second, assuming the new
investors are big and experienced, they will transfer new
technology, impose professional management and sometimes bring in
fresh capital to make the privatized assets more competitive
globally.

Third, as the privatized assets become better companies, they
will generate bigger tax revenues to the government. Fourth, if
the privatized assets make losses, the government does not have
to rescue them -- unless, without such a rescue, there would be a
gigantic crisis, like the banking crisis in 1998, which could
trigger a political revolution.

In short, the government is financially protected. Certainly
the vested interests would play the nationalist card to resist
privatization. But as a new democracy facing a rapidly changing
globalized economy, where cross-border investments come and go
rapidly, Indonesia should see privatization as making its economy
competitive and protecting its people from old-style financial
abuses in state enterprises.

Fourthly, by maintaining a free and independent media. In the
absence of a strong legal system, other institutions should be
allowed to check corruption. These would include non-governmental
organizations (such as Transparency International) and the media.

A good libel law is also needed to deter the media from making
up stories in an when the media plays a big role fighting
corruption. By directing public attention to high-profile
corruption cases, the media is exerting political (and often
embarrassing) pressures on the government and courts to apply
real justice. Through high quality investigative journalism, the
media has a powerful role in limiting, if not reducing,
corruption.

All in all, only when the three acts -- the good behavior of
national leaders, the implementation of the right government
policies and legal actions against wrongdoers occur
simultaneously and persistently, can widespread bad governance be
meaningfully reduced.

And despite the complexity and scale of corruption, there is
still room for optimism. Following the economic and political
crisis in 1998, Indonesia is finally entering into a new social
and political equilibrium. In this equilibrium, civil society,
the media and the electorate are forcing legislatures, the courts
and the government -- itself led by a seemingly clean leader --
to seriously implement good governance. Insyah Allah, the country
will move in the right direction.

The cost of bureaucracy -- Starting a business

Number of Duration Cost

Procedures (no. of days) (% of GNI per ca)

China 12 41 14.5

Hong Kong 5 11 3.4

India 11 89 49.5

Indonesia 12 151 130.7

South Korea 12 22 17.7

Malaysia 9 30 25.1

Philippines 11 50 19.5

Singapore 7 8 1.2

Taiwan 8 48 6.3

Thailand 8 33 6.7

Vietnam 11 56 28.6

United States 5 5 0.6

East Asia & Pacific 8 52 47.1

Source: World Bank

The author is a vice president and chief economist in an
international bank based In Jakarta. His views expressed herein
are personal.