SURVEY OF RECENT DEVELOPMENTS: Bulletin of Indonesian [PDF]

Cart

Log in | Register



Enter keywords, authors, DOI etc.

This Jour…

Bulletin of Indonesian Economic Studies

Advanced search

Volume 44, 2008 - Issue 2

214 Views

12 CrossRef citations

Survey article

SURVEY OF RECENT DEVELOPMENTS Ross H. McLeod Pages 183-208 | Published online: 31 Jul 2008

Download citation



Full Article

https://doi.org/10.1080/00074910802168980

Figures & data

References

Citations

Metrics

Reprints & Permissions



SUMMARY In this article SUMMARY SOCIO-POLITICAL CURRENTS MACROECONOMIC DEVELOPMENTS RICE ENERGY SUBSIDIES PUBLIC SECTOR REFORM References

th

The 10 anniversary of Soeharto's resignation was coloured by disappointment

People also read

with the slowness of reform, and with the government's reluctance to confront blatant religious intolerance. Nevertheless, economic growth is strong and investment spending buoyant. Inflation has risen well above target, suggesting that a more effective approach to monetary policy is needed. The recent surge in

Article

Survey of recent developments

global rice prices coincided with bountiful domestic harvests, putting the government under pressure to restrict rice exports rather than imports as it has in recent years. However, restricting exports has been recognised as a ‘starve thy neighbour policy’, and the ASEAN trade ministers have jointly agreed ‘to continue fair trade practices and to achieve an orderly regional rice trade’.

Ari Kuncoro et al. Bulletin of Indonesian Economic Studies Volume 42, 2006 - Issue 1 Published online: 18 Jan 2007

The government has at last increased domestic fuel prices significantly, mind-ful of the waste of valuable resources and the inequity involved in keeping such prices constant in the face of world price increases. It will implement a cash

Article

transfer program to compensate the poor for the resulting increase in living costs.

SURVEY OF RECENT DEVELOPMEN TS

The Ministry of Finance is leading reform of the central government bureaucracy. Its most fundamental initiatives are in human resource management, where it is attempting to match remuneration to skill requirements and responsibilities, and to align the pay structure more closely with that in the private sector–with pay rates rising much more rapidly than hitherto as levels of responsibility increase. It is also encouraging competition to fill vacancies by advertising them internally, rather than continuing to rely on promotion by seniority. At local government

Tao Kong et al. Bulletin of Indonesian Economic Studies Volume 44, 2008 - Issue 1 Published online: 16 Jul 2008

level, a small number of heads of government have gained a reputation as pioneers of reform. Two interviewed for this survey are exemplars of precisely what it was hoped would result from bringing government closer to the people

Article

through decentralisation, and from the switch to direct election of heads of local

The IMF and the Indonesian crisis

government. Both have considerable experience in the private sector, and their success seems related to their more entrepreneurial (as distinct from bureaucratic) way of thinking. ‘Good corporate governance’ has now become the mantra for state-owned

Stephen Grenville

enterprises (SOEs). It is recognised that this depends heavily on choosing the

Bulletin of Indonesian Economic Studies

right people to manage each firm and to oversee it on behalf of its owner.

Volume 40, 2004 - Issue 1

Accordingly, almost all directors and commissioners of the 11 SOEs indirectly

Published online: 12 Jul 2010

studied here have been replaced in recent months, and there is now a willingness to appoint professionals from private companies and from academia in order to

Article

gain access to needed skills. In addition, the initial selection of candidates has

SURVEY OF RECENT DEVELOPMEN TS

been shifted outside the bureaucracy to professional recruitment agencies.

SOCIO-POLITICAL CURRENTS May 21st 2008 marked the 10th anniversary of Soeharto's resignation from the presidency after over three decades in office. There has been much discussion

Sadayuki Takii et al.

within the media and academia about what has happened since then. Although

Bulletin of Indonesian Economic Studies

the economy is in quite good shape, casual observation reveals a rather

Volume 43, 2007 - Issue 3

surprising mood of disappointment in some quarters with the extent of reform

Published online: 18 Apr 2008

achieved in the last decade, and of pessimism about the future. Consistent with this, 40% of respondents in a recent survey rated conditions now worse or much

Article

worse than those 10 years ago, while only 33% rated them better or much better

SURVEY OF RECENT DEVELOPMEN TS

(LSI

2008).

The public has been disquieted by large increases in food prices over the last year, but of greatest concern in recent months has been the rapid escalation of world oil prices, and its implications for continuation of domestic fuel and energy subsidies. There is also much cynicism and dismay about the fact that the reformasi period has seen no end to the endemic corruption of the Soeharto era, but rather a flourishing of corrupt behaviour at the local government level. It may

Vincent Ashcroft et al. Bulletin of Indonesian Economic Studies Volume 44, 2008 - Issue 3 Published online: 6 Nov 2008

be that public perception is being driven by the Corruption Eradication Commission's vigorous campaign of prosecutions against corrupt officials: it is surely difficult for the public to believe that reformasi is having a substantial

Article

impact on corruption when daily confronted with new cases. However, the volume

Survey of recent developments

of such prosecutions is an indicator not so much of increasing corruption as of an increased determination to act against it. Another matter of growing concern is religious strife–particularly in relation to the tiny Ahmadiyah sect of Islam, which is regarded as heretical by mainstream

Ross H. Mcleod

Islamic groups, and has been hounded by the Defenders of Islam Front (FPI).

Bulletin of Indonesian Economic Studies

Alarmed at the government's failure to protect Ahmadiyah, a large number of

Volume 41, 2005 - Issue 2

Indonesia's intelligentsia highlighted their concerns in prominent press

Published online: 18 Jan 2007

advertisements in mid-May, and invited the public to a mass gathering in support of human rights and religious tolerance on 1 June (NAFRF

2008). Some of

those who attended were attacked by members of the FPI while police looked on. The next day the president urged the police force to do its job, after which some of those responsible for the attack were arrested. But within days the government had issued a joint ministerial decree which, although not banning Ahmadiyah as its opponents wanted, called on its followers, in effect, to fall into line with mainstream Islam (JP, 10/6/2008), seemingly in conflict with the Constitution's guarantee of religious freedom. 1

MACROECONOMIC DEVELOPMENTS The Coordinating Minister for Economic Affairs, Boediono, was appointed governor of the central bank on 22 May, following parliament's rejection of the president's two previous nominees (Kong and Ramayandi

2008: 31). Almost

four weeks passed before it was announced that Boediono's former position was to be filled by Sri Mul-yani Indrawati, who would also continue to serve as finance minister. This came as little surprise, not least because of the latter's masterful performance in coordinating a phalanx of cabinet ministers at a press conference on 23 May to announce the government's long-awaited decision on domestic fuel prices (see below).

Growth The national income accounts for the March quarter of 2008 show that the economy has settled down to a fairly steady annual growth rate in the range 6.0– 6.5% (Table 1). Non-oil and gas growth has been consistently a little higher–on average, around 6.9%, not too far behind the average growth rate of around 7.4% under Soeharto. The investment data have been very promising for some time now, with double-digit growth rates recorded during the last three quarters. Growth of investment in construction, by far the largest component, typically has been well above 8%. Less obviously, non-construction investment growth has been extraordinarily rapid in recent times. Investment in machinery and equipment has been growing for the last year at rates of 24–31%, while investment in transport surged to 50% (year on year) in the March quarter. Exports also grew very rapidly in that quarter, in line with earlier analyses that emphasised the bright side of Indonesia's relatively small exposure to the slowing US economy. Import growth continued to accelerate from the already high level achieved in the December quarter.

