The Political Economy of Local Governance Findings From An Indonesian Field Study (2009)

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The political economy of local governance: findings

from an Indonesian field study
a
Christian von Luebke
a
Stanford University ,
Published online: 24 Jul 2009.
To cite this article: Christian von Luebke (2009) The political economy of local governance: findings from an Indonesian
field study, Bulletin of Indonesian Economic Studies, 45:2, 201-230
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Bulletin of Indonesian Economic Studies, Vol. 45, No. 2, 2009: 201–30
THE POLITICAL ECONOMY OF LOCAL GOVERNANCE:

FINDINGS FROM AN INDONESIAN FIELD STUDY
Christian von Luebke*
Stanford University
Downloaded by [Moskow State Univ Bibliote] at 07:10 15 December 2013
Why do some local governments perform well, while others perform badly? The
rapid shift from centralised–authoritarian to decentralised–democratic rule in Indo-
nesia has been accompanied by a large variation in sub-national government poli-
cies across districts. Based on eight district case studies comprising 1,000 business
surveys and 120 in-depth interviews, this paper argues that demand-side pres-
sures from local firms, associations and district councils are less significant than
supply-side pressures from local government leaders in explaining variations in
taxation, licensing and corruption practices. In Indonesia’s early transition to demo-
cratic decentralisation, societal pressures have been constrained by collective action
problems and perverse political incentives. Local government leaders, on the other
hand, have strong powers and new incentives for policy reform. In response to the
good governance debate, this study’s findings suggest that government leadership
is an important, often under-estimated, policy determinant that can compensate for
(or aggravate) weak societal checks in transitioning economies.
INTRODUCTION
What determines sub-national policy outcomes? Why do some local govern-
ments provide efficient and responsive services, while others exhibit high levels
of administrative red tape and corruption? These questions have become increas-
ingly important in view of Indonesia’s pronounced shift from authoritarian–
centralised to democratic–decentralised governance. Since the collapse of
Soeharto’s New Order regime, Indonesia has become one of the most stable and
pluralistic democracies in Southeast Asia. Between 1999 and 2009, Indonesian
citizens elected roughly 1,600 national representatives, 30,000 local council mem-
bers and 800 governors, mayors and district heads. In addition, since the imple-
mentation of decentralisation in 2001, local tax and service responsibilities have
been fully devolved to more than 450 district governments. These reforms have
* The author wishes to thank Anne Booth, Taco Bottema, Alasdair Bowie, Donald Em-
merson, Merilee Grindle, Hal Hill, Yusaku Horiuchi, Tim Lankester, Andrew MacIntyre,
Chris Manning, Neil McCulloch, Ross McLeod, Agung Pambudhi, Arianto Patunru, Budy
Resosudarmo, Henk Schulte Nordholt, John Sidel, Hadi Soesastro, Thee Kian Wie, Peter
Timmer and three anonymous referees for constructive comments; and Juan Fransiska,
Martin Johari, Hari Pallapa, and Tanding Sari for their diligent field assistance. The author
bears sole responsibility for any errors of omission and commission.
ISSN 0007-4918 print/ISSN 1472-7234 online/09/020201-30 © 2009 Indonesia Project ANU

DOI: 10.1080/00074910903040310
202 Christian von Luebke
transformed Indonesia into one of the largest and most decentralised democracies
in the world.
Unsurprisingly, Indonesia’s rapid and far-reaching regime change has given
rise to significant policy differences across its regions. While some districts have
introduced more efficient and responsive service environments, many have
burdened the economy with new trade-distorting taxes, inefficient procedures
and administrative corruption. This pronounced variation in the quality of gov-
ernance suggests that a high level of policy uncertainty continues to constrain
domestic and international investment. It also provides an opportunity to study
the determinants of governance performance more broadly, by identifying what
has motivated some districts to perform better than others. Sub-national policy
differences offer a window into the political economy of reform and a valuable
basis for testing contending good-governance arguments.

