The Political Economy of Local Governance

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Bulletin of Indonesian Economic Studies

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The political economy of local governance: findings from an Indonesian field study
Christian von Luebke
a a
Stanford University , Published online: 24 Jul 2009.
To cite this article: Christian von Luebke (2009) The political economy of local governance: findings from an Indonesian field study, Bulletin of Indonesian Economic Studies, 45:2, 201-230 To link to this article: http://dx.doi.org/10.1080/00074910903040310
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Bulletin of Indonesian Economic Studies, Vol. 45, No. 2, 2009: 20130
THE POLITICAL ECONOMY OF LOCAL GOVERNANCE: FINDINGS FROM AN INDONESIAN FIELD STUDY
Christian von Luebke* Stanford University Downloaded by [The University Of Melbourne Libraries] at 20:26 02 April 2014
Why do some local governments perform well, while others perform badly? The rapid shift from centralisedauthoritarian to decentraliseddemocratic rule in Indonesia has been accompanied by a large variation in sub-national government policies across districts. Based on eight district case studies comprising 1,000 business surveys and 120 in-depth interviews, this paper argues that demand-side pressures from local rms, associations and district councils are less signicant than supply-side pressures from local government leaders in explaining variations in taxation, licensing and corruption practices. In Indonesias early transition to democratic decentralisation, societal pressures have been constrained by collective action problems and perverse political incentives. Local government leaders, on the other hand, have strong powers and new incentives for policy reform. In response to the good governance debate, this studys ndings suggest that government leadership is an important, often under-estimated, policy determinant that can compensate for (or aggravate) weak societal checks in transitioning economies.
INTRODUCTION What determines sub-national policy outcomes? Why do some local governments provide efcient and responsive services, while others exhibit high levels of administrative red tape and corruption? These questions have become increasingly important in view of Indonesias pronounced shift from authoritarian centralised to democraticdecentralised governance. Since the collapse of Soehartos New Order regime, Indonesia has become one of the most stable and pluralistic democracies in Southeast Asia. Between 1999 and 2009, Indonesian citizens elected roughly 1,600 national representatives, 30,000 local council members and 800 governors, mayors and district heads. In addition, since the implementation of decentralisation in 2001, local tax and service responsibilities have been fully devolved to more than 450 district governments. These reforms have
The author wishes to thank Anne Booth, Taco Bottema, Alasdair Bowie, Donald Emmerson, Merilee Grindle, Hal Hill, Yusaku Horiuchi, Tim Lankester, Andrew MacIntyre, Chris Manning, Neil McCulloch, Ross McLeod, Agung Pambudhi, Arianto Patunru, Budy Resosudarmo, Henk Schulte Nordholt, John Sidel, Hadi Soesastro, Thee Kian Wie, Peter Timmer and three anonymous referees for constructive comments; and Juan Fransiska, Martin Johari, Hari Pallapa, and Tanding Sari for their diligent eld assistance. The author bears sole responsibility for any errors of omission and commission.
ISSN 0007-4918 print/ISSN 1472-7234 online/09/020201-30 DOI: 10.1080/00074910903040310 2009 Indonesia Project ANU
*
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transformed Indonesia into one of the largest and most decentralised democracies in the world. Unsurprisingly, Indonesias rapid and far-reaching regime change has given rise to signicant policy differences across its regions. While some districts have introduced more efcient and responsive service environments, many have burdened the economy with new trade-distorting taxes, inefcient procedures and administrative corruption. This pronounced variation in the quality of governance suggests that a high level of policy uncertainty continues to constrain domestic and international investment. It also provides an opportunity to study the determinants of governance performance more broadly, by identifying what has motivated some districts to perform better than others. Sub-national policy differences offer a window into the political economy of reform and a valuable basis for testing contending good-governance arguments. This article explores two explanations of good governance: demand-side pressures coming from local citizens, in particular small and medium rms (henceforth societal pressure) and supply-side pressures exerted by district heads (henceforth government leadership). The societal pressure argument features strongly in recent good governance and corruption literatures (Boix, Adsera and Payne 2003; Hellman 1998; Kaufmann, Mehrez and Gurgur 2002; Klitgaard 1998). Combining notions of citizen participation (Chambers 1995), voice (Hirschman 1970) and social capital (Putnam 1993), this literature supports the over-arching proposition that decentralisation and local democracy empower civil societies to push for better government performance. Government leadership, on the other hand, arises as a key determinant in recent policy reform literatures: a common nding in comparative policy analyses in Asia (Mahbubani 2007; Rodrik 1996), Latin America (Grindle 2004; 2007) and Africa (Gray and McPherson 2001) is that public leaders shape policy outcomes by initiating reforms and supervising bureaucratic practices. The empirical results of this study suggest that government leadership is a more consistent explanation than societal pressure for local policy variations. The ndings from eight controlled case comparisons, comprising 1,000 business surveys and 120 interviews, demonstrate that demand-side pressures in rural Indonesia continue to be weakly developed. In Indonesias early transition to democracy, reform initiatives of local rms, associations and district councils are often compromised by collective action problems and perverse political incentives. The quality of government leadership, on the other hand, emerges as a salient force driving the quality of policy outcomes. The case ndings indicate that district heads with strong managerial skills and long-term career aspirations have successfully used their ofcial powers to initiate broad-based reform and supervise bureaucratic performance. The next section of this article provides a country-wide snapshot of local governance variation ve years after the introduction of democratic decentralisation. The third section explains the studys methodology: the use of sub-national variation for controlled case comparisons. The fourth section examines the effect of government leadership and societal pressure by assessing local tax, service and corruption practices across eight districts. The fth section places the empirical ndings in a political economy perspective. The nal section draws implications for scholarship and policy.
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The political economy of local governance: ndings from an Indonesian eld study
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VARIATIONS IN DISTRICT PERFORMANCE Indonesias decentralisation experience demonstrates that local governments have responded in diverse ways to the uniform devolution of tax and service authority. Existing surveys1 indicate that the extent to which district bureaucracies have constrained local economies with imprudent taxes, inefcient procedures and administrative corruption varies markedly across the country. One casualty of the rapid decentralisation process is the design of the local tax system. While the principal taxes (income, value-added and property) have remained with the centre, districts have gained control over existing local taxes (such as hotel, small-scale mining, advertising billboard and road lighting taxes) and the discretion to create new levies.2 Unfortunately, with rising local expenditures on the one hand and weakly dened national tax laws on the other,3 many districts have enacted distortionary taxes.4 But, as illustrated in gure 1a, these regulatory problems are far from uniform. A tax review by Indonesias Regional Autonomy Watch (KPPOD)5 indicates that just over one-half of the 134 districts assessed have experienced economic and/or legal distortions (scores below 3); one-quarter have seen moderate tax conditions (scores of 3); and almost onequarter have enjoyed tax environments conducive to business activity (scores
1 Problems of local tax, licence and business service practices are widely discussed in existing business climate studies; see, for example, Ray (2003); LPEMFEUI (2002, 2007); and World Bank (2006). 2 Although district own-source revenues (pendapatan asli daerah) have increased gradually since decentralisation, they still make up less than 10% of total local revenues. The lions share of district expenditures (93% in 2003) has been covered by transfers from the central government (Lewis and Suharnoko 2009: 228; DRSP 2006: 9). 3 Law 34/2000 on Regional Taxes and Levies (article 2.4) states that new taxes are not to obstruct economic development, but does not provide precise guidelines. The revision of Law 34 to include a positive list of non-distortionary levies is being debated in the national parliament at the time of writing. Another problem, as Ray (2003: 23) points out, is that the monitoring burden lies entirely with the central government. National ministries must identify district shortcomings (innocent until proven guilty), rather than local governments being required to seek national approvals (guilty until proven innocent). As a result, a large proportion of local regulations have not been reviewed (Lewis 2003; World Bank 2003: 29). 4 The National Chamber of Commerce and Industry (Kadin) estimates that over 70% of the new local regulations hamper economic development, because they either overlap with existing national taxes or constrain regional trade ows (Tagukawi 2003: 4). Concerned with economic distortions, the Ministry of Finance cancelled nearly one-third of district tax regulations it reviewed in 2001 (Lewis 2003: 187), and a total of 450 local bills reviewed between 2001 and 2005 (Simanjuntak 2005: 2). 5 KPPOD is a private research institute created in 2001 as a joint project of the National Chamber of Commerce and Industry (Kadin), academic institutions (University of Indonesia, Centre for Strategic and International Studies and Prasetiya Mulya Business School) and national media companies (Jakarta Post, Bisnis Indonesia and Suara Pembaruan). Since 2001, KPPOD has increasingly stimulated policy debates by publishing annual rankings of district business climates.
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FIGURE 1 Variation in District Policies and Practicesa