TABLE 1. Components of GDP Growth (2000 prices; % p.a. year on year) CSV

Display Table

The tendency of non-tradables growth to exceed that of tradables is still clearly evident (although the dividing line between these sectors is often quite fuzzy). Continued relatively slow growth of the agriculture, livestock, forestry and fisheries sector (at an average of about 3.5% for the last several years) is an expected consequence of structural change in the economy away from more traditional pursuits. 2 By contrast, declining output in mining and quarrying appears to reflect reluctance to invest in these activities given the continued uncertainties posed by the legal environment (Grigg

2008), whereas the

disappointingly slow growth of manufacturing has much to do with labour market regulations that weigh heavily on labour-intensive manufacturing activity (Suryahadi et al.

2003). Within non-tradables it is interesting to note the rapid

growth of the utilities sector (electricity, gas and water supply), within which the output of town gas has been expanding at astonishingly high rates of around 40% annually. The communications sector, dominated by mobile telephone services, continues its outstandingly rapid expansion, reflecting immense benefits to consumers and, presumably, very high profits within the industry. The down-side of this appears to be an increasing tendency for domestic business interests to employ political influence to try to wrest parts of this industry from the grip of foreign shareholders who have proven so successful in driving its growth. The previous survey reported on a legally baseless decision by the Business Competition Supervisory Commission (KPPU) intended to force a foreign (indirect) shareholder to divest its ownership of one or the other of two large mobile phone companies (Kong and Ramayandi

2008: 25–8). Meanwhile, a new regulation introduced by the

Ministry of Communications and Information Technology seeks to restrict investment in the telecommunications towers that comprise the mobile phone transmission network to domestic investors. 3 This appears to contravene the recently enacted Law 25/2007 on investment, which explicitly specifies the fields of investment that are closed to foreign firms, and stipulates that closure of additional fields to foreign investment requires a presidential decree to that effect (art. 12(3)).

Inflation: time for a new approach to monetary policy? The central bank's target for inflation in 2008 is 4–6%. The last time Indonesia saw CPI inflation within this range was in June 2007, when the rate fell briefly to slightly below 6%. Since then there has been a steady and increasingly rapid upward trend, with inflation reaching 10.4% in May 2008 (Figure 1)–even though Bank Indonesia (BI) had reduced its target inflation range to 4–6% in 2008 from 5–7% in 2007. FIGURE 1. Inflation Targeting? (% p.a.) a

Shaded areas indicate inflation target ranges for 2007 and 2008; CPI=

consumer price index; SBI=Sertifikat Bank Indonesia (Bank Indonesia Certificates), whose rates reflect official interest rate policy. Source: CEIC Asia Database.

Display full size

BI says that it follows an ‘inflation targeting’ approach to monetary policy, given that its legal responsibility is to achieve and maintain stability of the value of the currency (BI,

no date). There is certainly an inflation target, but in terms of

actual policy actions and outcomes this ‘single objective’ means little. Elsewhere, BI notes its concern also to safeguard the continuity of economic growth (e.g. BI 2008: 4). At the very least, therefore, there are in fact two objectives–although, in contrast with inflation, BI does not specify any target for growth. Whether it is wise for BI to concern itself with growth rather than simply focusing on inflation is moot. One virtue of having only an inflation objective is that the central bank can then be held accountable for failure to achieve it. With two objectives, this can readily be excused by reference to the supposed need to sacrifice inflation to support economic growth. Under a pure inflation targeting regime, any sustained tendency of inflation to move beyond the upper bound of the target range should be met by a tightening of monetary policy. But as can be seen from Figure 1, there was no such policy response to the acceleration of inflation between July and September 2007–or in early 2008, even though by this time inflation was well outside the now lower target range. Indeed, BI's policy interest rate continued to be pushed lower for a further eight months from the inflation low point in June 2007 before being nudged upward by a mere 0.25% in April 2008; by then the inflation rate was already above 8% and still rising. Moreover, inflation as measured by the wholesale price index (not shown here) rose to exceed 25% in April 2008. It was widely expected that BI would respond to the large jump in domestic fuel prices in late May 2008 (see below) by increasing its policy rate by perhaps 50 basis points (0.5%). In the event, the increase was only 25 basis points (to 8.5%), and the immediate reaction among observers was that this would not suffice to subdue the inflationary impact. More to the point, the fundamental question is: what should be done with interest rates if inflation is to be pushed below the 6% level? The disappointing inflation outcomes of the last several months, like those in 2001–02 (Alisjahbana and Manning and Roesad

2002: 282–3) and 2005–06 (Manning

2006: 149), suggest that the answer is unknown–and probably

unknowable, given our limited understanding of the dynamic relationships involved. Is there a more effective way of going about inflation targeting? One possibility would be to set the policy rate based on a target trajectory for growth of the money supply that is consistent with the desired evolution of the rate of inflation. For example, if BI wants to reduce inflation to, say, 5% by the end of 2008, it could manipulate the interest rate over time so as to reduce the rate of money supply growth steadily from its current high level of around 28% until it is consistent with this inflation rate. There is nothing new in this. Recall Boediono's comment about his experience as minister early in the Habibie presidency: ‘… it was not difficult to convince [Habibie] that a really tight monetary policy was necessary to break the prevailing inflationary spiral’ (Boediono

2002: 388). It

did, at the same time GDP growth was recovering from the depths of the crisis. Estimating the end-of-year target money supply growth rate is straight forward, given the clear medium- to long-term relationship between base money, prices and real output. Figure 2 shows how closely the rates of nominal GDP and money growth have moved over almost the last four decades, so much so that the ratio of currency in circulation to nominal GDP is much the same now as it was in 1970. 4 Since the growth rate of nominal GDP approximately equals the rate of inflation plus the rate of real output growth, and since output is likely to grow at about 6% in the near future, achieving 5% inflation simply requires annual base money growth to be reduced from 28% to around 11%. In the short run the interest rate on Bank Indonesia Certificates (SBIs)–or whatever other policy instrument is chosen–will need to be increased somewhat in order that a sufficient quantity can be sold to bring about the desired reductions in money growth. 5 FIGURE 2. Money and Nominal GDP Growth (% p.a.) Source: CEIC Asia Database; BPS-Statistics Indonesia; BI, Indonesia Financial Statistics (various issues).

Display full size

Strikingly strong support for the idea of controlling base money growth in order to meet an inflation target can be derived from the somewhat surprising experience of Singapore. Until very recently Singapore has been a paragon of price stability, with an average annual rate of CPI inflation of just 0.7% during 2001–06 (Figure 3). However, there has been a dramatic acceleration since the end of 2006, such that by April 2008 it stood at 7.6%. An explanation is readily available in terms of a dramatic change in the outcomes of monetary policy. Although money growth clearly has been somewhat volatile during the period under review, it was slow on average through late 2006, at just 5.1%. Since then, however, the average growth rate has more than doubled, to 11.3%. In rough terms, an increase of 6% in money growth has resulted in a 7% increase in inflation. FIGURE 3. Inflation and Money Growth in Singapore (% p.a.) Source: CEIC Asia Database.

Display full size

Financial markets The accelerating upward trend of prices of goods and services has not been observed in either the capital market or the market for foreign exchange (Figure 4). On the contrary, the exchange rate has averaged about Rp 9,250/$ since August 2007, with no discernible trend, while the stock exchange composite index relinquished almost all of the gains of September and October 2007 during the first half of March 2008, with little change subsequently. FIGURE 4. Jakarta Composite Index (JCI) and Exchange Rate Source: Indonesia Stock Exchange (IDX); Pacific Exchange Rate Service.