This article explores two explanations of good governance: demand-side pres-
sures coming from local citizens, in particular small and medium firms (henceforth
‘societal pressure’) and supply-side pressures exerted by district heads (henceforth
‘government leadership’). The societal pressure argument features strongly in
recent good governance and corruption literatures (Boix, Adsera and Payne 2003;
Hellman 1998; Kaufmann, Mehrez and Gurgur 2002; Klitgaard 1998). Combining
notions of ‘citizen participation’ (Chambers 1995), ‘voice’ (Hirschman 1970) and
‘social capital’ (Putnam 1993), this literature supports the over-arching proposi-
tion that decentralisation and local democracy empower civil societies to push
for better government performance. Government leadership, on the other hand,
arises as a key determinant in recent policy reform literatures: a common find-
ing in comparative policy analyses in Asia (Mahbubani 2007; Rodrik 1996), Latin
America (Grindle 2004; 2007) and Africa (Gray and McPherson 2001) is that public
leaders shape policy outcomes by initiating reforms and supervising bureaucratic
practices.
The empirical results of this study suggest that government leadership is a more
consistent explanation than societal pressure for local policy variations. The find-
ings from eight controlled case comparisons, comprising 1,000 business surveys
and 120 interviews, demonstrate that demand-side pressures in rural Indonesia
continue to be weakly developed. In Indonesia’s early transition to democracy,
reform initiatives of local firms, associations and district councils are often com-
promised by collective action problems and perverse political incentives. The
quality of government leadership, on the other hand, emerges as a salient force
driving the quality of policy outcomes. The case findings indicate that district
heads with strong managerial skills and long-term career aspirations have suc-
cessfully used their official powers to initiate broad-based reform and supervise
bureaucratic performance.
The next section of this article provides a country-wide snapshot of local gov-
ernance variation five years after the introduction of democratic decentralisation.
The third section explains the study’s methodology: the use of sub-national vari-
ation for controlled case comparisons. The fourth section examines the effect of
government leadership and societal pressure by assessing local tax, service and
corruption practices across eight districts. The fifth section places the empirical
findings in a political economy perspective. The final section draws implications
for scholarship and policy.
The political economy of local governance: findings from an Indonesian field study 203
VARIATIONS IN DISTRICT PERFORMANCE

Indonesia’s decentralisation experience demonstrates that local governments
have responded in diverse ways to the uniform devolution of tax and service
authority. Existing surveys1 indicate that the extent to which district bureaucra-
cies have constrained local economies with imprudent taxes, inefficient proce-
dures and administrative corruption varies markedly across the country.
One casualty of the rapid decentralisation process is the design of the local
tax system. While the principal taxes (income, value-added and property) have
remained with the centre, districts have gained control over existing local taxes
(such as hotel, small-scale mining, advertising billboard and road lighting taxes)
and the discretion to create new levies.2 Unfortunately, with rising local expendi-
tures on the one hand and weakly defined national tax laws on the other,3 many
districts have enacted distortionary taxes.4 But, as illustrated in figure 1a, these
regulatory problems are far from uniform. A tax review by Indonesia’s Regional
Autonomy Watch (KPPOD)5 indicates that just over one-half of the 134 districts
assessed have experienced economic and/or legal distortions (scores below 3);
one-quarter have seen moderate tax conditions (scores of 3); and almost one-
quarter have enjoyed tax environments conducive to business activity (scores
1 Problems of local tax, licence and business service practices are widely discussed in ex-
isting business climate studies; see, for example, Ray (2003); LPEM–FEUI (2002, 2007); and
World Bank (2006).
2 Although district own-source revenues (pendapatan asli daerah) have increased gradually
since decentralisation, they still make up less than 10% of total local revenues. The lion’s
share of district expenditures (93% in 2003) has been covered by transfers from the central
government (Lewis and Suharnoko 2009: 228; DRSP 2006: 9).
3 Law 34/2000 on Regional Taxes and Levies (article 2.4) states that new taxes are not to
‘obstruct economic development’, but does not provide precise guidelines. The revision
of Law 34 to include a ‘positive list’ of non-distortionary levies is being debated in the na-
tional parliament at the time of writing. Another problem, as Ray (2003: 23) points out, is
that the monitoring burden lies entirely with the central government. National ministries
must identify district shortcomings (‘innocent until proven guilty’), rather than local gov-
ernments being required to seek national approvals (‘guilty until proven innocent’). As a
result, a large proportion of local regulations have not been reviewed (Lewis 2003; World
Bank 2003: 29).
4 The National Chamber of Commerce and Industry (Kadin) estimates that over 70% of
the new local regulations hamper economic development, because they either overlap with
existing national taxes or constrain regional trade flows (Tagukawi 2003: 4). Concerned
with economic distortions, the Ministry of Finance cancelled nearly one-third of district
tax regulations it reviewed in 2001 (Lewis 2003: 187), and a total of 450 local bills reviewed
between 2001 and 2005 (Simanjuntak 2005: 2).
5 KPPOD is a private research institute created in 2001 as a joint project of the National
Chamber of Commerce and Industry (Kadin), academic institutions (University of Indo-
nesia, Centre for Strategic and International Studies and Prasetiya Mulya Business School)
and national media companies (Jakarta Post, Bisnis Indonesia and Suara Pembaruan). Since
2001, KPPOD has increasingly stimulated policy debates by publishing annual rankings of
district business climates.
FIGURE 1 Variation in District Policies and Practicesa