1a Tax Bill Evaluation 1b Licence Administration
Tax distortion index 5 4
Licence administration index 9 8 7 6 5 4 3 2 1
3 2 1
33
66
99
132
55
110
165
1c Fairness of Tender Process
1d Licence Corruption
Tender fairness index 9 8 7 6 5 4 3 2 1 55 110 165
Licence corruption (Rp '000) 500 400 300 200 100 0
54
108
162
a The horizontal axes show districts in ascending order of indicator value. Municipalities are not
included (see footnote 6). Indicators are explained below. 1a (134 districts): the indicator measures the quality of newly enacted district tax bills in terms of degree of economic and legal distortion; evaluations range from 1 (very distortionary) to 5 (very conducive to business activity). 1b (166 districts): the licence administration index combines rm perceptions of bureaucratic ease and timeliness of processes to obtain common business permits; responses range from 1 (very poor) to 9 (very good). 1c (166 districts): the fairness of public tender index reects rm perceptions of districts scal and managerial integrity during tendering for the construction of public schools, hospitals, roads and government buildings; responses range from 1 (very unfair) to 9 (very fair). 1d (162 districts): licence corruption is calculated as the mean value of reported bribe payments (Rp 000) for ve common business licences (SIUP [trade], Lokasi [location], Gudang [warehouse], IMB [building] and HO [externalities] permits). Source: KPPOD (2004a; 2005) survey data.
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above 3) (KPPOD 2004a).6 Thus, the main message arising from these data is that regulatory conditions remain critical, but also differ signicantly across districts. A similarly diverse picture arises in the case of administrative procedures. At this early stage of transition, many local bureaucracies (dinas) have attained monopolylike positions no longer under central supervision but not yet under fully-edged democratic control (Azis 2003: 3). In its Doing Business 2009 assessment, the World Bank (2008) ranks Indonesias administrative procedures for starting a business as among the most time- and cost-intensive in the world (129th among 181 countries). Registering a limited liability company in Indonesia takes more than three months twice as long as in most other ASEAN countries. In obtaining the necessary permits rms face a myriad of desks and paperwork at multiple technical agencies. There is considerable variation in regulatory performance across districts. Rustiani (2003: 80), for example, nds that the costs of obtaining small-scale industry permits (tanda daftar industri, TDI) can range from Rp 5,000 (Yogyakarta) to Rp 477,000 (Bandung), and processing times from two days (Yogyakarta) to 20 days (Medan). The KPPOD (2005) business survey conrms these pronounced differences. Information obtained from 8,700 private sector respondents in 224 districts and municipalities indicates that the quality of local licence administration is far from homogeneous. The licence administration indicator in gure 1b (for 166 districts), which comprises rm perceptions of bureaucratic ease and timeliness of processing, indicates a distinct spread between high and low ranking districts. Another illustrative indicator is the extent of administrative corruption. Corrupt government practices are not a new phenomenon in Indonesia. Studies show that administrative extortion (often referred to as cigarette, speed or grease money) was a persistent feature of the Soeharto era, and in the course of decentralisation has merely been dispersed across local governments (Ray 2003: 13; Schulte Nordholt 2005). On the basis of country-wide business surveys, KPPOD concludes that up to 80% of local businesses continue to pay informal fees when dealing with district bureaucracies (KPPOD 2004b: 70). In the rst years of decentralisation, these corrupt payments could raise licence costs by 60% and overall business expenses by 10% (LPEMFEUI 2002: 57). But below the aggregate level we nd, once again, distinct sub-national differences. These are particularly apparent in the way local governments administer public infrastructure construction and business licences. Despite uniform laws on transparent tender procedures (Keppres [Presidential Decree] 80/2003), the fairness with which districts allocate public contracts varies considerably. As illustrated in gure 1c, the KPPOD (2005) business survey found that just over two-thirds of the districts were characterised by unfair tender procedures (scores between 1 and 5), whereas just under one-third displayed relatively transparent and impartial practices (scores above 5). Similar variations emerge in terms of licence corruption. As depicted in gure 1d, survey results suggest that just under one-third of districts impose no unofcial licence fees; 44% demand illicit payments of up to Rp 50,000; and 27% inict illegal charges ranging between Rp 50,000 and Rp 450,000.
6 For comparability with our own case studies, which are of districts (kabupaten) rather than municipalities (kota), gures 1 and 2 present only the district data from the KPPOD studies, and exclude the municipality data.
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FIGURE 2 Relationship between Bribe Payments and Administration Times

