Governance in Indonesia

While transfers to the regions (and spending in the regions) has increased, many regions in Indonesia show limited improvements in their education system and basic infrastructure. As such, Indonesia keeps lagging behind its regional peers in terms of infrastructure development and enrollment rates beyond basic education. Some even claim that in some districts the situation has in fact deteriorated since the start of the Reformasi.

Indonesian authorities are in the process of moving to accrual accounting, particularly towards the full implementation of government accounting in the IMF Statistics Department's Government Finance Statistics Manual 2001 (GFSM 2001) compatible format. But although budget reporting by local governments is starting to improve it is still subject to long lags, does not follow international reporting standards (yet), and lacks a homogeneous classification of expenditures. Weak reporting at the local level is generally attributed to the weak quality of human resources working at the local government level. According to an IMF report, Indonesia's Finance Ministry does not obtain comprehensive and timely information on borrowing and debt, resulting in difficulties to monitor general trends in government debt.

Indonesia is characterized by a dual labor market: a small formal market and a large informal one. The formal-sector workers are protected through severance payments and relatively high minimum wages. The latter is an incentive for employers to hire workers from the informal sector where there exists a lack of social insurance. Extensive informality is detrimental to long-term growth and undermines the collection of tax revenues (needed for investment in the country's infrastructure, healthcare and education).

Below we briefly touch on relevant topics in Indonesia in relation to different definitions of governance:

(1) The Processes by which Governments are Chosen, Monitored, and Changed

As mentioned above there is a big break between Indonesia before 1998 and Indonesia after 1998. A huge different political context emerged (a decentralized democracy) and thus the system of governance had to change accordingly.

Almost two decades after changing to a democratic system (which is a relatively short period) Indonesia managed to create a relatively strong democracy. Strong in the sense that it is highly unlikely that this system is overhauled and replace by another one (there seems to exist strong support for democracy from all layers of society). There are fair and free elections every five years that determine the composition of the central government, local government, president, and local leaders. This system is further strengthened by well-developed local media institutions (television, newspapers, websites, etc) that are free to report about conditions in the country (and therefore has an important task in terms of monitoring the performance of governance in Indonesia).

Other institutions, such as the Corruption Eradication Commission (KPK), also have a key role in terms of monitoring the quality of governance in Indonesia and have been granted a high degree of power to do so. Meanwhile, the role of the military has been rather marginalized in terms of politics after 1998. Whereas before 1998 the military was a key political actor, its influence in the political affairs of the country has been on the decline in the Reformation era.

Also in the economic and financial domain, Indonesia now has strong and independent institutions in the era of democracy. These include the central bank (Bank Indonesia) and the Financial Services Authority (OJK). This makes the country's economy and financial markets much stronger compared to the preceding period (therefore a new Asian Financial Crisis seems unable to rock the economic and fiscal fundamentals of Indonesia). After the crisis in the late 1990s Indonesia has adopted a prudent fiscal system.

However, there remains room for improvement. Although Indonesia organizes fair and free elections every five years that does not mean democracy is working flawlessly. In fact, a major problem in Indonesia today is that many political institutions lack a high degree of democratic traditions. For example, political parties in Indonesia tend to be vehicles for specific people to gain power and/or the presidential seat. The PDI-P has been in the hands of former president Megawati Sukarnoputri for decades and her daughter Puan Maharani may take over from her. Former president Susilo Bambang Yudhoyono set up the Partai Demokrat (PD) specifically as a vehicle to become president (after he completed his two presidential terms the party has become more-or-less insignificant). Prabowo Subianto set up the Gerindra party specifically to aim for the presidency. All these political parties do not seem to differ much in vision (perhaps one can differ only two types of political parties in Indonesia: (1) those that want Islam to play a larger role in politics and life and (2) those that aim for a pluralist and rather secular society).