1a Tax Bill Evaluation 1b Licence Administration
Tax distortion Licence administration

index index
5 9
8
4 7
6
3 5
4
2 3
2
1 1
33 66 99 132 55 110 165
1c Fairness of Tender Process 1d Licence Corruption
Tender fairness Licence corruption

index (Rp '000)
9 500
8
400
7
6 300
5
4 200
3
100
2
1 0
55 110 165 54 108 162
a The horizontal axes show districts in ascending order of indicator value. Municipalities are not
included (see footnote 6). Indicators are explained below.
1a (134 districts): the indicator measures the quality of newly enacted district tax bills in terms of
degree of economic and legal distortion; evaluations range from 1 (very distortionary) to 5 (very con-
ducive to business activity).
1b (166 districts): the ‘licence administration index’ combines firm perceptions of ‘bureaucratic ease’
and ‘timeliness’ of processes to obtain common business permits; responses range from 1 (very poor)
to 9 (very good).
1c (166 districts): the ‘fairness of public tender’ index reflects firm perceptions of districts’ fiscal and
managerial integrity during tendering for the construction of public schools, hospitals, roads and gov-
ernment buildings; responses range from 1 (very unfair) to 9 (very fair).
1d (162 districts): ‘licence corruption’ is calculated as the mean value of reported bribe payments
(Rp ‘000) for five common business licences (SIUP [trade], Lokasi [location], Gudang [warehouse],
IMB [building] and HO [externalities] permits).
Source: KPPOD (2004a; 2005) survey data.

above 3) (KPPOD 2004a).6 Thus, the main message arising from these data is that
regulatory conditions remain critical, but also differ significantly across districts.
A similarly diverse picture arises in the case of administrative procedures. At this
early stage of transition, many local bureaucracies (dinas) have attained monopoly-
like positions – no longer under central supervision but not yet under fully-fledged
democratic control (Azis 2003: 3). In its Doing Business 2009 assessment, the World
Bank (2008) ranks Indonesia’s administrative procedures for starting a business as
among the most time- and cost-intensive in the world (129th among 181 countries).
Registering a limited liability company in Indonesia takes more than three months
– twice as long as in most other ASEAN countries. In obtaining the necessary per-
mits firms face a myriad of desks and paperwork at multiple technical agencies.
There is considerable variation in regulatory performance across districts. Rus-
tiani (2003: 80), for example, finds that the costs of obtaining small-scale indus-
try permits (tanda daftar industri, TDI) can range from Rp 5,000 (Yogyakarta) to
Rp 477,000 (Bandung), and processing times from two days (Yogyakarta) to 20
days (Medan). The KPPOD (2005) business survey confirms these pronounced dif-
ferences. Information obtained from 8,700 private sector respondents in 224 dis-
tricts and municipalities indicates that the quality of local licence administration is
far from homogeneous. The licence administration indicator in figure 1b (for 166
districts), which comprises firm perceptions of bureaucratic ease and timeliness of
processing, indicates a distinct spread between high and low ranking districts.
Another illustrative indicator is the extent of administrative corruption. Cor-
rupt government practices are not a new phenomenon in Indonesia. Studies show
that administrative extortion (often referred to as ‘cigarette’, ‘speed’ or ‘grease’
money) was a persistent feature of the Soeharto era, and in the course of decen-
tralisation has merely been dispersed across local governments (Ray 2003: 13;
Schulte Nordholt 2005). On the basis of country-wide business surveys, KPPOD
concludes that up to 80% of local businesses continue to pay informal fees when
dealing with district bureaucracies (KPPOD 2004b: 70). In the first years of decen-
tralisation, these corrupt payments could raise licence costs by 60% and overall
business expenses by 10% (LPEM–FEUI 2002: 5–7).
But below the aggregate level we find, once again, distinct sub-national dif-
ferences. These are particularly apparent in the way local governments admin-
ister public infrastructure construction and business licences. Despite uniform
laws on transparent tender procedures (Keppres [Presidential Decree] 80/2003),
the fairness with which districts allocate public contracts varies considerably. As
illustrated in figure 1c, the KPPOD (2005) business survey found that just over
two-thirds of the districts were characterised by unfair tender procedures (scores
between 1 and 5), whereas just under one-third displayed relatively transpar-
ent and impartial practices (scores above 5). Similar variations emerge in terms
of licence corruption. As depicted in figure 1d, survey results suggest that just
under one-third of districts impose no unofficial licence fees; 44% demand illicit
payments of up to Rp 50,000; and 27% inflict illegal charges ranging between
Rp 50,000 and Rp 450,000.
6 For comparability with our own case studies, which are of districts (kabupaten) rather
than municipalities (kota), figures 1 and 2 present only the district data from the KPPOD
studies, and exclude the municipality data.
FIGURE 2 Relationship between Bribe Payments and Administration Times

