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.