Display full size

RICE The annual rate of increase in domestic rice prices, which had been of the order of 15% in the latter half of 2007, declined quite rapidly at the end of the year and for the first few months of 2008 as a consequence of very successful harvests. Nevertheless, as is clear from work by Dawe ( Timmer (

2008) and Simatupang and

2008) published in this journal's recent special issue on rice policy

(BIES 44 (1), April 2008), the long-term trend in Indonesia is for rice production to grow more slowly than the demand for rice. Indonesian self-sufficiency in rice could be achieved only by heavy subsidisation–or by closing the border to imports of rice and thus artificially increasing the incentive to produce it. This has been official policy in recent years. The rationale for the policy–that this helps the poor–is now well understood to be misconceived (Warr

2005; McCulloch

2008). The majority of Indonesia's poor are net rice consumers rather than net producers, and so are harmed by the higher prices that result from import restrictions. Ironically, this point was clearly demonstrated by the surge in global rice prices in late 2007 and early 2008, which happened to coincide with the bountiful domestic harvest (box 1 and Figure 5). Suddenly, the government found itself under pressure to restrict rice exports rather than rice imports, because exports would have raised domestic rice prices at the expense of consumers. Yet it was precisely the desire to raise domestic prices that had driven the previous policy of restricting rice imports. High rice prices were now correctly and widely perceived as harmful to net consumers: the burden to middle-class net consumers now became large enough to generate protestation on a scale the government found hard to ignore.

BOX 1 CAN INDONESIA STILL TRUST THE WORLD RICE MARKET? Recent events on the world rice market have called into question my recent observation (Dawe

2008: 130) that Indonesia can trust the world rice

market to supply its needs when domestic production falls below consumption requirements, as will usually be the case. Prices more than doubled in just three months, from $357 per tonne in January 2008 to $923 per tonne in May–partly in response to exporting nations withholding supplies in order to hold down domestic prices, and to fears that others would follow suit. While some might argue that such events prove the need for selfsufficiency, that is unlikely to be the optimal policy solution. First, there is no policy that completely eliminates all risk in the rice economy. The world market was quite stable for many years before the current crisis, and autarky has very substantial costs and risks of its own. Self-sufficiency induced by import restrictions would raise domestic rice prices and increase poverty. In addition, prices will be very unstable in the face of domestic production fluctuations if imports are not an option; as an example, Indonesian domestic rice prices increased by 33% in real terms between May 2005 and May 2006 after import restrictions were imposed. Second, while fortunate not to be in the market in early 2008, Indonesia could have afforded imports even at the very high prices observed at that time, just as the Philippines was able to afford them. Note also that the April 2008 peak price was 64% lower than the peak reached in April 1974 in inflation-adjusted terms, and lower than the average real price on the world market from 1950 to 1981. Third, it is important to understand why prices surged. Per capita Asian rice production has been roughly constant during the past few years, and there has been no sudden increase in Asians’ rice consumption. Further, trade volumes were almost 20% higher in the first few months of 2008 than in the same period in 2007, so there was no shortage of supplies on the international market. In the absence of important developments in the ‘real’ rice economy, it seems that a combination of fear, opportunism and panic on the part of traders, consumers, farmers and governments (the latter in the form of export restrictions and aggressive importing) led to a sudden surge in speculative demand, driving prices to high levels. Because the most important actors in the world market are governments, not private traders, the current crisis is an example of government failure, not market failure. It would clearly be in Indonesia's interest if exporters did not impose ad hoc trade restrictions, and importing nations might want to bring such considerations into international trade negotiations at the World Trade Organization. But for exporters to agree to such conditions, importing nations will also need to agree to import in times of low prices. Thus, a free trade area for rice within ASEAN or ASEAN+3 a (and possibly including the South Asian Association for Regional Cooperation) would provide increased stability for all Asian countries. Not many would question such a policy prescription when it comes to rice trade between districts, and there is no fundamental difference when trade between nations is involved. David Dawe Food and Agriculture Organization of the United Nations, Rome aASEAN plus China, Japan and South Korea.

FIGURE 5. Recent Trends in World Rice Prices ($/tonne f.o.b., Vietnamese 25% brokens a ) af.o.b.=free on board; 25% brokens=rice with 25% broken grains.

Source: Food and Agriculture Organization.

Display full size

The upheaval in the global rice market in early 2008 is reminiscent of the selfdefeating policies implemented by many countries during the Great Depression of the 1930s. Faced with growing unemployment, countries typically devalued their currencies and imposed import restrictions so as to switch aggregate demand to domestic producers. These policies effectively attempted to export unemployment to trading partners, and so became known as ‘beggar thy neighbour policies’. Likewise in 2008, Egypt and India, both large rice exporting countries, faced with spiralling rice prices, introduced ‘starve thy neighbour policies’: they restricted rice exports to put downward pressure on domestic rice prices, sending global rice prices even higher for rice importing countries. Fortunately this process has been recognised for what it is. Thus the ASEAN trade ministers held a meeting in Bali in early May at which they jointly agreed ‘to continue fair trade practices and to achieve an orderly regional rice trade’ (Bisnis Indonesia, 5/5/2008). Particularly noteworthy was the fact that the world's largest exporter, Thailand, committed itself not to prohibit or limit rice exports–whereas earlier its prime minister had announced a goal of creating a rice exporter cartel (Bowring

2008). The outcome of the ministerial meeting seems to suggest a

regional consensus that interruptions to normal rice trading arrangements are not in any country's long-term interests. Since Indonesia is usually a rice importer, this agreement should strengthen the hand of policy makers in resisting calls for protection for rice farmers against imports when domestic production again, inevitably, falls short of consumption. This is likely to occur next in the latter part of 2008.

ENERGY SUBSIDIES Unquestionably the major recent economic and political event was the government's decision to increase domestic fuel prices by an average of 28.7% on 24 May (Table 2). This was precipitated by the astonishing rise in the world price of oil over the preceding 12 months. The initial draft budget for 2008 had assumed an oil price of $60 per barrel (Kong and Ramayandi

2008: 12–13)

but, by the time the parliament enacted the budget in November, the actual price was closer to $90. The government was slow to respond, waiting until early April to raise the oil price assumption to $95. Although this was realistic in terms of spot prices at the time, within just two months, oil had risen further to around $130 per barrel (Figure 6). FIGURE 6. World Oil Price and 2008 Budget Assumptions (OPEC basket $/barrel) Source: OPEC, .

Display full size

TABLE 2. Changes to Domestic Fuel Prices CSV

Display Table

With the government committed to holding domestic prices constant, large increases in the world price necessitate correspondingly large increases in outlays on subsidies for consumption of fuel and electricity. The impact on the deficit is small by comparison, however, since the government derives additional revenue from the increased value of Indonesia's oil and gas exports. The real underlying concerns–well understood by many of the key policy makers and their advisers–are the enormous waste of valuable resources and the inequity implied by these subsidies. Even with oil at only $100 per barrel the subsidies were estimated at about $26 billion (Kong and Ramayandi

2008: 16, box 1), with

this amount becoming much larger as the price surged to $130 and beyond. Moreover, the incidence of the subsidies is highly regressive. Wealthy people consume much more energy, directly and indirectly, than the poor: the Ministry of Finance estimates that the richest 40% of the population account for some 66% of the subsidies, while the poorest 40% receive only 18% (MOF

2008a).