Administration time (days)
40
III F
IV
F F
F F
F
30 F
F
F
F
F
FFF F F
F
F F F
F F
20 F F
F
F
F F F F F F
F F F F
F F F F
F F F
10 F
F F F
F
F
F F F
F F
F
F FFF F F
F F FF F F F
FF F F F F
F
F
FIF
F
F
F F FF II
0
0 20 40 60 80 100
Payment of illegal fees (Rp '000)
a The graph depicts 89 districts with data on both dimensions. It omits 52 districts that reported average
bribe levels below Rp 100 and 25 that reported bribes above Rp 100,000, the former because of presumed
under-reporting, the latter owing to limited plotting space. The quadrant border lines refer to median
processing times (12 days) and median bribe payments (Rp 31,927). Municipalities are not included.
Source: Own estimates based on the KPPOD (2005) business survey data.
In view of these diverging degrees of corruption, it is useful to test whether

high bribe payments are associated with shorter administration times. While
some economists have claimed empirical support for this ‘grease hypothesis’ (Leff
1964; Lui 1985), others claim strongly to have refuted it (Kaufmann and Wei 1999;
Kuncoro 2004). The KPPOD (2005) data, plotted in a corruption–time diagram,
provide little support for either position (figure 2): that is, there is no clear rela-
tionship between the level of bribes paid and the time taken to issue licences.7 The
chart does, however, underline the pronounced variation in district performance.
While some local governments are both faster and less corrupt than the sample
median8 (bottom-left quadrant), others inflict excessive time and bribe require-
ments on local firms (top-right quadrant).
7 Simple bivariate regression estimates – based on the survey data reported in KPPOD
(2005) for 114 districts – suggest that, if anything, bribe payments increase with processing
times for general business permits (tanda daftar perusahaan, TDP), although by very little.
The coefficient for the regressor ‘bribe payments for TDP permits’ is significant (t-value of
3.24), but barely greater than zero (3.95e-05).
8 Median administration times and bribe payments across 114 districts (the 89 shown in
figure 2 plus 25 outliers reporting bribes above Rp 100,000) are indicated by the quadrant
border lines in figure 2 (see also figure 2, note a). (These medians are calculated exclusive
of cases reporting bribes of below Rp 100).
FIGURE 3 Location of the Eight District Cases

Source: Cartographic Services, The Australian National University, Canberra.
CONTROLLED CASE STUDY METHODOLOGY

The variations in district practices make it possible to test the relative explanatory
strength of good-governance arguments centred on society and on leadership.
Based on strong district-level differences, this study chooses a set of distinct case
studies in west, central and east Indonesia. The case selection is of central impor-
tance in this paper. It reflects both analytical and Indonesia-specific considera-
tions. In order to control for region-specific differences, the study compares four
‘district pairs’ in four provinces: as shown in figure 3, these are Solok and Pesi-
sir Selatan (henceforth Pesisir) in West Sumatra; Kebumen and Klaten in Central
Java; Gianyar and Karangasem in Bali; and Bima and Lombok Timur (henceforth
Lotim) in West Nusa Tenggara (Nusa Tenggara Barat, henceforth NTB). These
districts are chosen in such a way that they vary in explanatory variables (King,
Keohane and Verba 1994), while remaining similar in other socio-economic and
political characteristics (tables 1a and 1b). In West Sumatra and Central Java, the
members of the district pairs differ markedly in strength of government leader-
ship, whereas in the second two provinces, Bali and NTB, they display substantial
differences in the strength of societal pressure.
The districts of Solok and Kebumen exhibit higher leadership qualities than
their counterparts, Pesisir and Klaten (table 1a). While the district heads of Solok
and Kebumen have attracted the attention of national and international media for
their anti-corruption initiatives and visionary reform plans, the leaders of Pesisir
and Klaten have been in the news in connection with budget irregularities and
corruption allegations. Kebumen’s district head, Rustriningsih, was praised for
her exceptional determination to improve bureaucratic standards and rural serv-
ice delivery (Cochrane 2004; Perlez 2003). In a similar vein, Solok’s district head,
Gamawan Fauzi, received acclaim for his efforts to abolish seniority-based project
allowances and to introduce Indonesia’s first ‘anti-corruption pact’, in cooperation
with Transparency International (Bachyul 2004: 4). In comparison, news reports
on the district heads of Klaten and Pesisir, Haryanto Wibowo and Darizal Basir,
indicate poor leadership qualities. Both were on the list of President Yudhoyono’s
corruption investigations in 2005: Wibowo for illegitimate procurements and
TABLE 1 Government Leadership and Societal Pressure Cases
1a Matched district pairs with strongly differing government leadership indicators
West Sumatra Central Java
Solok Pesisir Kebumen Klaten
Government leadership indicators