Administration time (days) 40 III
F F F F F F F F
IV
30
F FFF F F F F F F F F F F F F F F F F F F F F F F F F F F F F
20
10
F F
F F F
F F F F F F F F F
F F FF F F F F F FF F F F F F F
F F F F
F F F FF
II
80 100
20
60 40 Payment of illegal fees (Rp '000)
a The graph depicts 89 districts with data on both dimensions. It omits 52 districts that reported average
bribe levels below Rp 100 and 25 that reported bribes above Rp 100,000, the former because of presumed under-reporting, the latter owing to limited plotting space. The quadrant border lines refer to median processing times (12 days) and median bribe payments (Rp 31,927). Municipalities are not included. Source: Own estimates based on the KPPOD (2005) business survey data.
In view of these diverging degrees of corruption, it is useful to test whether high bribe payments are associated with shorter administration times. While some economists have claimed empirical support for this grease hypothesis (Leff 1964; Lui 1985), others claim strongly to have refuted it (Kaufmann and Wei 1999; Kuncoro 2004). The KPPOD (2005) data, plotted in a corruptiontime diagram, provide little support for either position (gure 2): that is, there is no clear relationship between the level of bribes paid and the time taken to issue licences.7 The chart does, however, underline the pronounced variation in district performance. While some local governments are both faster and less corrupt than the sample median8 (bottom-left quadrant), others inict excessive time and bribe requirements on local rms (top-right quadrant).
7 Simple bivariate regression estimates based on the survey data reported in KPPOD (2005) for 114 districts suggest that, if anything, bribe payments increase with processing times for general business permits (tanda daftar perusahaan, TDP), although by very little. The coefcient for the regressor bribe payments for TDP permits is signicant (t-value of 3.24), but barely greater than zero (3.95e-05). 8 Median administration times and bribe payments across 114 districts (the 89 shown in gure 2 plus 25 outliers reporting bribes above Rp 100,000) are indicated by the quadrant border lines in gure 2 (see also gure 2, note a). (These medians are calculated exclusive of cases reporting bribes of below Rp 100).
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FIGURE 3 Location of the Eight District Cases
Source: Cartographic Services, The Australian National University, Canberra.
CONTROLLED CASE STUDY METHODOLOGY The variations in district practices make it possible to test the relative explanatory strength of good-governance arguments centred on society and on leadership. Based on strong district-level differences, this study chooses a set of distinct case studies in west, central and east Indonesia. The case selection is of central importance in this paper. It reects both analytical and Indonesia-specic considerations. In order to control for region-specic differences, the study compares four district pairs in four provinces: as shown in gure 3, these are Solok and Pesisir Selatan (henceforth Pesisir) in West Sumatra; Kebumen and Klaten in Central Java; Gianyar and Karangasem in Bali; and Bima and Lombok Timur (henceforth Lotim) in West Nusa Tenggara (Nusa Tenggara Barat, henceforth NTB). These districts are chosen in such a way that they vary in explanatory variables (King, Keohane and Verba 1994), while remaining similar in other socio-economic and political characteristics (tables 1a and 1b). In West Sumatra and Central Java, the members of the district pairs differ markedly in strength of government leadership, whereas in the second two provinces, Bali and NTB, they display substantial differences in the strength of societal pressure. The districts of Solok and Kebumen exhibit higher leadership qualities than their counterparts, Pesisir and Klaten (table 1a). While the district heads of Solok and Kebumen have attracted the attention of national and international media for their anti-corruption initiatives and visionary reform plans, the leaders of Pesisir and Klaten have been in the news in connection with budget irregularities and corruption allegations. Kebumens district head, Rustriningsih, was praised for her exceptional determination to improve bureaucratic standards and rural service delivery (Cochrane 2004; Perlez 2003). In a similar vein, Soloks district head, Gamawan Fauzi, received acclaim for his efforts to abolish seniority-based project allowances and to introduce Indonesias rst anti-corruption pact, in cooperation with Transparency International (Bachyul 2004: 4). In comparison, news reports on the district heads of Klaten and Pesisir, Haryanto Wibowo and Darizal Basir, indicate poor leadership qualities. Both were on the list of President Yudhoyonos corruption investigations in 2005: Wibowo for illegitimate procurements and
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TABLE 1 Government Leadership and Societal Pressure Cases 1a Matched district pairs with strongly differing government leadership indicators
West Sumatra Solok Government leadership indicators Integrity (media reports)a Anti-corruption efforts (%)b Business survey scorec Overall leadership quality Societal pressure Chambers/associationsd Literacy/schoolinge Pesisir Central Java Kebumen Klaten
High 95 4.2 High Insignicant High 95% 6.8 yrs
Low 37 2.7 Low Insignicant High 94% 7.4 yrs
High 48 3.8 High
Low 5 2.1 Low
Insignicant Insignicant Moderate Moderate 85% 6.2 yrs 1,162.3 29 230 28 Javanese 99 Islam 99 Christian 1 PDI-P 39 PKB 21 83% 7.3 yrs 1,108.1 30 350 24 Javanese 99 Islam 93 Christian 6 PDI-P 56 PAN 14
Control variablesf Population 2001 (000) 434.7 388.7 National transfers 2001 ($ million) 16 14 Annual income per capita 2002 ($) 450 400 Poverty rate 2001 (%) 12 13 Major ethnic group (%) Minangkabau Minangkabau 96 95 Major religions (%) Islam Islam 100 100 Major political parties 1999 (% support) Golkar 33 PPP 20
Sources a National and international media reports.
Golkar 25 PPP 21
b KPPOD (2005) business survey data; percentage of respondents (40 rms/district) that report moderate to very strong anti-corruption efforts.
c The business survey scores are composite indicators based on responses to the authors question-
naires, with roughly 125 respondents in each district; they summarise local perceptions (ranging from 1, very poor, to 5, very good) of ve sub-indicators: district heads integrity; political will; communication skills; power to change; and general popularity. d Authors pre-eldwork observations in Bali and NTB and interviews with national policy experts. e Indonesia Human Development Index (UNDP 2001). f Control variables are based on various data sources from the Ministry of Finance, the Central Bureau of Statistics and the National Election Commission. Political parties: Golkar: originally Golongan Karya (the state political party under the New Order, and one of the major post-New Order parties); PDI-P: Partai Demokrasi Indonesia-Perjuangan (Indonesian Democratic Party of Struggle); PPP: Partai Persatuan Pembangunan (United Development Party, an Islamic political grouping); PKB: Partai Kebangkitan Bangsa (National Awakening Party; Peoples Awakening Party); PAN: Partai Amanat Nasional (National Mandate Party).
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TABLE 1 (continued) Government Leadership and Societal Pressure Cases 1b Matched district pairs with strongly differing societal pressure indicators
Bali Gianyar Societal pressure indicators Associational presence (observation)d District schooling (years)e Awareness of local politicsg (%) Overall societal pressure Government leadership Business survey scorec Karangasem Bima NTB Lotim
High 7.6 72 High Moderate (2.6)
Low 4.7 62 Low Moderate (2.7)
High 7.0 72 High Moderate (3.2)
Low 5.5 40 Low Moderate (3.1)
Control variablesf Population 2001 (000) National transfers 2001 ($ million) Annual income per capita 2002 ($) Poverty rate 2001 (%) Major ethnic group (%) Major religions (%)
Major political parties 1999 (% support)
391.5 28 670 6 Balinese 97 Hindu 99 Islam 1 PDI-P 87 Golkar 7
359.5 24 400 19 Balinese 96 Hindu 96 Islam 4 PDI-P 78 Golkar 12
505.0 21 245 34 Mbojo 99 Islam 99 Christian 1 Golkar 52 PPP 9
971.2 25 240 37 Sasak 97 Islam 99 Hindu 1 Golkar 44 PPP 9
Sources
cf As for panel 1a. g Indonesia Governance and Development Survey (World Bank 2002; sampling and data information
available at <http://go.worldbank.org/GHY36RKTX0>); presented gures refer to the share of 60 household respondents (in each district) who were well-informed about local elections (that is, they could recall the names of district head candidates and local politicians).
property sales; Basir for misappropriation of agricultural and micro-credit funds.9 These differences in executive integrity are echoed in the KPPOD (2005) business survey results. The surveys conrmation of district heads anti-corruption efforts is signicantly higher in Solok (95%) than in Pesisir (37%); and more pronounced
9 Pertanian dan korupsi berjalan seiring (Agriculture and corruption walk hand in hand), Kompas, 18/11/2003: 3; Presiden keluarkan izin pemeriksaan dua bupati (President authorises investigation of two district heads), Tempo, 29/4/2005.
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in Kebumen (48%) than in Klaten (5%). Moreover, the eld survey conducted for this study demonstrates that perceived leadership qualities (a composite indicator consisting of district heads integrity, political will, communication skills, power to change and popularity levels) are remarkably high in Solok and Kebumen (4.2 and 3.8, respectively), whereas they remain relatively low in Pesisir and Klaten (2.7 and 2.1, respectively). Turning to the second explanatory variable, we chose Gianyar and Bima for their distinctiveness in societal pressure indicators. Both districts exhibit higher levels of associational presence, educational achievement and political awareness than the control districts of Karangasem and Lotim (table 1b).10 Gianyars associational strength rests on long-standing craftsmanship and sustained tourism ows. Numerous handicraft associations have sprung up in villages that produce silverware, stone sculptures, ceramics and wood carvings. Moreover, citizens in Gianyar seem better educated than their peers in Karangasem (7.6 versus 4.7 average years of schooling) and somewhat better informed about local politics (72% versus 62%). Similar differences arise in NTB. A lively seaport during the days of the colonial spice trade, Bima continues to host a large community of small-scale traders and agro-businesses. The district stands out for its active chamber of commerce which, according to interview and media data, has repeatedly criticised government practices and encouraged rms to engage in public decision making.11 Bima is also characterised by higher average levels of schooling than its neighbour Lotim (7.0 versus 5.5 years) and by greater political awareness (72% versus 40%). Based on this controlled case selection, the study evaluates differences in local government performance. Two methods in particular were used to collect data on district policies and practices. The rst was to carry out local business surveys. During 12 months of eldwork, from April 2005 to March 2006, we conducted business surveys with 1,000 respondents (roughly 125 in each district).12 Survey respondents were randomly chosen from listings in local yellow pages directories, and were evenly stratied across retail, manufacturing and service sectors. Consistent with employment structures in rural Indonesia, roughly 90% of the surveyed respondents were owners of small and cottage-sized rms.13 The second
10 Undoubtedly, there are other ways to measure local societal pressure. In this paper I focus on the outlined private sector indicators for two reasons. First, data on them were available for all district cases (whereas data on media access or NGO activity were patchy in Eastern Indonesia). Second, small and cottage-size rms (the primary respondents in the survey) are strongly represented in district societies. 11 The head of Bimas local chamber of commerce (Kadinda), Qurais Abidin, is reported to have chided government ofcials repeatedly for their failure to provide effective services and attend to public needs (Anwar 2001). Other reports describe Bimas Kadinda head as a rigorous government observer and a tireless supporter of small rms (Menggagas kerja sama KukarNTB [Envisioning cooperation between Kutai Kartanegara and West Nusa Tenggara], Bali Pos, 5/8/2003: 23). 12 The survey greatly beneted from the assistance of four local enumerators (most of them undergraduate students) in each district, who received a 5-day training course before administering the survey questionnaires. 13 According to Rice (2000: 7), small and cottage-sized enterprises account for roughly 90% of Indonesias labour force and 40% of national GDP.
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data collection method was the conduct of in-depth interviews with over 120 local stake-holders and national policy experts.14 Interviews were semi-structured, with questions asked about local business conditions, government performance, corruption and democracy. In each district, the sampling frame included four ofcials (nance, planning, small-industry, economic development), four business people (retail, manufacturing, public construction, services), one social science academic, one chamber of commerce and industry representative, two NGO members and two local journalists. Interviews were complemented with direct observation in government ofces and local markets. Downloaded by [The University Of Melbourne Libraries] at 20:26 02 April 2014 LOCAL GOVERNMENT PERFORMANCE: COMPARATIVE CASE FINDINGS The analysis of local governance in the eight selected districts is based on three performance criteria: rst, an evaluation of the quality of administrative regulation, as reected in the degree to which new tax bills distort regional economies; second, an evaluation of administrative procedures, as exemplied by the efciency and quality of licensing services; and third, an evaluation of administrative corruption, as indicated by irregularities in public recruitment and administrative processes. These district performance assessments draw primarily on our survey and interview data and, occasionally, on evaluations conducted by the Ministry of Finance and KPPOD. Administrative regulation Pairwise differences in administrative regulation were found to be more pronounced in the leadership than in the societal pressure cases. A clear distinction emerged between Solok and Pesisir in our study. Since the introduction of decentralisation, Solok had refrained from enacting distortionary regulations, whereas Pesisir had passed a tax bill that clearly obstructs regional trade ows. Since 2001 all commercial vehicles crossing Pesisirs borders had been subject to road usage taxes (Perda [Regional Regulation] 13/2001). Apart from obstructing regional trade, these local taxes had become particularly controversial, according to rms in Pesisir, because more than half of the levies were captured by local ofcials, who gave receipts only to every second truck.15 Formal tax bills were not the only obstacle in Pesisir. Another problem, albeit less obvious, emerged in the form of informal trade levies. As one senior ofcial
14 Regional perspectives were complemented with national narratives in Jakarta, including interviews with former Indonesian ministers (for regional autonomy and agriculture), senior ofcials (in the ministries of nance and home affairs), policy experts (The World Bank, the United Nations, the German aid agency GTZ, The Asia Foundation, KPPOD) and academics at the University of Indonesia and the Centre for Strategic and International Studies. 15 That border tariffs represent a serious problem, not only in Pesisir but also in other parts of Sumatra, is well illustrated in a study by the SMERU Research Institute (2001). According to SMERUs estimates, trucks transporting oranges from Kabanjahe in North Sumatra to Jakarta pay levies (ofcial and non-ofcial) ranging from Rp 270,000 to Rp 1,000,000 a burden that can reduce business prots by up to 7%.
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admitted in a private conversation, many government and military ofcials are more inclined to reap benets from illegal logging than to prevent excessive deforestation in national reserves. Most traders comply with these informal taxes to avoid unnecessary trouble. It does not matter whether we carry legal or illegal logs, a local trader explains, payments to forest ofcers [polisi hutan] are a necessary evil for keeping the business on track if we dont comply, our houses will be raided and we end up being convicted for illegal logging, guilty or not. Similar informal charges on the transportation of timber occurred in Klaten. As a senior ofcial disclosed, the local forestry ofce was collecting roughly $20,000 worth of transport levies each year by making use of a legal grey zone. In the absence of clear district regulations, local ofcials collected charges on timber imports based on an outdated ministerial decree.16 Even more disturbing is that collected revenues were not accounted for in ofcial district budgets: according to informants in Klaten, these informal charges were often divided among senior bureaucrats. The levies imposed unwarranted burdens on Klatens furniture and handicraft industries. In Kebumen, on the other hand, there were no reports of formal or informal trade distortions. On the basis of these observations in Sumatra and Java, the tax environments in Kebumen and Solok at the time of the study can be ranked as very good (no distortions), in Klaten as poor (informal distortions) and in Pesisir as very poor (formal and informal distortions). Turning to the societal pressure cases, we found regulatory differences to be small in comparison. While both the districts in Bali had eschewed distortionary tax regulations, the opposite was true in NTB. According to records from the Ministry of Finance, the governments of both Bima and Lotim had enacted tax bills that signicantly obstructed regional trade and development.17 In the case of Bima, three regulations stand out in particular: rst, a levy on regional exports (Perda 16/2000) that taxes agricultural and manufactured goods at district borders at rates of 510%; second, a levy on local shers (Perda 7/2001) that charges annual head taxes of up to Rp 200,000, irrespective of sales or prots; and third, a levy on local cooperatives (Perda 15/2000) equal to 4% of their annual surpluses. Similar trade distortions, albeit less severe, were found in Lotim. Although Lotims parliament had refrained from enacting head taxes on small rms, it too had imposed a 5% export levy on the transport of all commodities across its borders (Perda 16/2001). Concerned about their negative welfare effects, the Ministry of Finance ofcially rejected all of the new tax bills submitted by Bima and Lotim.18 These national rejections, however, had little or no impact. As a senior ofcial in Bimas economic department explained it:
We are aware that the Ministry of Finance rejected [the export levy] in 2002 But the head of our law department advised us to disregard the national decree After 16 Ministry of Forestry Decree 310/Kpts-II/1999 (Guidelines for Granting Forestry Rights). 17 The evaluations presented in this paragraph were obtained from Ministry of Finance reports S26/MK.07/2002; S486/MK.07/2002; and S 523 /MK.07/2002. 18 While the Ministry of Finance can make suggestions for annulments, the nal decision lies with the Ministry of Home Affairs.
The political economy of local governance: ndings from an Indonesian eld study all, we live in the era of regional autonomy [and] the local trade tax constitutes one of our highest revenue sources.
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The analysis of administrative regulations in Bali and NTB highlights two ndings. First, and more generally, some local tax policies are instructive examples of initial setbacks to decentralisation. The governments in Bima and Lotim consciously ignored national-level rejections of trade-distorting tax bills, and gave priority to short-term government revenues over long-term welfare gains. Second, pairwise comparisons indicate little difference in regulatory quality. Since Gianyar and Karangasem exhibited no tax-induced distortions, the regulatory environment is rated as very good in both districts. Bima and Lotim, in contrast, had imposed imprudent trade taxes, a problem further aggravated in Bimas case by arbitrary taxes on shers and local cooperatives. Accordingly, the regulatory environment is categorised as poor in Lotim (one distortionary bill) and very poor in Bima (three distortionary bills). Administrative procedures Local administrative procedures can be distinguished in terms of quality and efciency. The quality dimension is exemplied in local service standards at the so-called one-stop shops (OSSs). The main objective of OSSs is to streamline licensing procedures: theoretically, citizens can complete bureaucratic formalities with one stop in these integrated service units, instead of visiting a succession of ofces. The qualities of these OSS units were assessed during unannounced visits in each district. The results are summarised in table 2. In the Sumatran and Javanese cases, superior leadership (indicated by the superscript L on the abbreviated district names in table 2) coincided with better service quality. The most striking differences emerged between Solok and Pesisir. The visit to Soloks OSS (satu pintu plus [one door plus]) set a high performance benchmark: licensing requirements and fee details were readily available in welldesigned brochures (and on display boards); three out of four service counters were attended by knowledgeable and affable staff; duty ofcials were administering licence requests on modern computer facilities; and all service areas displayed anti-corruption signs indicating that bribe payments were prohibited. Pesisirs service unit (pos yantu, short form of pos pelayanan satu pintu, literally, one-door service post), on the other hand, turned out to be a poorly managed, one-room facility. The small ofce, attended by two inexperienced ofcials, was equipped with run-down furniture and an outdated information board. Although eager to assist, the duty ofcers explained that most licensing matters were handled by sectoral departments. Notable differences emerged also in Central Java. The OSS in Kebumen (pelayanan perijinan, licence service) displayed a moderately good service environment. Situated behind three service counters, a group of well-trained civil servants responded instantly to licensing inquiries and provided helpful information brochures. Although interviews revealed the need for additional computer facilities and precise job descriptions, Kebumens business services compared favourably with those in Klaten. Hidden in the back corridors of the district heads ofce, Klatens OSS (unit pelayanan satu atap, literally, single-roofed service unit) was little more than a dark room lled with old typewriters and dusty les. The duty
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TABLE 2 Quality of One-Stop Services (OSS)a

