Indonesia: The losing fight against graft

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Southeast Asia

By Bill Guerin JAKARTA - As Indonesia prepares for an April general election and its first-ever direct presidential election in July, the government is busy trying to establish policy credibility in the eyes of the market. Political rivalry has heated up ahead of April 25, when more than 145 million eligible voters will go to the polls to cast their votes for a new government and a new variation on the theme of reform. Though campaign platforms have not emerged, it is unlikely that any of the would-be presidential candidates will stand up for the fight against corruption. Macroeconomic indicators show that the economic team, coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti, Minister of State Enterprises Laksamana Sukardi, Minister for National Development Kwik Kwan Gie and Finance Minister Boedionio has, by hook or by crook, achieved a modicum of success.

Interest rates continued to fall last year and inflation was contained in a band peaking at an annualized rate of less than 6 percent. The rupiah gained strongly against the US dollar, and in spite of the diminishing current account, surplus foreign-exchange reserves continued to increase and pushed stock prices well up. But increasing macroeconomic stability has had little impact on growth. Growth has been mainly driven by consumption and, as exports have weakened, a slowdown in manufacturing growth continues to drag down overall growth.

Revenues need to rise and spending needs to be cut to push growth higher. Investment is needed to generate jobs. Official figures put the number of unemployed at 42.7 million, a level that social experts have described as a "time bomb". An estimated 2.5 million young people need jobs every year, but current growth levels of about 4 percent will sustain, at best, only 1.2 million jobs, leaving 1.3 million to join the ranks of the unemployed. Furthermore, with foreign direct investment just 20 percent of gross domestic product (GDP), the economy remains too weak to provide capital to embark on strong growth. The massive unemployment levels threaten political stability and raise the specter of even more social unrest. The World Bank warned last week that unemployment had reached an "alarming level", with country director Andrew Steer pushing the government to recognize the need to focus economic policy on creating urgently needed jobs and to move fast before the problem increases.

Sofjan Wanandi, head of the Indonesian Employers Association, put it more starkly. "Without first addressing unemployment, we will not be able to address any issue, including national security and political instability," warned Wanandi. Pressure from nationalists forced a withdrawal from the International Monetary Fund's structural adjustment program at the end of last month. Though the 30 bilateral and multilateral donors grouped in the Consultative Group on Indonesia, came to the rescue by pledging US$3.4 billion in new loans and grants for this year, the disbursement of at least $1 billion of the amount pledged will depend on progress on the policy agenda. Much of the borrowing will go toward beefing up the state budget, heavily burdened with payment of existing debts. Foreign debt stands at $77.1 billion.

Domestic borrowers owe almost as much, Rp619.7 trillion ($70 billion). Rp131.2 trillion - about one-third of the estimated revenue - has been earmarked to repay domestic and foreign debts. The government is banking on the sale of some 14 state-owned enterprises to meet its Rp5 trillion ($580 million) privatization target and help cover the budget deficit, which for this year has been set at Rp24.4 trillion, or 1.2 percent of GDP. The privatization program is supposed to develop transparency, efficiency and professionalism in state-owned enterprises, most of which have been criticized for their inefficiency and corrupt culture. Vested interests and political bickering have dogged privatization from the outset and stalled progress in a number of cases. The early excesses of regional autonomy, when in the public sector and the bureaucracy power moved sharply from central to local government, showed that decentralization had given birth to a demon. The mood of reformasi was everywhere in local communities and they assumed a mandate to demonstrate and pressure local legislatures, where state enterprises are mainly based, though this was often based on little more than an idea of their right to protest. President Megawati Sukarnoputri put this all down to growing pains. The problems, she said, were related to the country's "statehood and nationhood". The most noteworthy casualty of the political complications in the regions has been the world's third-largest cement maker, Cemex SA. There are strong rumors that the Mexican giant may wind up business operations in Indonesia unless it gets "a convincing proposal" from Jakarta that would allow the company to have a majority stake in state-owned PT Semen Gresik, Indonesia's largest cement maker. Cemex SA has already taken the government to arbitration proceedings at the International Center for Settlement of Investment Disputes and asked that Jakarta pay for the vast expenses it incurred during continual political complications of its investment plans. But corruption has taken the heaviest toll on the economy. Speaking in 1949, the late vice president Muhammed Hatta lamented that corruption had become an "Indonesian way of life". For those not overly familiar with the country, it may be difficult to grasp just how corruption pervades every stratum of society. The giving of presents, and reciprocal personal favors through protection, special treatment, and the favors of women are integral to the Javanese code of normal conduct and social behavior. This, after all, is former president Suharto's legacy, an accepted natural order of things where his family, his ministers or, for that matter, the holder of any powerful office enriched himself in the course of executing his duties.