Integrity (media reports)a High Low High Low
Anti-corruption efforts (%)b 95 37 48 5
Business survey scorec 4.2 2.7 3.8 2.1
Overall leadership quality High Low High Low
Societal pressure
Chambers/associationsd Insignificant Insignificant Insignificant Insignificant
Literacy/schoolinge High High Moderate Moderate
95% 94% 85% 83%
6.8 yrs 7.4 yrs 6.2 yrs 7.3 yrs
Control variablesf
Population 2001 (‘000) 434.7 388.7 1,162.3 1,108.1
National transfers 2001 ($ million) 16 14 29 30
Annual income per capita 2002 ($) 450 400 230 350
Poverty rate 2001 (%) 12 13 28 24
Major ethnic group (%) Minangkabau Minangkabau Javanese Javanese
96 95 99 99
Major religions (%) Islam Islam Islam Islam
100 100 99 93
Christian Christian
1 6
Major political parties 1999 Golkar Golkar PDI-P PDI-P
(% support) 33 25 39 56
PPP PPP PKB PAN
20 21 21 14
Sources
a National and international media reports.
b KPPOD (2005) business survey data; percentage of respondents (40 firms/district) that report mod-
erate to very strong anti-corruption efforts.
c The business survey scores are composite indicators based on responses to the author’s question-
naires, with roughly 125 respondents in each district; they summarise local perceptions (ranging from
1, ‘very poor’, to 5, ‘very good’) of five sub-indicators: district heads’ integrity; political will; commu-
nication skills; power to change; and general popularity.
d Author’s pre-fieldwork observations in Bali and NTB and interviews with national policy experts.
e Indonesia Human Development Index (UNDP 2001).
f Control variables are based on various data sources from the Ministry of Finance, the Central Bureau
of Statistics and the National Election Commission. Political parties: Golkar: originally Golongan
Karya (the state political party under the New Order, and one of the major post-New Order parties);
PDI-P: Partai Demokrasi Indonesia-Perjuangan (Indonesian Democratic Party of Struggle); PPP: Par-
tai Persatuan Pembangunan (United Development Party, an Islamic political grouping); PKB: Partai
Kebangkitan Bangsa (National Awakening Party; People’s Awakening Party); PAN: Partai Amanat
Nasional (National Mandate Party).
TABLE 1 (continued) Government Leadership and Societal Pressure Cases
1b Matched district pairs with strongly differing societal pressure indicators
Bali NTB
Gianyar Karangasem Bima Lotim
Societal pressure indicators

Associational presence (observation)d High Low High Low
District schooling (years)e 7.6 4.7 7.0 5.5
Awareness of local politicsg (%) 72 62 72 40
Overall societal pressure High Low High Low
Government leadership
Business survey scorec Moderate Moderate Moderate Moderate
(2.6) (2.7) (3.2) (3.1)
Control variablesf
Population 2001 (‘000) 391.5 359.5 505.0 971.2
National transfers 2001 ($ million) 28 24 21 25
Annual income per capita 2002 ($) 670 400 245 240
Poverty rate 2001 (%) 6 19 34 37
Major ethnic group (%) Balinese Balinese Mbojo Sasak
97 96 99 97
Major religions (%) Hindu Hindu Islam Islam
99 96 99 99
Islam Islam Christian Hindu
1 4 1 1
Major political parties 1999 PDI-P PDI-P Golkar Golkar
(% support) 87 78 52 44
Golkar Golkar PPP PPP
7 12 9 9
Sources
c–f As for panel 1a.
g Indonesia Governance and Development Survey (World Bank 2002; sampling and data information
available at <http://go.worldbank.org/GHY36RKTX0>); presented figures refer to the share of 60
household respondents (in each district) who were well-informed about local elections (that is, they
could recall the names of district head candidates and local politicians).
property sales; Basir for misappropriation of agricultural and micro-credit funds.9