Indicator West Sumatra SolL Information availability Staff capacity & attitude Physical facilities Data management Decision-making authority Anti-corruption measures OSS score (mean value) 4 4 5 5 3 4 4.2 Pes 2 2 2 2 1 1 1.7 Poor Central Java KebL 3 3 3 3 2 1 2.5 Kla 1 1 1 1 1 1 1.0 Bali GiaS 5 5 5 4 2 1 3.7 Kar 2 2 1 4 1 1 1.8 NTB BimS Lot 4 4 2 2 2 3 2.8
Overall service evaluation Good
Fair V-poor Good
Poor V-poor Fair
a Scores range from 1 (very poor) to 5 (very good). The superscripts L and S refer to high-leadership
and high-societal-pressure cases, respectively. Bima has no data () because it has no OSS. Source: Own evaluations based on interviews with business people and observations during unannounced visits.
ofcer, who reluctantly provided an outdated information sheet, was not trained to answer technical questions. In light of these poor conditions, it was unsurprising to learn that very few citizens make use of Klatens OSS services. In the Balinese and NTB cases, there was little or no alignment between societal pressure and service performance: while the Balinese comparison indicated a positive relationship, the NTB comparison pointed in the opposite direction. In Bali, Gianyars OSS (unit pelayanan terpadu, or integrated service unit) exhibited moderately good business services: excellent human, physical and informational facilities were somewhat compromised by limited decision-making authority (table 2). The service unit in Karangasem received a considerably lower evaluation: limited administrative powers were accompanied by poor physical and human capacities. Ironically, in the absence of properly dened functions, a set of new donor-funded computer facilities in Karangasems OSS remained untouched. In NTB, higher societal pressure was accompanied by lower OSS performance. Despite its active chamber of commerce, Bima had failed to establish an integrated service facility. According to interviews with local business people, the announced OSS project had long been held up by Bimas sectoral departments. In 2004, after several years of bureaucratic resistance, the government abandoned its plan for integrated services and redistributed earmarked resources to other routine purposes. The government in Lotim, in contrast, had succeeded in establishing an integrated service unit. Despite physical and technical limitations, Lotims onestop shop (Sintap) provided a moderately good service environment. Noteworthy was the provision of detailed licence information and a poster campaign against corruption. Two ofcial notices at the entrance reading do not trust intermediary agents; come to the service unit in person and double-check published rates; please report illegal fees indicated efforts to improve administrative integrity.
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TABLE 3 Licensing Times Before and After Decentralisationa (days)