High government officials demand "special payments". Other such illegal payments are generally expected throughout lower levels of government in the form of bribes connected with import and export licenses, exchange controls, tax assessments, police protection, or loan applications. A survey last month by the Regional Autonomy Watch showed just how widespread the practice is. The survey covered 5,140 companies, both regional and national, and included foreign companies. Of the illegal fees, 13.1 percent were paid to court officials, 11.5 percent to security officers, 8.5 percent to community groups and 6.1 percent to thugs. This may be all par for the course in Indonesia but, of course, it greatly hinders economic development and results in not only reduced levels of investment but also overblown government expenditure. It also distorts the ratios of government expenditure, so that education, health, and infrastructure maintenance lose out to less efficient but more easily manipulated public projects. For most of Suharto's New Order era, industrialization of the country saw grand-scale conversion of rice fields to factories, golf courses and swanky real-estate complexes. Infrastructure development has not kept pace. Only about 34 percent of the urban population (or 14 percent of the total population) is served directly by water utilities. Less than 3 percent of the population has access to a basic telephone service in their homes.

Only 1.3 percent of the total population has access to network sewerage, while 73 percent of urban households are estimated to have only septic tanks. Little, if any, money is going into roads and highways. In many parts of outlying provinces, such as Papua and Sumatra, farmers cannot take the rice they grow to the nearest port, because there are no of roads and transport. Many outer island regions also suffer regular power outages. Only about half the population is connected to the national grid. A World Bank draft infrastructure report entitled "Averting an Infrastructure Crisis: A Framework for Policy and Action" warns that infrastructure is critical for Indonesia's growth and poverty reduction and should now be made a national priority. It says private investors are not ready to invest because of inconsistent policy and regulatory environment. Corruption, the bank says, affects infrastructure particularly severely. Corruption has also cost the government revenue from the huge amount of tax arrears by compromising its ability to collect taxes and tariffs. Concern over this has spurred a revision of the tax laws.

Under the proposed new law, due to be debated in the House next month, the tax office will have greater powers to detain major tax evaders without trial and to apprehend those suspected of committing tax crimes. Giving the taxman authority to confiscate assets and bank accounts owned by "uncooperative taxpayers", without the consent or involvement of the police, may seem a tough measure, but taking the police out of the equation is likely to encourage corruption further in the form of extortion and collusion between unscrupulous tax officials and taxpayers. Understanding how widely Suharto's patriarchal style was accepted as normal behavior helps to highlight the difficulties for any president of Indonesia to generate an approach to "clean governance". Institutional reforms currently being implemented are aimed at improving the lack of government and corporate transparency. Four key institutions at the forefront of accountability monitoring, Bank Indonesia, the Election Commission, the Supreme Audit Agency and the Supreme Court need to be greatly strengthened, warns the World Bank.

Other political factors giving rise to concern vis-a-vis the economy are centered on the ability of legislators to claim some sort of sovereign right to interfere in the technical processes consequent on decisions made by the Indonesian Bank Restructuring Agency and the ministers with economic portfolios. The Chandra Asri deal and the sale of Bank Central Asia and the Salim plantations were striking examples of such untoward political interference during this administration and showed that the legislature could now overrule decisions by the executive.

Such political considerations that put politics before the interests of the country have hindered the momentum for reform and continue to create a high degree of uncertainty, the worst enemy of business. A World Bank report in late October warned Indonesia was at a critical juncture in the fight against corruption. Though convicted corruption felon Akbar Tanjung continues to lead the House of Representatives, the report stopped short of directly criticizing Megawati for tolerating corruption, though it pointed out that corrupt officials from the Suharto regime remain entrenched in the civil service, judiciary and law-enforcement agencies. The report, titled "Combating Corruption in Indonesia: Enhancing Accountability for Development", argues that the nature of Indonesia's current transition makes it very difficult to develop and implement a comprehensive strategy to fight corruption. Vested interests remain powerful, law-enforcement institutions are weak, and the ability of the state to implement an integrated program of anti-corruption measures is limited. Conflicts of interest among the political elite make it difficult for the government to make good on its frequent promises to accelerate reforms. The parliamentary-geared political system and uncertainty over the outcome of the election and the likely make-up of the next government and parliament may severely restrain progress. The level of political corruption such as vote-buying and legal or illegal campaign contributions by the wealthy and other special-interest groups to influence laws and regulations is likely to increase rather than subside in the run-up to the elections. The World Bank report says the high cost and weak regulation of campaign finance will continue to drive corruption. A concerted war on such corruption is one of the long-overdue reform measures, but Megawati has said simply that with the recent establishment of the Corruption Eradication Commission, the nation should hope for an end to graft. She seeks re-election through the Indonesian Democratic Party of Struggle, challenging other presidential candidates such as People's Consultative Assembly Speaker Amien Rais, former president Abdurrahman "Gus Dur" Wahid, ex-military chief General (retired) Wiranto and others. But Megawati has drawn flak from her own supporters and many others who are unimpressed with her performance and leadership in running the country. It is this lack of leadership that raises concerns that reform measures may be sidelined by the need to advance populist measures to gain voter support at the expense of the long-term health of the economy. The World Bank report concludes that the war on corruption is "too important to be left solely to government to fight" and will require strong leadership. The choices facing Indonesia's leaders are stark, it says, warning that failure to act now could have severe consequences for long-term stability. Every question and every possible answer touches on the need to build an economy that will deliver sustainable growth to a country where 40 percent of the workforce is unemployed and whose population is expected to reach 250 million by 2020. Hard-won gains in macroeconomic stability could disappear if the election fails to bring to power a coalition strongly determined to launch a full frontal attack on corruption and build up good governance. This is a battle from which Indonesia cannot afford to run. (Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)