Eventually the president was persuaded of the need to raise domestic prices. The government was well aware of the political sensitivity of the issue, however, and thus announced its intention to adjust fuel prices well in advance, without specifying either the date on which this would occur or the extent of the increases–in short, giving the public time to adjust psychologically to the idea. In the event, although there were protests for several days by certain NGOs and student groups, the general public seemed resigned to the reality that fuel prices were bound to rise. There were also protests by minibus drivers in response to delays by local government authorities in adjusting public transport fares, which unreasonably and unnecessarily reduced their earnings significantly for a period of about two weeks. Although fuel subsidies are clearly inequitable, individuals are concerned about the direct impact on themselves of fuel price increases rather than the distributional implications. This impact is significant for the poor, and so the government also announced its intention to implement a cash transfer program to compensate them for the higher costs of public transport and of the kerosene used for cooking and lighting. These transfers were set at Rp 100,000 per month per family for some 19.1 million families designated as poor, and would continue through to the end of 2009. A similar program had been implemented following the very large fuel price increases in October 2005. The SMERU Research Institute found that, while the Post Office was an effective mechanism for delivery of these transfers, the program was rather poorly targeted: 45% of the available funds went to non-poor households, while 45% of poor households did not receive any transfers (SMERU Research Institute

2006). For its part, the

government claims that the rate of mistargeting in 2005 was only 10%, and that it expects an improved outcome this time (Bisnis Indonesia, 12/06/2008). In any case, the cash transfer program could hardly be less equitable than untargeted subsidies for fuel consumption. This point seemed lost on the protesters, however. Indonesia is not the only country that has faced politically difficult choices as a consequence of surging world oil prices. Malaysia, for example, reduced its fuel subsidies shortly after Indonesia did. In neither case did the government raise domestic prices to world prices, as has been done in many other countries, including Singapore. 6 There is much to be said for such a policy, which in fact was foreshadowed on the previous occasion when domestic prices were adjusted in Indonesia (Presidential Decree 55/2005, art. 9), but has never been implemented (except that fuels for industrial use are not subsidised). World prices are changing constantly, leading to unanticipated changes in the cost of subsidies if domestic prices are fixed. This can be highly disturbing to budget outcomes, and can result in significantly reduced spending in other, more desirable areas. For all his faults, former President Soeharto ensured that a very large proportion of the oil boom revenues of the 1970s and early 1980s was reinvested in infrastructure, education and health care; even the considerable windfall gains channelled to his cronies were largely re-invested in private sector activity. Much of the explanation for remarkable economic progress–including poverty reduction–during the Soe-harto era can be found in these policies. By contrast, the current president has not perceived the new oil boom of the last few years as a welcome opportunity to increase spending on badly needed infrastructure, or to bring about improvements in the quality and quantity of education and health services. Rather, it is seen and portrayed as a burden to be borne. The government also announced its intention to introduce an alternative means of targeting fuel subsidies more carefully, by restricting the purchase of subsidised fuel to owners of motor cycles and operators of public transport vehicles, given that poorer people tend to make greater use of public transport and to own motor cycles rather than automobiles. Under this policy, fuel for motor cars would also continue to be subsidised for an indefinite period, though at a lower rate. The new scheme was to rely on an electronic ‘smart card’, which would allow some maximum amount of subsidised fuel to be purchased within any given period. 7 Purchases beyond this threshold would have to be at unsubsidised, or less heavily subsidised, prices, which implied that the government would need to introduce a three-tier pricing system involving further increases in the prices paid by non-target groups. The deadline for introduction of the new system was to be the beginning of 2009, but this seemed unrealistic. Apart from the need to identify the tens of millions eligible to participate, and to produce and allocate the new cards to them, retailers of these fuels would need to be provided with electronic card reading equipment and to be connected to a central database by a nationwide telecommunications network. In view of the evident enormity of these tasks, only Java and Bali were to be covered in the first phase, implying the need for highly problematical different pricing structures in different parts of the country. In the event, however, the smart card plan was abandoned (Dow Jones International News, 18/6/2008). The government blamed the high cost of the scheme, but it is hard to imagine that this would have outweighed the potentially large savings in subsidies. It seems more likely that the crucial factor was concern about middleclass sensitivity to the further implied increases in prices. Notwithstanding the new increases, subsidised domestic fuel prices remain far below world levels. A large part of total subsidies is for the consumption of kerosene, the domestic price of which is far lower relative to the world price than is the case for gasoline (Figure 7) and diesel fuel. The government is intending to phase out this subsidy, not merely by raising the price of kerosene, but also by restricting its supply, while simultaneously encouraging households to switch to natural gas by providing free gas storage bottles. Since this is a massive task it will take some time to complete; in the meantime it is planned to issue such households with ‘control cards’, which will allow them to purchase subsidised kerosene in limited amounts. At world prices, natural gas is a cheaper form of fuel for these purposes than kerosene, and Indonesia's relatively high consumption of kerosene reflects the high levels of subsidy in the past. Thus the shift to using natural gas at world parity prices will involve some additional burden to households, but this also does not yet seem to have been noticed by the media. FIGURE 7. Domestic and International Fuel Prices a (Rp/litre) aDiesel is omitted for clarity.

Source: Ministry of Finance.

Display full size

PUBLIC SECTOR REFORM Indonesia's economic performance in recent times has been impressive, notwithstanding the severe challenges posed by rising global food and energy prices and by all too frequent natural disasters. But there remains much room for improvement in the climate in which the private sector is required to operate: Indonesia ranks 123rd of 178 countries on ease of doing business in the World Bank's Doing Business 2008 report, and 143rd of 180 countries in Transparency International's Corruption Perceptions Index for 2007, for example. Expectations as to how quickly the public sector could be reformed after Soeharto left office may well have been unrealistic, but that does not diminish the urgency of achieving more in this field. The remainder of this survey focuses on three parts of the public sector, widely defined, in which particularly notable efforts are being made to introduce the kinds of reforms on which further improvement in Indonesia's performance depends: the Ministry of Finance (MOF), two local governments in Central Java, and a group of companies under the Ministry for State-owned Enterprises. These specific entities were chosen for study because they are at the forefront of reform, rather than being representative of the public sector in general. Moreover, the emphasis is on describing some of the main thrusts of reform; for the most part it is too early to provide an analysis of their impact, which, in any case, is beyond the scope of this survey.

Ministry of Finance The first steps towards reform within the Ministry of Finance occurred under the government of Megawati Soekarnoputri and her finance minister, Boedi-ono. The process began with the establishment of a Large Taxpayers Office as an attempt to increase the level of income tax revenues, widely regarded as well below potential. Further impetus for reform was generated by the enactment of three laws in the following two years: Law 17/2003 on State Finances; Law 1/2004 on the State Treasury; and Law 15/2004 on Auditing of State Finances. These laws heralded a change from past practices, demanding a much higher level of transparency and accountability within government and, in particular, within the finance ministry. The Medium Term National Development Plan for 2004–09 included a plan for reform of the bureaucracy, calling for the application of ‘good governance’ principles in general–and, in particular, improved supervision and accountability of civil servants; restructuring of management and institutions; better management of human resources; and the improvement of services provided to the public. When the present Minister of Finance, Sri Mulyani Indrawati, took up her position in December 2005, she decided to push forward vigorously with reform in her own ministry, clearly signalling her intentions by replacing the heads of the ‘notoriously corrupt’ tax and customs and excise directorates general (DGs) within four months of taking office (Witular

2006).

The Ministry of Finance has a large number of offices spread throughout the archipelago, and employs around 62,000 civil servants. Under the current minister, it is serving as a pilot project to lead reform of the bureaucracy, rather than waiting for centrally driven whole-of-government reforms that seem unlikely to materialise in the near future. Broadly stated, the aim of bureaucratic reform is to create a civil service whose personnel are ‘clean’ (non-corrupt), professional and accountable, and which is efficient and effective in carrying out its functions. Thus it is recognised that reform does not merely entail bringing corruption under control (seemingly the president's principal focus), but also involves improving the capacity of the bureaucracy to design and implement government policies. There are two main components of this reform effort, one concerned with the way the ministry goes about its business, and the other with the way its human resources are managed (MOF

2008b).