Before Decentralisation West Sumatra Central Java SolokL Pesisir KebumenL Klaten GianyarS Karangasem BimaS Lotim Average 10.0 12.9 16.4 18.7 21.3 12.9 9.6 10.4 14.0 Last Two Years 7.1 9.7 15.9 15.5 26.6 14.0 7.6 9.4 13.2 Evaluation
Very good Good Fair Fair Poor Fair Good Good
Bali NTB
a Presented gures are based on responses to the survey question please estimate the average time
needed to obtain necessary business permits (a) before decentralisation and (b) during the last two years. Evaluation scores are explained in detail in appendix 1. The superscripts L and S refer to highleadership and high-societal-pressure cases, respectively. The unit days refers to calendar rather than working days, so there are 7 days in a week. Source: Authors business survey of 1,000 randomly selected local rms in eight districts.
A second indicator for administrative procedures is the efciency with which local bureaucrats process business licences. The eld survey of about 125 rms in each district provides an estimate of how many days per year local businesses spent obtaining standard government permits. Although bureaucratic formalities depend on the nature of the business activity in question, most rms are required to obtain TDP and disturbance permits (hinder ordonantie) for negative externalities. Additional sector-specic requirements include general trade (surat ijin usaha pedagang, SIUP) and industry licences (TDI). The survey data indicate that administrative procedures had improved slightly in recent years. Since the enactment of regional autonomy, local citizens took roughly 13 days to obtain necessary business permits (close to the median processing time derived from the KPPOD data shown in gure 2), one day less than in the predecentralisation years (table 3). To interpret these improvements as local efciency gains would be misleading, however. Since 2001, most administrative procedures have been fully devolved from the national and provincial level to the district level. The removal of super-ordinated authorisation (and related waiting periods) could arguably translate into shorter processing times than those observed in this survey. Since decentralised licensing procedures have markedly reduced communication and transaction costs, there seems to be ample room for further improvement in administrative efciency. In the pairwise comparisons, the largest differences in administrative efciency emerged in Bali. Firms in Gianyar reported that after the enactment of decentralisation it took them almost four weeks to clear common licence requirements
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(almost one week more than before decentralisation), whereas their colleagues in Karangasem took two weeks. While case differences in administration times remained insignicant in NTB (just over one week in both cases) and in Central Java (roughly 16 days in both cases), the comparisons in West Sumatra indicated moderate differences. Solok administered business permits within seven days (the best performance in the group), whereas Pesisirs rms took 10 days to nalise administrative paperwork. Consistent with these survey results (and evaluation scales outlined in appendix 1), administrative efciencies are rated as poor in Gianyar; fair in Kebumen, Klaten and Karangasem; good in Bima, Lotim and Pesisir; and very good in Solok. Although less pronounced than was the case for administrative regulation, observable case differences provide some indication that efciency in administrative procedures is negatively linked to societal pressure (Gianyar/Karangasem) and positively linked to government leadership (Solok/Pesisir). Administrative corruption A third aspect of local government performance is the extent of public corruption. The rst indicator of this draws on reported estimates of bribery during the recruitment of civil servants (pegawai negeri sipil, PNS).19 The interview question do some PNS applicants pay bribes in order to obtain local government positions received a surprisingly large positive response. Many of the non-government interviewees were willing not only to conrm the existence of corruption, but also to give estimates of the value of illegal transactions (table 4). The responses of non-government observers indicate that upfront career investments in the public sector are not an exception, but rather a recurrent phenomenon. On average, eight out of 10 non-government respondents conrmed that bribery conventions exist and that some PNS candidates invest signicant sums in securing life-long government employment. One NGO worker illustrated this point by stating:
One of my relatives was eager to join the government. He was offered a PNS position in exchange for Rp 35 million. To avoid suspicion, local brokers asked him to pay the money in four instalments. They call it onion payments, one layer at a time. In the end, he did not get the job, because someone else paid more than Rp 50 million. There is an enormous demand for public service positions. Some farmers even sell their land and livestock to make these payments for their children.
Reports on recruitment corruption differed considerably across districts. The interview data in table 4 suggest that the strongest evidence of illegal practices in
19 The Indonesian media have repeatedly reported on bribery in relation to PNS recruitment. The newspaper Kompas, for instance, featured the story of a PNS candidate complaining to President Yudhoyono about being asked to pay Rp 40 million to enter the public service in Bekasi, West Java (Kompas, 29/10/2004: 5). Other examples include: Penerimaan CPNS dinilai KKN [Corrupt public servant recruitment], Waspada, 24/3/2006: 12; Perlu pelicin Rp 4075 juta untuk jadi PNS di Sum-Ut [In North Sumatra, you need 4075 million to become a PNS], Republika, 3/12/2001: 11; Penerimaan PNS: Joko terindikasi langgar disiplin pegawai [PNS recruitment: indications that Joko violated the civil service disciplinary code], Kompas, 4/8/2006: 24.
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TABLE 4 Corruption during Public Service Recruitment (interview perceptions, Rp million per transaction)
Respondent No. 1 Central Java KebumenL Klaten West Sumatra SolokL Pesisir Bali GianyarS Karangasem NTB BimaS Lotim 2 3 4 5 6 7 8 9 10 Evaluation
15 90
8 75
8 75
0 75
0 70
exists exists 60 55
50
50
45
Fair 6 65 Very poor
0 30 30 40 45 50
0 28 25 30 45 50
0 23
0 23
0 20
0 15
0 0 exists exists
0 Very good Poor 23 18 20

Poor Poor
exists exists exists exists exists 0 20 15 15 12 8 exists exists 40 35 40 35 38 35 35 30 30 30 30 25 25
exists 36 Very poor 36 Very poor
a Presented gures are based on the interview question please provide an estimate of the bribe payments that some PNS [civil servant] candidates make to obtain a government position. = average of responses with a numerical value. Respondents in each district are displayed in descending order of reported bribes. The response exists indicates that respondents afrm bribe payments without providing clear estimates; indicates non-responses; evaluation scores are explained in detail in appendix 1. The superscripts L and S refer to high-leadership and high-societal-pressure cases, respectively. Source: Data from interviews with 10 non-government respondents in each district.
the surveyed districts is to be found in Klaten. Here, all 10 respondents conrmed the existence of upfront bribe payments and estimated that some civil servants have invested Rp 4590 million (an average of Rp 65 million) in securing their government positions. Given that monthly starting wages of PNS barely exceed Rp 1 million, these outlays are equivalent to roughly 48 years of ofcial salaries. These simple, rough calculations suggest that new government ofcials have an incentive to engage in illegitimate practices in order to secure a return on their investment. In Kebumen, by contrast, only a few interviewees reported such irregularities. With estimates ranging from 0 to Rp 15 million (average Rp 6 million), Kebumens interviewees observed distinctly lower bribe conventions. A similar contrast can be seen in the two Sumatran cases. In Pesisir, interview respondents estimated entry fees in the range Rp 1530 million (average Rp 23 million), and declared that the prevalence of corruption had increased since 2001. Soloks recruitment process, in contrast, received an exceptionally good evaluation. All interviewees in Solok without exception asserted that bribe payments were unheard of in recent years. While some acknowledged that
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irregularities occurred in the 1980s and early 1990s, there was general agreement that incoming ofcials had been selected in a fair and transparent manner since the introduction of decentralisation. The interviews in Bali and NTB suggested high, but less divergent, levels of corruption. In both Bima and Lotim, average bribe payments were reported at Rp 36 million. A striking feature was the similarity not only of these average gures, but also of individual statements: six respondents in Bima and ve in Lotim reported bribery payments of Rp 3040 million. The survey data in Bali also point to rather uniform levels of corruption, indicating that average PNS recruitment bribes amounted to Rp 20 million in Karangasem and Rp 18 million in Gianyar. Undoubtedly, given the limited number of observations, these gures should be interpreted with some caution. They serve not as proof, but rather as an indication, of bribery practices. Such qualications notwithstanding, the results help to identify diverging corruption trends: in one district there is no indication, in one district there is some indication, and in six districts there are strong indications, that some civil servants have secured ofce by paying bribes rather than performing well in entrance exams. Based on these trends (and consistent with the evaluation scale in appendix 1), the level of integrity in public recruitment is evaluated in this study as very good in Solok, fair in Kebumen, poor in Pesisir, Gianyar and Karangasem and very poor in Klaten, Bima and Lotim. These results indicate a clear alignment with underlying leadership differences, but no relationship between corruption scores and pairwise distinctions in societal pressure. The results for the second corruption indicator, administrative integrity during licensing procedures, were less clear cut. In West Sumatra, Soloks good recruitment practices coincided with low levels of licensing irregularities (table 5). Respondents in Solok reported that illegal add-on fees for business permits had fallen signicantly, from 5.2% of total charges during the pre-decentralisation years to 2.9% in recent years. In contrast, business people in Pesisir had experienced rising extortion since decentralisation, and had recently been paying average corruption premiums of 7.4%. Bureaucratic extortion in the two Central Javanese cases was higher and remained fairly equal across the two cases. According to our surveys, local rms in Kebumen encountered average corruption fees of 9.8%, whereas their colleagues in Klaten reported fees of 8.4%. Although the gures were slightly lower in Klaten than in Kebumen, they had increased more steeply since decentralisation. In view of these corruption tendencies, administrative integrity is ranked as good in Solok and as poor in Pesisir, Kebumen and Klaten (appendix 1). The survey results for the societal pressure cases in Bali and NTB provide an inconsistent picture. Respondents in Gianyar stated that average corruption fees had more than doubled, from about 5.5% to 12.3%, since the beginning of decentralisation (table 5). In the other three districts, business people faced far less government extortion. In Karangasem, Bima and Lotim, survey participants reported recent add-on fees of 2.64.1%, gures that had hardly changed since decentralisation. Based on these corruption indicators in the societal pressure cases, administrative integrity is evaluated as very poor in Gianyar, as fair in Lotim and as good in Karangasem and Bima. Interestingly, Gianyars case shows that administrative corruption can prevail regardless of high OSS standards. An NGO representative in Gianyar explains this as follows:
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TABLE 5 Corruption Fees during Licence Administration (estimated % of total charges)