These differences in executive integrity are echoed in the KPPOD (2005) business
survey results. The survey’s confirmation of district heads’ anti-corruption efforts
is significantly higher in Solok (95%) than in Pesisir (37%); and more pronounced
9 ‘Pertanian dan korupsi berjalan seiring (Agriculture and corruption walk hand in hand)’,
Kompas, 18/11/2003: 3; ’Presiden keluarkan izin pemeriksaan dua bupati (President author-
ises investigation of two district heads)’, Tempo, 29/4/2005.
in Kebumen (48%) than in Klaten (5%). Moreover, the field survey conducted for
this study demonstrates that perceived leadership qualities (a composite indicator
consisting of district heads’ integrity, political will, communication skills, power
to change and popularity levels) are remarkably high in Solok and Kebumen (4.2
and 3.8, respectively), whereas they remain relatively low in Pesisir and Klaten
(2.7 and 2.1, respectively).
Turning to the second explanatory variable, we chose Gianyar and Bima for
their distinctiveness in societal pressure indicators. Both districts exhibit higher
levels of associational presence, educational achievement and political awareness
than the control districts of Karangasem and Lotim (table 1b).10 Gianyar’s associa-
tional strength rests on long-standing craftsmanship and sustained tourism flows.
Numerous handicraft associations have sprung up in villages that produce silver-
ware, stone sculptures, ceramics and wood carvings. Moreover, citizens in Gianyar
seem better educated than their peers in Karangasem (7.6 versus 4.7 average years
of schooling) and somewhat better informed about local politics (72% versus 62%).
Similar differences arise in NTB. A lively seaport during the days of the colonial
spice trade, Bima continues to host a large community of small-scale traders and
agro-businesses. The district stands out for its active chamber of commerce which,
according to interview and media data, has repeatedly criticised government prac-
tices and encouraged firms to engage in public decision making.11 Bima is also
characterised by higher average levels of schooling than its neighbour Lotim (7.0
versus 5.5 years) and by greater political awareness (72% versus 40%).
Based on this controlled case selection, the study evaluates differences in local
government performance. Two methods in particular were used to collect data
on district policies and practices. The first was to carry out local business surveys.
During 12 months of fieldwork, from April 2005 to March 2006, we conducted
business surveys with 1,000 respondents (roughly 125 in each district).12 Survey
respondents were randomly chosen from listings in local ‘yellow pages’ directo-
ries, and were evenly stratified across retail, manufacturing and service sectors.
Consistent with employment structures in rural Indonesia, roughly 90% of the
surveyed respondents were owners of small and cottage-sized firms.13 The second
10 Undoubtedly, there are other ways to measure local societal pressure. In this paper I
focus on the outlined private sector indicators for two reasons. First, data on them were
available for all district cases (whereas data on media access or NGO activity were patchy
in Eastern Indonesia). Second, small and cottage-size firms (the primary respondents in the
survey) are strongly represented in district societies.
11 The head of Bima’s local chamber of commerce (Kadinda), Qurais Abidin, is reported to
have chided government officials repeatedly for their failure to provide effective services
and attend to public needs (Anwar 2001). Other reports describe Bima’s Kadinda head as
a rigorous government observer and a tireless supporter of small firms (‘Menggagas kerja
sama Kukar–NTB [Envisioning cooperation between Kutai Kartanegara and West Nusa
Tenggara]’, Bali Pos, 5/8/2003: 23).
12 The survey greatly benefited from the assistance of four local enumerators (most of
them undergraduate students) in each district, who received a 5-day training course before
administering the survey questionnaires.
13 According to Rice (2000: 7), small and cottage-sized enterprises account for roughly
90% of Indonesia’s labour force and 40% of national GDP.
data collection method was the conduct of in-depth interviews with over 120 local
stake-holders and national policy experts.14 Interviews were semi-structured, with
questions asked about local business conditions, government performance, cor-
ruption and democracy. In each district, the sampling frame included four officials
(finance, planning, small-industry, economic development), four business people
(retail, manufacturing, public construction, services), one social science academic,
one chamber of commerce and industry representative, two NGO members and
two local journalists. Interviews were complemented with direct observation in
government offices and local markets.
LOCAL GOVERNMENT PERFORMANCE:

COMPARATIVE CASE FINDINGS

The analysis of local governance in the eight selected districts is based on three
performance criteria: first, an evaluation of the quality of administrative regula-
tion, as reflected in the degree to which new tax bills distort regional economies;
second, an evaluation of administrative procedures, as exemplified by the effi-
ciency and quality of licensing services; and third, an evaluation of administrative
corruption, as indicated by irregularities in public recruitment and administrative
processes. These district performance assessments draw primarily on our survey
and interview data and, occasionally, on evaluations conducted by the Ministry
of Finance and KPPOD.
Administrative regulation
Pairwise differences in administrative regulation were found to be more pro-
nounced in the leadership than in the societal pressure cases. A clear distinction
emerged between Solok and Pesisir in our study. Since the introduction of decen-
tralisation, Solok had refrained from enacting distortionary regulations, whereas
Pesisir had passed a tax bill that clearly obstructs regional trade flows. Since 2001
all commercial vehicles crossing Pesisir’s borders had been subject to ‘road usage
taxes’ (Perda [Regional Regulation] 13/2001). Apart from obstructing regional
trade, these local taxes had become particularly controversial, according to firms
in Pesisir, because more than half of the levies were captured by local officials,
who gave receipts only to every second truck.15
Formal tax bills were not the only obstacle in Pesisir. Another problem, albeit
less obvious, emerged in the form of ‘informal trade levies’. As one senior official
14 Regional perspectives were complemented with national narratives in Jakarta, includ-

ing interviews with former Indonesian ministers (for regional autonomy and agriculture),
senior officials (in the ministries of finance and home affairs), policy experts (The World
Bank, the United Nations, the German aid agency GTZ, The Asia Foundation, KPPOD)
and academics at the University of Indonesia and the Centre for Strategic and International
Studies.
15 That border tariffs represent a serious problem, not only in Pesisir but also in other parts
of Sumatra, is well illustrated in a study by the SMERU Research Institute (2001). Accord-
ing to SMERU’s estimates, trucks transporting oranges from Kabanjahe in North Sumatra
to Jakarta pay levies (official and non-official) ranging from Rp 270,000 to Rp 1,000,000 – a
burden that can reduce business profits by up to 7%.
admitted in a private conversation, many government and military officials are

more inclined to reap benefits from illegal logging than to prevent excessive
deforestation in national reserves. Most traders comply with these informal taxes
to avoid unnecessary trouble. ‘It does not matter whether we carry legal or illegal
logs’, a local trader explains, ‘payments to forest officers [polisi hutan] are a neces-
sary evil for keeping the business on track … if we don’t comply, our houses will
be raided and we end up being convicted for illegal logging, guilty or not’.
Similar informal charges on the transportation of timber occurred in Klaten. As
a senior official disclosed, the local forestry office was collecting roughly $20,000
worth of transport levies each year by making use of a legal ‘grey zone’. In the
absence of clear district regulations, local officials collected charges on timber
imports based on an outdated ministerial decree.16 Even more disturbing is that
collected revenues were not accounted for in official district budgets: according
to informants in Klaten, these informal charges were often divided among senior
bureaucrats. The levies imposed unwarranted burdens on Klaten’s furniture and
handicraft industries. In Kebumen, on the other hand, there were no reports of
formal or informal trade distortions.
On the basis of these observations in Sumatra and Java, the tax environments
in Kebumen and Solok at the time of the study can be ranked as ‘very good’ (no
distortions), in Klaten as ‘poor’ (informal distortions) and in Pesisir as ‘very poor’
(formal and informal distortions).
Turning to the societal pressure cases, we found regulatory differences to be
small in comparison. While both the districts in Bali had eschewed distortionary
tax regulations, the opposite was true in NTB. According to records from the Min-
istry of Finance, the governments of both Bima and Lotim had enacted tax bills
that significantly obstructed regional trade and development.17 In the case of Bima,
three regulations stand out in particular: first, a levy on regional exports (Perda
16/2000) that taxes agricultural and manufactured goods at district borders at
rates of 5–10%; second, a levy on local fishers (Perda 7/2001) that charges annual
head taxes of up to Rp 200,000, irrespective of sales or profits; and third, a levy on
local cooperatives (Perda 15/2000) equal to 4% of their annual surpluses. Similar
trade distortions, albeit less severe, were found in Lotim. Although Lotim’s par-
liament had refrained from enacting head taxes on small firms, it too had imposed
a 5% export levy on the transport of all commodities across its borders (Perda
16/2001). Concerned about their negative welfare effects, the Ministry of Finance
officially rejected all of the new tax bills submitted by Bima and Lotim.18 These
national rejections, however, had little or no impact. As a senior official in Bima’s
economic department explained it:
We are aware that the Ministry of Finance rejected [the export levy] in 2002 … But
the head of our law department advised us to disregard the national decree … After
16 Ministry of Forestry Decree 310/Kpts-II/1999 (‘Guidelines for Granting Forestry