To make itself more effective in carrying out its functions the ministry has changed its organisational structure, splitting some DGs into two or more, and combining other organisational units into a single DG. It has also defined the functions of some of the DGs more precisely than before. At the same time it has focused on all of the repetitive tasks undertaken throughout the ministry, with a view to redesigning the processes involved (‘standard operating procedures’) to make them simpler and more transparent–and to backing this up by setting standard times for completion of these tasks. While important in themselves, these kinds of measures are much less fundamental than changes to the way human resources are managed, precisely because it is the job of individuals to decide upon, for example, the best way to organise the ministry and design its operational processes. The changes to human resource management currently being implemented are far reaching, reflecting the need to clear away the accumulation of policies and practices that hinder efforts to optimise performance of the bureaucracy. The changes include preparing detailed job descriptions for each position; grading each position on the basis of its scope, the competencies required and the risks that need to be managed by incumbents; determining a structure of remuneration that reflects this grading; identifying training needs by comparing individuals’ skill sets with the skills required in the positions they occupy or are likely to occupy in the future; quantifying surpluses and deficits of skills within the existing workforce; and developing a system for monitoring performance and rewarding or penalising individuals accordingly. The ministry has found that there is a surplus of lower-level employees with only general skills, while at higher levels the need for officials with professional skills (particularly those acquired through post-graduate education) often far exceeds their availability. This reflects the failure in the past to relate the level and types of recruitment to actual manpower needs, and to provide sufficient opportunities for ministry personnel to undertake further training. A particular problem (apparently common to the entire bureaucracy) is that both recruitment and training were cut back heavily in the late 1990s as a result of budgetary difficulties following the 1997–98 financial crisis. Ten years later this is causing considerable problems, to which the ministry is responding by sending large numbers of its staff to study for higher degrees, both domestically and overseas. It has also indicated that it will establish additional functional positions for staff with specific professional skills, and that it may introduce crash training courses to meet its workforce needs– particularly for accountancy staff (Bisnis Indonesia, 6/7/2007, 21/9/2007, 24/9/2007). By contrast, there appears to be little the ministry can do about excessive staff numbers at the lower levels, even though the civil service ministry is well aware of the problem. 8 The finance ministry has compiled a set of guidelines for improving discipline among MOF officials, together with a code of ethics for all Echelon I (top-level management) officials, and has also established a Code of Ethics Council. More important in practice, perhaps, is the decision to improve the structure of remuneration and to tie remuneration to the work done. Henceforth, performance is to be ‘valued’–that is, remunerated–on the basis of the job gradings mentioned above. The greater the skill requirements and responsibilities of the position, the higher the level of remuneration. As a first step in determining a new pay structure, a multinational consulting firm specialising in monitoring private sector remuneration of managerial and professional employees was commissioned to provide a comparison with official levels of remuneration in the ministry. 9 Consistent with other studies, its research found that civil service pay at lower levels in the hierarchy was quite comparable with that in the private sector, but that the rate of increase in remuneration with increasing levels of responsibility was much slower. In other words, formal remuneration of officials at the highest levels of the bureaucracy was far below that of top executives within the private sector–the implication being that this was detrimental to the goal of optimising the performance of such officials, and thus the ministry itself. Accordingly, the ministry has brought its pattern of remuneration more closely into line with that in the private sector, through the mechanism of a special allowance for finance ministry officials known as tunjangan khusus pembina keuangan negara (TKPKN) (Figure 8), intended to replace all existing allowances. FIGURE 8. Ministry of Finance Special (TKPKN) Allowances a (Rp ‘000/month) a

See text for an explanation of ‘TKPKN’. These allowances represent an

increasing proportion of total remuneration as responsibility level increases, reaching well over 75% at higher management levels. It has been reported that officials working in designated ‘modern offices’ in the Directorate General of Taxation also received an ‘additional allowance’, tunjangan kerja tambahan (TKT), with an ‘additional special allowance’, tunjangan tambahan khusus (TTK), for account representative staff (Bisnis Indonesia, 6/7/2007). Source: Finance Minister Decree No. 289/KMK.01/02007, available at .

Display full size

The ministry needed to be given special approval to raise remuneration levels for its employees significantly. There have been reports that remuneration has been increased four-fold (Sheridan



2008), but this means little because, as Figure 8

shows, the increase has not been applied evenly across all levels of the hierarchy; indeed, to have done so would have been needlessly expensive, and would not have had much impact on incentives for good performance. In keeping with the heavy emphasis on differentiating between positions and tying remuneration to their grading, much higher proportionate increases have been implemented at higher levels. Thus Echelon I officials at the highest grading (level 27) should now receive a special allowance (and total remuneration) of around $60,000 annually. 10 The new pay scale appears to leave high-level officials still well behind their private sector peers, however. Directors of large companies appear to earn far higher sums: of the order of $350,000 p.a. in PT Telkom, for example (Trianto 2008). A private sector human resources training manager with a university degree and 5–6 years experience could expect to earn Rp 10–15 million per month according to Kelly Services (

2007). This would correspond to a ministry

position grading of about 18, for which the special allowance, basic salary and other allowances would total about Rp 14 million, yet promotion to this level would typically take about twice as long: 10–11 years. Nevertheless, this still amounts to a dramatic break with the past. The total remuneration figure of Rp 14 million just mentioned is dominated by the special allowance of Rp 10.8 million. A further important and closely related change concerns the filling of vacancies. Whereas in the past individuals waited patiently until seniority brought them to the top of the list of those eligible for promotion to higher positions, under the new arrangements–still in the initial phase–vacancies are advertised internally, and anybody within the ministry who meets the job specifications (in relation to requisite educational qualifications, skills and experience) is encouraged to apply. Applications can be made via the internet, and CVs can be updated online. For the time being this kind of competition for promotions is limited to Echelon II positions. After applications are received a short list is prepared, on the basis of which a committee of Echelon I officials makes its recommendations. Since promotions previously have depended heavily on seniority but also on the backing of one's superiors, the new approach is experiencing some opposition from Echelon I officials–uncomfortable, presumably, with losing their capacity to dispense patronage to (and thus ensure the loyalty of) their subordinates. In order to minimise the influence of favouritism, the ministry now puts heavy emphasis on ‘key performance indicators’ (KPIs), which are used to differentiate between applicants for vacant positions. At the highest level the minister holds quarterly meetings with her Echelon I officials, at which the latter are required to report on their own achievements relative to KPI targets. As yet there has been no move to open up ‘structural’ job vacancies to applications from people outside the ministry, much less from the private sector, although limited outside hiring to fill ‘functional’ positions is well accepted. Functional positions are those that require specific technical skills, whereas structural positions do not. For example, a medical graduate would probably be employed in a functional position open only to qualified doctors, whereas an economics graduate would typically be employed in a structural position that might just as likely be occupied by an arts graduate. Within the MOF, applications for positions as lecturers at the ministry's training institute (Sekolah Tinggi Akuntansi Negara) are accepted from outside. Arguably, the lack of opposition to outside recruitment to functional positions reflects the fact that they require skills not possessed by people already employed in the ministry. By contrast, there tends to be an over-supply from within of individuals eligible for promotion to higher structural positions (albeit often lacking desirable skills), so any suggestion that outsiders should also be permitted to apply would be bound to meet with strong opposition. It is hoped that the now more generous remuneration levels will provide a stronger incentive to employees of the ministry to work hard and to act with integrity and discipline, and new internal regulations stipulate a list of sanctions that can be imposed on those who do not live up to these expectations. Specifically, it is envisaged that fines will be imposed in the form of deductions from the special allowances: for example, employees who fail to come into the office without reasonable excuse will find their monthly special allowances cut by 5% per day of absence. For more serious offences employees can be subjected to deductions as large as 90–95% of their special allowances, or can be demoted or dismissed from their positions. It is hard to imagine that the threat of such penalties will have much of an impact, given an organisational culture averse to actually imposing them. On the other hand, the much higher remuneration available to those who gain promotion to the higher levels, in conjunction with a more competitive system of promotions based on individual performance, has the potential significantly to alter the behaviour of ministry officials. Although the original intention was for the new special allowance to replace the plethora of existing allowances, in fact it seems that many of the latter still exist, so that high-level bureaucrats now receive the new TKPKN allowance in addition to the allowances they received prior to reform. As a consequence it would appear that many are now paid far more generously than has been the case in the past–perhaps even more generously than would be necessary to bring them into line with their private sector peers. The problem is being tackled, however. For example, the ministry announced recently that all of its high-level officials currently serving also as commissioners of state-owned enterprises would be resigning from these positions as soon as practicable (Bisnis Indonesia, 12/6/2008). Perhaps the minister 's most spectacular action in relation to bureaucratic reform was to remove some 1,200 individuals from the customs office at Tanjung Priok, Jakarta's main port, and replace them with about 850 officials regarded as more trustworthy. The new officials are monitored quite carefully, and there is a strong emphasis on rewards for good performance and penalties for those who do not perform well. The ministry claims to be encouraged by the results of this shakeup, but it is under no illusion that the battle has already been won. At its request, officers of the Corruption Eradication Commission (KPK) carried out raids at the end of May 2008 on the same Tanjung Priok office, during which quantities of cash, presumed to be bribes, were found hidden in the desk drawers of a number of customs officers (JP, 3/6/2008).