Before Decentralisation West Sumatra Central Java SolokL Pesisir KebumenL Klaten GianyarS Karangasem BimaS Lotim Average 5.2 6.3 8.9 6.2 5.5 2.9 2.3 4.4 5.2 Last Two Years 2.9 7.4 9.8 8.4 12.3 2.8 2.6 4.1 6.3 Evaluation
Good Poor Poor Poor Very poor Good Good Fair
Bali NTB
a Presented gures are based on responses to the survey question please estimate average unofcial
costs (as percentage of ofcial prices) for business licences. Evaluation scores are explained in detail in appendix 1. The superscripts L and S refer to high-leadership and high-societal-pressure cases, respectively. Source: Authors business survey of 1,000 randomly selected local rms in eight districts.
The information brochures at Gianyars one-stop licensing service [which outline licence fees and times] can be misleading. Once we talk to licence ofcials, we are offered special assistance for special fees. In fact, they do exactly the same thing just in less time Actual licence procedures could be much faster But as long as the bureaucratic system remains unchanged, there is little hope of improvement.
Despite mixed results, administrative corruption seems to be somewhat lower in districts with good leadership. While pairwise results are relatively indistinct in Java and NTB and strongly contradictory in Bali, the comparisons in Sumatra provide some, albeit modest, support for the leadership hypothesis. Summary All in all, the results from these controlled comparisons in Sumatra, Java, Bali and NTB suggest that the quality of government leadership plays a greater role in explaining performance differences than does the presence of societal pressure. The empirical data give little indication that levels of pressure from local rms and societal representatives constitute a key explanation for diverging district outcomes. The selected cases in Bali and NTB which differ markedly in levels of higher education, business association activity and political awareness do not reveal a coherent pattern. Taken as a whole, the evaluations of administrative regulations, administrative procedures and corruption suggest that the high-societal-pressure cases are, if anything, characterised by lower government performance than the high-leadership cases. As summarised in table 6, although both Balinese governments demonstrated a fair overall performance,
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TABLE 6 Local Governance Evaluation of Societal Pressure Cases in Bali and NTBa
Province District Societal pressure level 1 Tax-induced distortions (distortion in new tax bills) Rating 2 One-stop services (observation score, 1 to 5) Rating 3 Administrative efciency (licence processing, in days) Rating 4 Public recruitment corruption (reported mean, Rp million) Rating 5 Licensing corruption (% of ofcial fees) Rating Overall evaluation Average rating (stars) Gianyar High Bali Karangasem Low Bima High NTB Lotim Low
None
None
Very strong
Strong
3.7
1.8
1.0
2.8
27
14
18
20
36
36
12.3
2.8
2.6
4.1
Fair (2.8)
Fair (3.2)
Poor (2.2)
Fair (2.6)
a Summary evaluation ratings range from very poor (1 star) to very good (5 stars); evaluation scales are explained in detail in appendix 1.
Source: Authors business surveys, interviews and observations.
the evaluation of high societal pressure Gianyar (2.8 stars) remained slightly behind that of Karangasem (3.2 stars), where societal pressure is less marked. Likewise, despite higher levels of associational and educational access, Bimas citizens faced less favourable government practices (2.2 stars) than their counterparts in Lotim (2.6 stars). The leadership comparisons, on the other hand, exhibit a relatively consistent pattern. The controlled case studies in West Sumatra and Central Java show that districts with better government leadership also displayed fewer regulatory tax distortions, more efcient licence administration and less public sector corruption (table 7). The comparisons in West Sumatra provide a particularly striking indication of this relationship. While the good leadership qualities of Soloks district head coincided with very good average performance (4.6 stars), the poor quality of Pesisirs government leadership corresponded with poor average regulatory and procedural standards (2.2 stars). It is remarkable, moreover, that Solok displayed better results in OSS services, administrative efciency and public recruitment practices than any of the other districts. The positive leadershipgovernance nexus is also conrmed, albeit less resoundingly, in the Javanese case comparison. While Kebumens good leadership was aligned with fair average local government
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TABLE 7 Local Governance Evaluation of Leadership Cases in West Sumatra and Central Javaa
Province District Reform-oriented leadership level 1 Tax-induced distortions (distortion in new tax bills) Rating 2 One-stop services (observation score, 1 to 5) Rating 3 Administrative efciency (licence processing, in days) Rating 4 Public recruitment corruption (reported mean, Rp million) Rating 5 Licensing corruption (% of ofcial fees) Rating Overall evaluation Average rating (stars) West Sumatra Solok High Pesisir Low Central Java Kebumen High Klaten Low
None
Very strong
None
Fair
4.2
1.7
2.5
1.0
10
16
16
23
65
2.9
7.4
9.8
8.4
Very good (4.6)
Poor (2.2)
Fair (3.2)
Poor (2.0)
a Summary evaluation ratings range from very poor (1 star) to very good (5 stars); evaluation scales are explained in detail in appendix 1.
Source: Authors business surveys, interviews and observations.
outcomes (3.2 stars), Klatens poor executive qualities were associated with poor average governance conditions (2.0 stars). POLITICAL ECONOMY OF LOCAL GOVERNANCE To explain the effects of government leadership and societal pressure it is necessary to take a detailed look at the political economy of local governance. The analysis of sub-national actors and their interests starts with an acknowledgment of Indonesias historical context. Clearly, decentralisation and democratisation took place not on a blank slate, but on an authoritarian foundation spanning the period from the Javanese kingdoms through Dutch colonialism (16191942) to Soehartos New Order (196598). It is well known that the New Order regime systematically suppressed political and societal movements (Crouch 1978; Thee, Hofman and Rodrick-Jones 2004) and established patronage networks that reached from the presidency down to the village level (Liddle 1996; McLeod 2000). The high level of corruption and preferentialism readily observable in the irregularities of public recruitment and contracts revealed by our survey conrms that democratic norms compete with patrimonial conventions.
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As I will argue in this section, initial impulses for improvements in government are most likely to come from district heads. Indonesias regime change has not only further enlarged the ofcial powers of district leaders, but also provided them with new incentives to improve governance. Reform impulses from societal forces, on the other hand, remain less signicant: in Indonesias early transition to democracy, local rms, associations and council members continue to be constrained by collective action problems and perverse political incentives. In order to illustrate the constraints facing local rms it is helpful to distinguish three groups: rst, a very large group of small indigenous rms local traders, shop-keepers and craftsmen of various ethnic origins and representing a large part of civil society; second, a small group of ethnic-Chinese rms, engaged mainly in wholesale and retail trade; and third, a small group of large indigenous rms that generate revenue from construction, procurement, resource extraction and manufacturing. In relation to the rst group, eld observations suggest that small rms are constrained by common collective action problems and deepseated risk aversion. First, consistent with Mancur Olsons (1965) argument, this groups large and dispersed structure hinders attempts to organise (high coordination costs) and enforce (high detection costs) joint activities among small rms. As a result, individual members tend to free-ride on others efforts and render joint initiatives ineffective. Second, small rms remain sceptical about the effectiveness of reform petitions. Based on their experiences during the Soeharto era, many interviewees concur that the personal risks involved in criticising government shortcomings clearly outweigh the possible benets of doing so. Even today, a majority of small rms share the view that their complaints fall on deaf ears or, worse, evoke bureaucratic retaliation. Scepticism is equally strong among Chinese Indonesian rms. Notwithstanding their small and coherent group structure, which allows for effective collective action, ethnic Chinese communities strictly refrain from engaging in public debate. This cautious behaviour emerges as a response to social hardship in recent decades. Many of the local Chinese rms (particularly in NTB and Java) report experience of ethnic violence and discriminatory treatment. Some witnessed anticommunist and anti-Chinese riots in the 1960s; others experienced anti-Chinese demolition and looting in the late 1990s. Against this background of social vulnerability, Chinese minorities are concerned primarily with maintaining friendly and stable relationships with local power-holders. As one Chinese entrepreneur in Kebumen summarises it: Many Chinese people are afraid to speak out in public. They believe that criticising ofcials harms their business Anxieties have strongly increased since Chinese shops were burnt down in the 1998 riots. Thus, despite their economic power in rural economies,20 Chinese business communities are reluctant to participate in societal efforts to improve government outcomes. Apart from social vulnerabilities, there are also monetary disincentives to pressing for reform. These are particularly obvious in the case of large indigenous rms. In light of the small size of rural consumer markets, many indigenous entrepreneurs in the eight districts studied derive a substantial proportion of their
20 In Bima, for instance, most supermarkets, restaurants and hotels are in the hands of ethnic Chinese. Also in Lotim, Klaten, Kebumen, Gianyar and Karangasem, respondents report that Chinese entrepreneurs dominate local markets.
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revenue from public sector contracts. Government projects remain very attractive, as they promise high returns and involve relatively low risks. Against this backdrop, it is unsurprising to nd that many large rms prefer to maintain close ties with government ofcials rather than to criticise administrative shortcomings. As one businessman in Bima noted, government contracts for the construction of local schools, hospitals and roads are so lucrative that they easily compensate for the costs of bad governance. Especially in the absence of credible law enforcement, rms involved in public sector projects have stronger incentives to cooperate (or collude) with government ofcials than to push for administrative reform. Indeed, one of the objectives of reform is fair procurement, which would result in more genuine competition for and lower prots from government contracts. A lack of reform pressure is also evident in local chambers of commerce and industry (Kadinda). With the public tender legislation introduced by the Megawati administration,21 local Kadinda units lost much of their former inuence: the discontinuation of their coordination function and the lack of tangible services for business communities resulted in sharp declines in membership. Even relatively active chambers such as those in Bima and Gianyar seem to have had limited success in mobilising the private sector in support of reform initiatives. The director of Bimas Kadinda, for instance, acknowledges that joint activities often fail because chamber members lack cohesion. Despite the introduction of democratic rights, he contends, many rms avoid anything that may cause friction with government ofcials either because they are socially vulnerable or because they have large stakes in public contracts. Perverse incentive structures have also undermined representative functions in district councils (DPRD). In the rst years of decentralisation, the combination of centralised party structures and non-transparent compilation of party lists notably weakened local electoral accountability. Studies show that national party elites continue to exert great inuence on local politics, particularly through the compilation of local party lists (Sherlock 2004; Ufen 2008). The persistence of political centralisation can be attributed partly to the stipulations of the electoral laws. The 1999 parliamentary elections were based on closed party lists, which gave voters no choice between candidates and provided national parties with ample room to establish clientelistic networks with local politicians. Even the semi-open list elections in 2004, which introduced candidate names onto the ballet paper, preserved the inuence of national party boards, because electoral outcomes continued to be biased heavily towards top-listed candidates.22 According to local NGO
21 New public tender regulations were outlined in Presidential Decrees (Keppres) 18/2003 and 80/2003. 22 Sherlock (2004: 40) explains how the electoral rules disadvantaged low-listed candidates in the 2004 elections: consider a situation where Party B receives 50,000 votes in an electoral district. The quota for that district is 50,000 votes therefore Party B is allocated 1 seat. Candidate 1 on the party list receives no individual votes. Candidate 4 on the party list receives 49,000 votes (i.e. just under the quota). [As a result] Candidate 1 is elected, despite having received no individual votes, whereas Candidate 4 loses all his votes to the top-listed candidate (and does not take a seat). A December 2008 Constitutional Court ruling abolishing party-internal vote transfers reduced this list-position bias in the 2009 elections, but party boards still wield considerable power by determining which candidates appear on the lists.
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and media observers, these clientelistic party structures have created a situation where list positions are auctioned off to local candidates who make considerable donations to party headquarters. In the absence of punitive voting mechanisms, many DPRD politicians were preoccupied with managing internal party relations and campaign funding often through illegitimate means23 and often neglected the interests of local constituencies. District heads, on the other hand, face incentives that align them more closely with local citizens, for three basic reasons. First, government leaders stand in the spotlight of local and national media. In contrast with council members, whose actions can be obfuscated by party agreements and coalitions, district heads achievements and failures are more clearly discernible in local news reports. Second, and relatedly, Indonesias decentralisation reforms have prompted a notable rise in the number of donor-funded governance projects, with corresponding opportunities to gain national acknowledgment and additional project funding.24 Third, the introduction of direct elections for district heads (pilkada) in 2004 has provided those elected with additional political incentives to attend to broadbased interests. In contrast to the non-transparent party-list system of DPRD elections, the plurality (rst past the post) system of the pilkada exposes government leaders to greater electoral competition. Above all, it enables local citizens to vote out non-performing or corrupt district heads. Motivated by electoral pressure, media exposure and donor funding, some district heads have attended closely to the interests of society in general and small business owners in particular. The case evidence suggests that district heads who are imbued with political ambition and good managerial skills have been strong driving forces for policy reform. Consistent with reformist leadership accounts in other Asian, Latin American and African transition countries (Grindle 2004; 2007; Gray and McPherson 2001; Mahbubani 2007), the district heads in Solok and Kebumen have skilfully used their ofcial powers to forge strategic reform pacts. They have successfully aligned the interests of local communities and national supporters and, in doing so, have created a valuable momentum to break bureaucratic resistance to government reforms. Backed by these reform coalitions, they have employed an effective mix of monitoring (call-in talk shows, SMS complaint boxes); penalties (demotion and dismissal of corrupt staff); and reward systems (merit-based promotion, performance awards) to improve bureaucratic practices.