The point here is that basically only those who have power, a good network, and money can come into a position to be elected in high political positions (although the Joko Widodo story tells us that this situation is slowly changing). Quality and intelligence takes the backseat.

Money politics, thus, continue to play a role in Indonesia's political system. Someone who runs for a high political position (whether on the central of regional level) needs to have deep pockets to finance his campaign or rely on the financial support of wealthy businessmen close to him (implying that - after he has been elected - lucrative public tenders will go to the befriended businessmen).

Regarding the free media, it is interesting to note that, usually, media institutions in Indonesia have political interests (and it shows in their coverage of the news). For example, news station Metro TV is owned by Surya Paloh, founder of the Nasdem party (that supports Widodo), while news station TV One (part of the Bakrie Group) was close to Prabowo Subianto during the 2014 presidential election. And there are various other examples. On the one hand it is dangerous that there are close ties between media institutions and the political elite, on the other hand - considering most political sides can rely on support from a specific media institution - you could say that, overall, Indonesian media manage to transfer a balanced picture to the people (but you should simply not rely on the coverage of one particular media institution).

Moreover, media institutions are also aware that if they take their support for a specific political side too far, then they can lose credibility (for example TV One was heavily mocked by Indonesians due to its coverage during the 2014 presidential election). In fact, the Indonesian Broadcasting Commission (KPI) sent warning letters to Metro TV and TV One, saying they violated broadcast standards by airing content that was biased toward one of the two presidential candidates.

(2) The Systems of Interaction between the Administration, the Legislature, and the Judiciary

Indonesia supports the "trias politica", referring to the separation of powers between the legislature, the executive and the judiciary power. Disputes over matters of influence and power between these three powers are common in many countries, including Indonesia. In the case of Indonesia, relationships between these three powers are in a state of considerable flux (not well-defined) and the exact balance of authority between these powers tends to ebb and wane depending on factors such as the political mood of the day, the financial strength of different institutions, personalities, issues at stake, etc.

Contrary to Suharto's authoritarian New Order government, the executive branch of Indonesia does not control - or has a major influence on - the legislative and judicial branches (and civil society). Currently, the legislative branch has enough power to keep the executive branch in check (for example it has the power to impeach the president). In fact, depending on the result of elections, when the opposition in parliament is big, the government encounters difficulty to obtain approval for its programs. Another negative example is that Finance Minister Sri Mulyani Indrawati met such a degree of resistance in parliament when she tried to reform the corrupt tax office in 2010, she decided to move to the World Bank.

Although all three branches seem to operate independently from each other, widespread corruption remains a big problem, especially within the parliament of Indonesia. Some say this institution is the country's most corrupt institution. However, in recent years, not only parliamentarians but also several ministers (in the Susilo Bambang Yudhoyono administration) and judges have been arrested and sentenced to imprisonment as they were found guilty of accepted bribes. Corruption in the judicial branch is a problem as it jeopardizes the credibility of the courts and therefore undermines the attractiveness of the business and investment climate of Indonesia as investors have to face a higher degree of legal uncertainty.

(3) The Ability of the Government to Create and to Implement Public Policy

Indonesia's bureaucracy is known to be complicated and seems to be a 'power center' in its own right, thus effectively resisting efforts toward reforms, while bribery remains rife. Incompetent and unaccountable civil servants have slowed the performance of the entire bureaucracy. As such, it creates or perpetuates inefficiency at the central and local government level. President Widodo tries to overcome this situation by putting many government services online, hence limiting room and opportunities for civil servants to request some additional money for their services.

It is often stated that - in terms of policy making - there is a lot of planning in Indonesia but a lack of implementation. Overlapping regulations and the weak quality of civil servants make policy implementation difficult. Often policies made at the macro-level are not, or only partly, implemented at the micro-level.

Under President Widodo the Indonesian government uses deregulation - the reduction or elimination of government power in a particular industry - to make the investment climate more attractive.

Last update: 23 December 2016