Local governments Indonesia undoubtedly has a great deal to gain from successful reform of the central government bureaucracy. However, given the dramatic increase in responsibilities of local governments (districts and municipalities) since the beginning of 2001 under decentralisation, reform at that level is perhaps equally urgent. In January 2007 there were 456 local governments (363 districts and 93 municipalities), 11 and the heads of a small number of these have gained a reputation as pioneers of reform. The outstanding achievements of these few pioneers will not in themselves change the face of Indonesia, but the examples they set, in combination with the recent introduction of direct elections for heads of government, seem likely to have a considerable impact in the longer run. Some of the individuals who have been able to develop a reputation as successful reformers at local government level are now seeking to build on that success by running for election at provincial level. In order to gain some appreciation for what is being done by way of reform at local government level, the author briefly visited two neighbouring district governments in Central Java–the municipality of Solo and the district of Sragen– to interview their respective heads of government, both of whom have established reputations as active and successful reformers. It is probably no coincidence that both the walikota (mayor), Bpk Joko Widodo, and the bupati (district head), Bpk Untung Wiyono, have considerable experience as private sector businessmen. This gives them a different perspective from the majority of their peers who have spent their entire careers within the bureaucracy (and/or the military). In particular, when faced with a problem they seem naturally inclined to look for ways to deal with it, rather than to list the reasons why its solution is beyond their authority or capacity. It seemed clear that both men are in the habit of imagining useful things to do, and then finding ways to get them done. The entrepreneurial way of thinking can be seen in policies of the mayor of Solo in relation to small-scale trading activity in the city. All over Indonesia, such trading is carried on in two main locations: traditional markets and public spaces. For the traders or shoppers who use traditional markets, these places leave much to be desired. Architectural eyesores, their design does not facilitate the movement of people and goods. They are usually poorly lit, poorly drained and unhygienic, lacking adequate sanitation facilities and garbage disposal systems. These shortcomings are multiplied when pedagang kaki lima (PKL, petty traders) establish their own market areas in public spaces such as along roadsides and footpaths, in public parks and gardens and, indeed, around the fringes of traditional markets. As a result, the flow of traffic in such locations is greatly hindered, and the visual quality of the urban environment is seriously degraded. In all of this the mayor perceived both the need for better management of some of the city's major assets–its traditional markets and its streets and other public spaces–and the opportunity to generate substantial additional revenues. The traditional markets were totally rebuilt in modern form so as to provide a far more attractive and functional environment in which to carry out this kind of economic activity–which, of course, is a very important part of daily life within Indonesia's lower income strata. In addition, an entirely new market was constructed in order to relocate almost 1,000 PKLs then occupying much of the space in the park surrounding an important local monument. The design of this new market took into account inputs from the PKLs following a deliberate program of consultation, 12 and this mass relocation was therefore accomplished in a festive atmosphere, without any of the protest–or even violent resistance–that is a typical outcome elsewhere when city authorities decide to clear particular areas of informal traders by force. The new market is some five kilometres away from the original informal trading area, so the government upgraded the roads and public transport services leading to it. It also created much publicity for the move, as a result of which the new market is thriving. None of the traders involved in this process was required to contribute any capital to the costs of construction or reconstruction of the markets; rather, these investments were funded from the city budget. However, all traders are now required to pay a small daily fee (retribusi) for their occupancy. This provides a significant additional revenue stream from which the mayor expects, for example, to repay the costs of construction of the new market within about eight years. These initiatives amount to a remarkable success story: the park has regained its status as green space; traders and their customers have much improved environments in which to interact; traffic flows more smoothly on the city's streets; and the government has acquired a significant additional revenue stream. As a consequence of this and other policy initiatives the mayor appears to enjoy considerable popularity and respect among his constituents. These are the kinds of outcomes it was hoped could be achieved by bringing government closer to the people through decentralisation, and by the switch to direct election of heads of government. The bupati of Sragen is also having a significant impact on the daily life of his constituents through an extraordinarily wide range of initiatives, ranging from the creation of wireless ‘hot spots’ for internet users to the processing of market refuse to produce bio-gas (Suherdjoko

2008a). He has built a high public

profile, and uses it to exhort both government employees and the general public to work hard and to be creative. One of the most basic ideas about being in business is that high profits are available only to those willing to do different things or do things differently. Thus, for example, the bupati encourages farmers to involve themselves in mixed farming (combining livestock and/or fresh-water fisheries with crop production) and to ‘go organic’–conscious of both the negative long-term impact of inorganic fertilisers on soil quality and the much higher prices commanded by organic food products. To this end, he places government personnel in the villages to advise farmers on such matters and to motivate them to seize new income generation opportunities. The government has its own experimental farming area for research on organic farming, and it encourages the local population to switch to organic foods for health reasons. At the same time, it provides opportunities for individuals outside agriculture to learn new skills useful in business. To this end, it has established a training agency to teach a wide range of skills, such as garment and furniture making, automotive and electrical repairs, English language, beauty salon management and the use of computers and information technology. Such training is provided free of charge to those who are unemployed or are seeking to enter the workforce for the first time. Another achievement has been the conversion of dry waste land to productive use through irrigation (Suherdjoko

2008b). This has been accomplished mainly

by tapping into artesian water, which seems to be quite plentiful in the area. Many small dams have been constructed that permit this water to be stored and then pumped into rice fields, allowing three harvests per year rather than one or two. Some dams are also used for fish farming, and the government has a facility for breeding fish, eels, prawns and so on, which are then placed in the dams until they mature. A recent resurgence in the popularity of batik in Indonesia has provided an opportunity to exploit yet another under-utilised local resource: the skills of batik makers. The government has established a batik showroom on the main street of Sragen, from which it markets a wide range of batik products, relying exclusively on local artisans–who, in turn, use only organic dyes. It claims to assist some 17,000 batik makers in this way. The kabupaten (district) government is pioneering a revolution in the recruitment of civil servants (Pemkab Sragen