23 Between 1999 and 2006, Indonesia Corruption Watch (ICW) identied over 80 DPRD corruption cases amounting to a total welfare loss of roughly $50 million (DRSP 2006: 118). 24 As the two examples in Solok and Kebumen illustrate, projecting a reformist image can be a promising strategy for attracting nancial support from donor agencies. Between 2000 and 2005, district heads Rustriningsih of Kebumen and Gamawan of Solok formed good-governance partnerships with The World Bank, USAID and the German aid agency GTZ. Both heads were repeatedly invited to conferences and study tours. District head Gamawan, for instance, attended the International Anti-Corruption Conference in Seoul in 2004 (nanced by German donors) and the International City Management Conference in San Diego in 2005 (nanced by USAID).
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The nding that district heads are well positioned and motivated to push for public reforms should not lead to the conclusion that societal forces are irrelevant. Quite the contrary is true. Although district heads initiate reform coalitions, societal groups constitute an important pillar within these coalitions. And although common channels of societal pressure local rms, business associations and district councils are currently compromised by perverse incentive structures, local citizens nonetheless play a key role in monitoring bureaucratic practices and signalling shortcomings to local government leaders. Moreover, as local democracy and information technology progress, local citizens will increasingly compare the performance of their incumbents with other benchmark cases. Although Indonesia may have been endowed with a mere handful of reformist district heads at the outset of decentralisation, succeeding election cycles and rising political awareness are likely to encourage better leadership standards over time. Moreover, since the Constitutional Court abolished the dysfunctional DPRD list system in December 2008, there is hope that local council members will provide additional checks and balances. CONCLUSIONS AND POLICY IMPLICATIONS Have Indonesias democratic decentralisation reforms led to improvements in local governance? The answer offered in this study is yes, but only in some districts. Both nation-wide snapshots and case study results indicate that overall performance levels remain relatively low. During the rst years of decentralisation, many districts continued to exhibit high levels of tax distortion, red tape and public corruption. Beneath this aggregate perspective, however, we nd considerable variation. While some local governments have provided efcient and responsive services, others have burdened local economies with administrative uncertainty, inefciency and extortion. These district-level variations reect ongoing dynamics in local political economies. In the early years of decentralisation, local actors have been exposed to both democratic and non-democratic norms with free elections and rights of association on the one hand and pervasive preferentialism and patronage on the other. The case ndings in Bali and NTB show that societal pressures from local rms, business associations and council members are less signicant as an inuence on local governance than traditional good-governance literatures suggest. For most local rms, the benets of engaging in reform efforts rarely justify the costs of doing so: this holds true for small business owners who face high coordination and retaliation costs, for Chinese Indonesian entrepreneurs who foresee disproportionate social risks, and for large construction and procurement rms that expect high benets from sustaining close government ties. Thus far, neither local business chambers nor district councils have provided the means to solve these incentive problems. The former have been weakened by a declining mandate and membership, whereas the latter have been attending more to party elites than to local citizens. Local government leaders, on the other hand, have stronger incentives to push for policy reform. The eld interviews indicate that district heads increasingly realise that reformist agendas attract voter support, national acknowledgment and donor funding, thereby enhancing prospects for career advancement. Reform
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orientations have been strengthened further by the introduction of direct elections for district heads and the growth of independent media. Government leaders are increasingly scrutinised by local journalists and, unlike their legislative colleagues, require a majority vote to attain ofce. Responding to these political incentives, the district heads of Solok and Kebumen have become catalysts for change, translating citizen interests into policy initiatives, sustaining reform momentum with local and national support networks and supervising the practices of district bureaucracies. The results of these efforts are readily observable in the controlled case comparisons. The case studies in West Sumatra and Central Java demonstrate that higher leadership qualities are accompanied by less distortionary tax regulations, more efcient administrative services and more effective controls on corruption. The ndings of this study carry several implications for scholarship and policy. In the context of current governance debates, the empirical results challenge the view that government improvements and public reform are primarily the result of demand-side pressures. After 30 years of social and political suppression, Indonesian citizens need time to gain condence in democratic values. As long as societal actors remain dependent on the goodwill and patronage of government ofcials, they are ill-positioned to push for improvements in governance. Field observations indicate that many public sector jobs, government contracts and party-list positions have continued to be allocated on the basis of non-transparent, elite-centric agreements. Thus, in early post-authoritarian transitions, where democratic norms co-exist with patrimonial conventions, it is not so much the pressure of societal groups as the presence of good (or bad) leadership that explains local policy outcomes. The signicance of government leadership should not, however, lead to the conclusion that societal factors are irrelevant. The case ndings from Solok and Kebumen show that district heads increasingly respond to public opinion and electoral incentives. Arguably, incentives for reformist leadership become more pronounced with rising transparency and societal awareness. Policy measures that make local government performance more comparable and competitive are likely to encourage public reform in other Indonesian districts. These measures may include more widely disseminated good governance rankings,25 a functional framework for local minimum service standards (in education, health and infrastructure services) and an expansion of support programs for independent and investigative journalism.
25 Sub-national performance indicators can be drawn from the World Bank (2007) Public Finance Management Framework, the KPPOD (2008) local economic governance survey, the Jawa Pos Institute of Pro-Otonomi (JPIP 2008) rankings and the LPEMFEUI (2007) investment climate assessment, just to name a few sources.
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Anwar, K. (2001) Kembalikan predikat Bima lewat hasil bumi [Revitalizing Bimas agricultural trademarks], Kompas, 21 November: 23. Azis, I. (2003) Concepts and practice of decentralization: some notes on the case of Indonesia, Paper prepared for the Permanent Mission of Indonesia to the United Nations, New York NY. Bachyul, S. (2004) Gamawan Fauzi, pioneering regent, Jakarta Post, 24 September: 5. Boix, C., Adsera, A. and Payne, M. (2003) Are you being served? Political accountability and quality of government, Journal of Law, Economics, and Organization 19 (2): 44590. Chambers, R. (1995) Poverty and livelihoods: whose reality counts?, Environment and Urbanization 7 (1): 173204. Cochrane, J. (2004) Looking for a real leader; when it comes to talent at the top, Indonesians have to wait, Newsweek International, 8 March: 2. Crouch, H. (1978) The Army and Politics in Indonesia, Cornell University Press, Ithaca NY. DRSP (Democratic Reform Support Program) (2006) Decentralization 2006: stock taking on Indonesias recent decentralization reforms, USAID (US Agency for International Development) Democratic Reform Support Program, Jakarta. Gray, C. and McPherson, M. (2001) The leadership factor in African policy reform and growth, Economic Development and Cultural Change 49 (4): 70740. Grindle, M.S. (2004) Despite the Odds: Contentious Politics and Education Reform, Princeton University Press, Princeton NJ. Grindle, M.S. (2007) Going Local: Decentralization, and the Promise of Good Governance, Princeton University Press, Princeton NJ. Hellman, J. (1998) Winners take all: the politics of partial reform in post-communist transitions, World Politics 50 (2): 20334. Hirschman, A.O. (1970) Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Harvard University Press, Cambridge MA. JPIP (The Jawa Pos Institute of Pro-Otonomi) (2007) Otonomi Award 2007: Mentradisikan Kompetisi Memintas Kemajuan [Autonomy Award 2007: Establishing Competition to Accelerate Progress], JPIP, Surabaya. Kaufmann, D., Mehrez, G. and Gurgur, T. (2002) Voice or Public Sector Management? An Empirical Investigation of Determinants of Public Sector Performance, World Bank, Washington DC. Kaufmann, D. and Wei, J. (1999) Does grease money speed up the wheels of commerce?, Working Paper No. 7093, National Bureau of Economic Research (NBER), Cambridge MA. King, G., Keohane, R.O. and Verba, S. (1994) Designing Social Inquiry: Scientic Inference in Qualitative Research, Princeton University Press, Princeton NJ. Klitgaard, R. (1998) Controlling Corruption, University of California Press, Berkeley CA. KPPOD (Komite Pemantauan Pelaksanaan Otonomi Daerah, Regional Autonomy Watch) (2004a) Kajian Textual Perda Pajak dan Retribusi Daerah [Contextual Assessment of Local Taxes and Levies], Unpublished report, KPPOD, Jakarta. KPPOD (Komite Pemantauan Pelaksanaan Otonomi Daerah, Regional Autonomy Watch) (2004b) Daya Tarik Investasi Kabupaten/Kota di Indonesia 2003: Persepsi Dunia Usaha: Peringkat 200 Kabupaten/Kota di Indonesia (Regional Investment Attractiveness 2003: A Survey of Business Perception: Rating of 200 Districts/Municipalities in Indonesia), KPPOD and The Asia Foundation, Jakarta, viewed 13 June 2009 at <http://kppod.org/ ind/datapdf/rating/2003/rating2003.pdf>. KPPOD (Komite Pemantauan Pelaksanaan Otonomi Daerah, Regional Autonomy Watch) (2005) Daya Tarik Investasi Kabupaten/Kota di Indonesia 2004 (Regional Investment Attractiveness 2004: A Survey of 214 Districts/Municipalities in Indonesia), KPPOD, Jakarta.
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KPPOD (Komite Pemantauan Pelaksanaan Otonomi Daerah, Regional Autonomy Watch) (2008) Local Economic Governance: A Survey in 243 Regencies and Cities in Indonesia, KPPOD, Jakarta. Kuncoro, A. (2004) Bribery in Indonesia: some evidence from micro-level data, Bulletin of Indonesian Economic Studies 40 (3): 32954. Leff, N.H. (1964) Economic development through bureaucratic corruption, American Behavioral Scientist 8 (3): 8. Lewis, B.D. (2003) Tax and charge creation by regional governments under scal decentralisation: estimates and explanations, Bulletin of Indonesian Economic Studies 39 (2): 17792. Lewis, B.D. and Suharnoko, B. (2009) Local tax effects on the business climate, in Rural Investment Climate in Indonesia, ed. N. McCulloch, Institute of Southeast Asian Studies, Singapore: 22445. Liddle, R.W. (1996) Leadership and Culture in Indonesian Politics, Allen and Unwin, Sydney. LPEMFEUI (Institute for Economic and Social Research, Faculty of Economics, University of Indonesia) (2002) Ketidakpastian Usaha di Indonesia: Dampak dari Otonomi Daerah dan Suap [Business Uncertainty in Indonesia: Impact of Regional Autonomy and Bribery] (Cost of Doing Business Survey), LPEMFEUI, Jakarta. LPEMFEUI (Institute for Economic and Social Research, Faculty of Economics, University of Indonesia) (2007) Monitoring Investment Climate in Indonesia: A Report from the Mid 2006 Survey, LPEMFEUI, Jakarta. Lui, F.T. (1985) An equilibrium queuing model of bribery, Journal of Political Economy 93 (4): 76081. Mahbubani, K. (2007) From Confucius to Kennedy: principles of East Asian governance, in East Asian Visions: Perspectives on Economic Development, eds I. Gill, Y. Huang and H. Kharas, World Bank, Washington DC: 188203. McLeod, R.H. (2000) Governmentbusiness relations in Soehartos Indonesia, in Reform and Recovery in East Asia: The Role of the State and Economic Enterprise, ed. P. Drysdale, Routledge, London: 14668. Olson, M. (1965) The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard University Press, Cambridge MA. Perlez, J. (2003) An Indonesian leader wins attention for her clean politics, New York Times, 8 September: 6. Putnam, R. (1993) Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press, Princeton NJ. Ray, D. (2003) Decentralization, regulatory reform and the business climate, in Proceedings of the Conference on Decentralization, Regulatory Reform and the Business Climate, ed. D. Ray, Partnership for Economic Growth US Agency for International Development (PEGUSAID), Jakarta: 140. Rice, R. (2000) Small enterprises as an essential part of the Indonesian development strategy, PEG Policy Paper 18, Partnership for Economic Growth, Jakarta. Rodrik, D. (1996) Understanding economic policy reform, Journal of Economic Literature 34 (1): 941. Rustiani, F. (2003) Izin: mampukah melindungi masyarakat dan seharusnya beban siapa? [Licences: can they protect society and whose responsibility are they?], in Proceedings of the Conference on Decentralization, Regulatory Reform and the Business Climate, ed. D. Ray, Partnership for Economic Growth US Agency for International Development (PEGUSAID), Jakarta: 7183. Schulte Nordholt, H. (2005) Decentralisation in Indonesia: less state, more democracy?, in Politicising Democracy: Local Politics and Democratisation in Developing Countries, eds J. Harriss, K. Stokke and O. Tornquist, Palgrave Macmillan, Basingstoke: 2950.
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APPENDIX 1 Evaluation Scores for Local Government Performance