2008). Rather than ranking applicants on the

basis of a general examination, as is the usual practice throughout Indonesia, it now screens them carefully for competency in the particular skills it needs. For example, applicants for a position in public relations are tested on their ability to write press releases, draft speeches or public presentations, take photographs, shoot and edit videos, and undertake graphic design work. All applicants are also tested on their computer skills and English language abilities, both of which are regarded as essential. In an attempt to ensure a professional and fair selection process, the government involves academics from nearby universities, along with a team from an independent firm of educational consultants. Such an approach to recruitment is self-evidently sensible, so it is indicative of the fundamental malaise in human resources management in government throughout the nation that the kabupaten had to obtain special permission from the civil service ministry before it could put this into practice. By contrast, there is yet to be any significant change to human resources management in Solo because of continuing and counter-productive control from the centre. The mayor complained that perhaps half of his employees were surplus to real needs, yet he is prohibited not only from dismissing them but even from reducing the total number through attrition (i.e. through retirements and deaths). On the contrary: the civil service ministry instructs his government as to how many new staff must be recruited each year, without even allowing it to select only those applicants with useful skills. 13 Both the mayor and the bupati were well aware of the stifling impact of bureaucratic red tape on both businesses and individuals in the past, and both have established what appear to be very successful ‘one-stop shops’ to facilitate the issue of documents such as licences, permits, identity cards and health care cards. 14 Past practice, familiar throughout Indonesia, involved a tortuous process in which individuals would have to approach one (typically unsmiling) official after another, usually in uncomfortable and unattractive surroundings, wasting hours, days or weeks of valuable time, and probably having to hand over ‘grease money’ in order to make any progress at all. 15 Under the new approach, offices have been attractively refurbished to allow friendly, across-the-counter interaction with a single official, who is able to see the process through to completion in a far shorter–and pre-specified–time. Indeed, Sragen has led the nation in introducing a system that also allows these kinds of interactions to be undertaken online (JP, 8/4/2007). Interesting differences emerge in regard to remuneration of officials in these two local governments. The mayor argued that as a result of controls imposed by the central government he had virtually no freedom to make any kind of incentive payments to his officials. Moving to the one-stop-shop approach deprived many officials of the additional income they obtained previously in the form of bribes intended to hasten the issue of permits and other documents, and the loss of this income might have been offset by compensating increases in salaries or allowances. In the absence of such compensation there was some initial resistance to this radical new way of doing things. The mayor was able to overcome this, however, simply by shifting a couple of recalcitrant officials to other positions where they had no opportunities for soliciting bribes. This was sufficient to overcome any potential opposition from other officials. By contrast, the bupati has found a way to reward good work with better remuneration. His solution to the problem of central control is to argue that, although he may not make incentive payments using funds transferred from the central government, any revenue he can generate from business activity becomes peda-patan asli daerah–own-source revenue–which he is free to use as he chooses. Thus, for example, with the assistance of various local financial institutions, he has established a lending program designed to help local microenterprises. This program seems to be running satisfactorily, and he allocates half of its interest income to boost the remuneration of government employees. In similar vein, he found it possible to pay off the debt of the local water supply company using budgetary savings, 16 and the consequent savings in interest payments–together with a small increase in the charge for piped water–rendered the company newly profitable, adding further to the district's own-source revenue. Both the Solo and Sragen governments not only have a strong focus on facilitating private sector business activity, but also have significant poverty alleviation programs. The most important of these involve free education and health care for the poor. The Solo government also has a lending program designed to upgrade the housing of the poor from slums to simple though decent houses built to standard designs. It is careful to fund only a modest share of the total cost involved, leaving the owners and their families with the responsibility to cover the rest.

State-owned enterprises Another important part of the public sector is the large collection of state-owned enterprises (SOEs), numbering 139 and with total assets of around $150 billion in 2006. Historically, these firms have not been particularly profitable, and indeed have often made large losses. Pertamina, the state oil company, contributes roughly half of the collective net profits of these firms, but this owes much to the fact that it collects a significant proportion of the rents from exploitation of Indonesia's oil and gas resources. On the other hand, other SOEs–most notably the state electricity company, PLN–make large losses because the government forces them to set their prices at unrealistically low levels for socio-political reasons. Such considerations aside, poor management among Indonesia's SOEs is well known, and significant reform is necessary if this problem is to be overcome. The SOEs are the responsibility of the Ministry for State-owned Enterprises, and to get an idea of the nature of the reform process relating to these enterprises the author met with Dr Irnanda Laksanawan, Assistant Deputy for Strategic Industries (a collection of some 11 SOEs within that ministry). 17 SOE reform started in 2002 with the issue by the Minister for State-owned Enterprises of a decree on The Application of Good Corporate Governance in State-owned Enterprises (KEP-117/M-MBU/2002). ‘Good corporate governance’ (GCG) is now the mantra of the ministry and the SOEs, and it is recognised as depending heavily on choosing the right people to manage the firm (the board of directors) and oversee it on behalf of its owner (the board of commissioners). Thus the principal thrust of reform in this area is to seek out individuals with high integrity and levels of competence in appropriate fields for appointment to these top levels of management and oversight; to obtain written commitments in relation to performance from these individuals; to give them sufficient autonomy to be able to manage the companies in question as they see fit; and then to hold them accountable for the results achieved. 18 In the past, SOE commissioners were not expected to do very much and, from that point of view, it did not really matter who was appointed to such positions. At the same time, nearly all directors were promoted to their positions from within the firms in question. With the new emphasis on GCG all this has changed, and the minister has replaced almost all of the former directors and commissioners of these 11 SOEs in recent months. Both directors and commissioners are now expected to exert a significant impact on the firm's performance. It follows that they need high levels of technical or financial expertise, and so the ministry is prepared to appoint professionals from private companies and from academia. It perceives a particular need for high-level financial expertise, and so has made several appointments of individuals recruited from the finance industry. The most important action undertaken by the ministry is to select individuals to serve on the boards of directors, and it now puts a lot of effort into this process, based on a recent ministerial decree (KEP-09A/MBU/2005) on ‘Fit and Proper Tests of Candidates for Membership of the Board of Directors of State Enterprises’. Breaking from past practice, the decree provides for such testing to be carried out by an outside ‘professional institution’, starting with a list of at least nine candidates, from which a short list of three is recommended to the minister for a final determination. Firms that wanted to undertake this work were required to bid for it, and the ministry chose about five of them (including one international firm) to be used in relation to all 11 companies for which new directors were sought. A key aspect of the fit and proper test was to give applicants the opportunity to make a presentation on what they saw as being wrong with the company in question, and what they would do if they had the chance to improve its performance. For the successful applicants the answers to these questions then formed the basis for commitments for which they could later be held accountable–as the ministry's new approach is to include targets for key performance indicators in contracts with commissioners and directors in relation to production growth, market shares, certain financial ratios, and so on. Commissioners and directors are now required to report on a monthly basis to the ministry (as shareholder) on management and financial matters, and their performance is evaluated at the annual shareholders meeting. 18 June 2008

Notes 1 Article 29 (2) of the Constitution states that ‘The state guarantees the freedom of all members of the population to embrace their respective religions and to worship in accordance with their religions and beliefs’. 2 Crop output is greatly influenced by climatic conditions, so the relatively high growth rate in Q1 2008 (table 1) does not mean much on its own. 3 Art. 5(1) of Ministerial Decree No. 02/Per/M.Kominfo/3/2008. 4 Currency in circulation comprises the bulk of base money. The demand for base money is distorted by regulatory changes in banks’ required reserve ratios, so it is more meaningful to focus on currency. 5 Sales of SBIs reduce base money by exactly the same amount, so all that is needed is to accept bids in auctions of SBIs up to the yield level that results in the desired quantity being issued. 6 Malaysia's announced increases were considerably larger than Indonesia's, and the government has foreshadowed its intention to implement further increases until domestic prices match world prices. 7 ‘Pemerintah akan menerapkan sistem distribusi BBM jenis tertentu secara tertutup [Government to apply closed system of distribution for certain kinds of fuels]’, Ministry of Energy and Mineral Resources, 30/1/2008, accessed 18 June 2008 at . 8 ‘Menpan: Indonesia kelebihan PNS [Minister for the Civil Service: Indonesia has an excess of civil servants]’, Tempo Interaktif, 15/5/2007. 9 It is necessary, albeit tedious, to refer to ‘pay/remuneration’ rather than ‘salaries’, because total remuneration consists of basic salary plus allowances, and the latter far exceed the former—especially at the upper levels of the hierarchy. 10 At an exchange rate of Rp 9,300/$. 11 A list is available at . 12 A local NGO, Kompip (Consortium for Monitoring and Strengthening Public Institutions), which focuses on democratisation and is supported by the Ford Foundation, claims some of the credit for this (Kompip

2007).