Very Good Tax-distorting taxation (observation based) Licensing efciency (in processing days) None X7 X=0 X=0 Good Little 7 < X 14 0<X5 0 < X 3.3 Fair Some 14 < X 21 5 < X 15 Poor Strong 21 < X 28 15 < X 30 Very Poor Very strong X > 28 X > 30 X > 10
Recruitment corruption (Rp million) Licensing corruption (% of total licence fees)
3.3 < X 6.7 6.7 < X 10

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This article was downloaded by: [The University Of Melbourne Libraries] On: 02 April 2014, At: 20:26 Publisher:

Bulletin of Indonesian Economic Studies

Stanford University , Published online: 24 Jul 2009.

Bulletin of Indonesian Economic Studies, Vol. 45, No. 2, 2009: 20130

Christian von Luebke

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Christian von Luebke

FIGURE 1 Variation in District Policies and Practicesa

Tax distortion index 5 4

Licence administration index 9 8 7 6 5 4 3 2 1

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1c Fairness of Tender Process

Tender fairness index 9 8 7 6 5 4 3 2 1 55 110 165

Licence corruption (Rp '000) 500 400 300 200 100 0

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Christian von Luebke

FIGURE 2 Relationship between Bribe Payments and Administration Times

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60 40 Payment of illegal fees (Rp '000)

FIGURE 3 Location of the Eight District Cases

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Source: Cartographic Services, The Australian National University, Canberra.

Christian von Luebke

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High 95 4.2 High Insignicant High 95% 6.8 yrs

Low 37 2.7 Low Insignicant High 94% 7.4 yrs

High 48 3.8 High

Low 5 2.1 Low

High 7.6 72 High Moderate (2.6)

Low 4.7 62 Low Moderate (2.7)

High 7.0 72 High Moderate (3.2)

Low 5.5 40 Low Moderate (3.1)

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Major political parties 1999 (% support)

391.5 28 670 6 Balinese 97 Hindu 99 Islam 1 PDI-P 87 Golkar 7

359.5 24 400 19 Balinese 96 Hindu 96 Islam 4 PDI-P 78 Golkar 12

505.0 21 245 34 Mbojo 99 Islam 99 Christian 1 Golkar 52 PPP 9

971.2 25 240 37 Sasak 97 Islam 99 Hindu 1 Golkar 44 PPP 9

Christian von Luebke

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Christian von Luebke

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Christian von Luebke

TABLE 2 Quality of One-Stop Services (OSS)a

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Overall service evaluation Good

Fair V-poor Good

Poor V-poor Fair

TABLE 3 Licensing Times Before and After Decentralisationa (days)

Very good Good Fair Fair Poor Fair Good Good

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Christian von Luebke

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Fair 6 65 Very poor

0 Very good Poor 23 18 20

exists exists exists exists exists 0 20 15 15 12 8 exists exists 40 35 40 35 38 35 35 30 30 30 30 25 25

exists 36 Very poor 36 Very poor

Christian von Luebke

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TABLE 5 Corruption Fees during Licence Administration (estimated % of total charges)

Good Poor Poor Poor Very poor Good Good Fair