13 This is in spite of the minister's earlier observation that ‘the number of civil servants would be reduced by at least one million in order to improve efficiency’ (JP, 10/16/2006). 14 Indeed, the bupati felt that many of the existing requirements for permits and other documents served no useful purpose, so he simply abolished them. 15 In typically blunt fashion, the bupati described the district's employees in the past as lazy, lacking creativity, non-innovative, and responsive rather than proactive; bureau cratic procedures were described as slow and rigid, and accompanied by petty extortion (pungutan liar or pungli). 16 He found that it was possible to cut the actual cost of certain large capital expenditure items (such as bridge construction) by more than half relative to the budgeted amounts through more careful procurement procedures. 17 This group of firms was previously under the control of Soeharto's Minister for Technology—later to become president—B.J. Habibie. 18 The board of directors includes the CEO and other top executives; the board of commissioners consists of non-executive representatives of the shareholder(s), who monitor the work of the directors and help determine the broad strategy of the company.

References 1. Alisjahbana, Armida and Manning, Chris. 2002. Survey of recent developments’. Bulletin of Indonesian Economic Studies, 38(3): 277–305. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 2. BI (Bank Indonesia) no date ‘Inflation targeting framework’ , accessed 18 June 2008 at < http://www.bi.go.id/web/id/Tinjauan+Kebijakan/Inflation+Targeting/itf.htm >. [Google Scholar] 3. BI (Bank Indonesia) 2008 Monetary Policy Review: Economy, Monetary, and Banking , March, accessed 18 June 2008 at < http://www.bi.go.id/web/en/Riset+Survey+Dan+Publikasi/Publikasi/MPR/mpr_0308.htm >. [Google Scholar] 4. Boediono 2002 ‘The international monetary fund support program in Indonesia: comparing implementation under three presidents’ , Bulletin of Indonesian Economic Studies 38 (3) : 385 – 91 . [Google Scholar] 5. Bowring , Philip 2008 ‘How to make the food crisis worse’ , International Herald Tribune , 8 May . [Google Scholar] 6. Dawe, David. 2008. Can Indonesia trust the world rice market?’. Bulletin of Indonesian Economic Studies, 44(1): 115–32. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 7. Grigg , Angus 2008 ‘Indonesia misses mining boom’ , Australian Financial Review , 22 February . [Google Scholar] 8. Kelly Services 2007 ‘Kelly Services Salary Guide 2007’ , Jakarta . [Google Scholar] 9. Kompip (Konsorsium Monitoring dan Pemberdayaan Institusi Publik, Consortium for Monitoring and Strengthening Public Institutions) 2007 Deliberative Democracy for Social Justice , Kompip, Solo . [Google Scholar] 10. Kong , Tao and Ramayandi , Arief 2008 ‘Survey of recent developments’ , Bulletin of Indonesian Economic Studies 44 (1) : 7 – 32 . [Taylor & Francis Online], [Google Scholar] 11. LSI (Lingkaran Survei Indonesia, Indonesian Survey Institute) 2008 ‘Reformasi setelah 10 tahun [Reform after 10 years]’ , Kajian Bulanan [Monthly Analysis] 13, May, accessed 18 June 2008 at < http://www.lsi.co.id/ >. [Google Scholar] 12. Manning, Chris and Roesad, Kurnya. 2006. Survey of recent developments’. Bulletin of Indonesian Economic Studies, 42(2): 143–70. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 13. McCulloch, Neil. 2008. Rice prices and poverty in Indonesia’. Bulletin of Indonesian Economic Studies, 44(1): 45–64. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 14. MOF (Ministry of Finance) 2008a The Indonesian government's economic agenda and priorities: fuel price policy and its economic, social and budgetary impact , 26 May, Ministry of Finance, Jakarta . [Google Scholar] 15. MOF (Ministry of Finance) 2008b Profil Reformasi Birokrasi Departemen Keuangan [Profile of Bureaucratic Reform in the Department of Finance] , Ministry of Finance, Jakarta . [Google Scholar] 16. NAFRF (National Alliance for Freedom of Religion and Faith) 2008 ‘Let's defend our Indonesia!’ , Jakarta Post , 10 May . [Google Scholar] 17. Pemkab Sragen (Sragen Kabupaten Government) 2008 ‘Terketat, seleksi penerimaan CPNS Pemkab Sragen’ [Tightest: selection of civil service applicants by Sragen Government] , Sragen Kabupaten Government, accessed 18 June 2008 at < http://humas.sragenkab. go.id/ >. [Google Scholar] 18. Sheridan , Greg 2008 ‘Indonesia's treasure in safe hands’ , The Australian , 29 May . [Google Scholar] 19. Simatupang, Pantjar and Timmer, C. Peter. 2008. Indonesian rice production: policies and realities’. Bulletin of Indonesian Economic Studies, 44(1): 65–80. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 20. SMERU Research Institute 2006 Evaluation of the Unconditional Cash Transfer in Indonesia , Policy Brief, SMERU Research Institute, Jakarta, December, accessed 18 June 2008 at < http://www.smeru.or.id/policybrief/cashtransfer_eng.pdf >. [Google Scholar] 21. Suherdjoko 2008a ‘Win-win for Sragen: turning trash into cash’ , Jakarta Post , 2 May . [Google Scholar] 22. Suherdjoko 2008b ‘Manmade lakes fulfill Sragen farmers’ hopes’ , Jakarta Post , 25 May . [Google Scholar] 23. Suryahadi, Asep, Widyanti, Wenefrida, Perwira, Daniel and Sumarto, Sudarno. 2003. Minimum wage policy and its impact on employment in the urban formal sector’. Bulletin of Indonesian Economic Studies, 39(1): 29–50. [Taylor & Francis Online], [Web of Science ®], [Google Scholar] 24. Trianto , Hery 2008 ‘Apakah gaji eksekutif Indonesia kemahalan? [Is executive pay too high in Indonesia?]’ , Bisnis Indonesia Online , 4 June . [Google Scholar] 25. Warr, P. 2005. Food policy and poverty in Indonesia: a general equilibrium analysis’. Australian Journal of Agricultural and Resource Economics, 49(4): 429–51. [Crossref], [Web of Science ®], [Google Scholar] 26. Witular , Rendi Akhmad 2006 ‘Sri Mulyani fires chiefs of tax, customs offices’ , Jakarta Post , 22 April . [Google Scholar]

PDF

Browse journals by subject

Back to top

Area Studies

Earth Sciences

Health and Social Care

Museum and Heritage Studies

Arts

Economics, Finance, Business & Industry

Humanities

Physical Sciences

Information Science

Politics & International Relations

Behavioral Sciences Education Bioscience

Language & Literature Engineering & Technology

Built Environment

Social Sciences Law

Environment & Agriculture Communication Studies

Sports and Leisure Mathematics & Statistics

Environment and Sustainability Computer Science Food Science & Technology

Medicine, Dentistry, Nursing & Allied Health

Development Studies

Tourism, Hospitality and Events Urban Studies

Geography

Information for

Open access

Help and info

Authors

Overview

Help

Editors

Open journals

FAQs

Librarians

Open Select

Press releases

Societies

Cogent OA

Contact us Commercial services

Copyright © 2017 Informa UK Limited Privacy policy & cookies Terms & conditions Accessibility Registered in England & Wales No. 3099067 5 Howick Place | London | SW1P 1WG

Connect with Taylor & Francis