Rights’).
17 The evaluations presented in this paragraph were obtained from Ministry of Finance
reports S26/MK.07/2002; S486/MK.07/2002; and S 523 /MK.07/2002.
18 While the Ministry of Finance can make suggestions for annulments, the final decision
lies with the Ministry of Home Affairs.
all, we live in the era of regional autonomy [and] the local trade tax constitutes one
of our highest revenue sources.
The analysis of administrative regulations in Bali and NTB highlights two find-
ings. First, and more generally, some local tax policies are instructive examples
of initial setbacks to decentralisation. The governments in Bima and Lotim con-
sciously ignored national-level rejections of trade-distorting tax bills, and gave
priority to short-term government revenues over long-term welfare gains. Sec-
ond, pairwise comparisons indicate little difference in regulatory quality. Since
Gianyar and Karangasem exhibited no tax-induced distortions, the regulatory
environment is rated as ‘very good’ in both districts. Bima and Lotim, in contrast,
had imposed imprudent trade taxes, a problem further aggravated in Bima’s case
by arbitrary taxes on fishers and local cooperatives. Accordingly, the regulatory

environment is categorised as ‘poor’ in Lotim (one distortionary bill) and ‘very
poor’ in Bima (three distortionary bills).
Administrative procedures
Local administrative procedures can be distinguished in terms of quality and
efficiency. The quality dimension is exemplified in local service standards at the
so-called ‘one-stop shops’ (OSSs). The main objective of OSSs is to streamline
licensing procedures: theoretically, citizens can complete bureaucratic formalities
with ‘one stop’ in these integrated service units, instead of visiting a succession of
offices. The qualities of these OSS units were assessed during unannounced visits
in each district. The results are summarised in table 2.
In the Sumatran and Javanese cases, superior leadership (indicated by the
superscript L on the abbreviated district names in table 2) coincided with better
service quality. The most striking differences emerged between Solok and Pesisir.
The visit to Solok’s OSS (satu pintu plus [‘one door plus’]) set a high performance
benchmark: licensing requirements and fee details were readily available in well-
designed brochures (and on display boards); three out of four service counters
were attended by knowledgeable and affable staff; duty officials were administer-
ing licence requests on modern computer facilities; and all service areas displayed
anti-corruption signs indicating that bribe payments were prohibited. Pesisir’s
service unit (pos yantu, short form of pos pelayanan satu pintu, literally, ‘one-door
service post’), on the other hand, turned out to be a poorly managed, one-room
facility. The small office, attended by two inexperienced officials, was equipped
with run-down furniture and an outdated information board. Although eager to
assist, the duty officers explained that most licensing matters were handled by
sectoral departments.
Notable differences emerged also in Central Java. The OSS in Kebumen
(pelayanan perijinan, ‘licence service’) displayed a moderately good service envi-
ronment. Situated behind three service counters, a group of well-trained civil serv-
ants responded instantly to licensing inquiries and provided helpful information
brochures. Although interviews revealed the need for additional computer facili-
ties and precise job descriptions, Kebumen’s business services compared favoura-
bly with those in Klaten. Hidden in the back corridors of the district head’s office,
Klaten’s OSS (unit pelayanan satu atap, literally, ‘single-roofed service unit’) was
little more than a dark room filled with old typewriters and dusty files. The duty
TABLE 2 Quality of One-Stop Services (OSS)a
Indicator West Sumatra Central Java Bali NTB

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

(days)
Before Last Evaluation

Decentralisation Two Years
West Sumatra SolokL 10.0 7.1 Very good

Pesisir 12.9 9.7 Good
Central Java KebumenL 16.4 15.9 Fair

Klaten 18.7 15.5 Fair
Bali GianyarS 21.3 26.6 Poor

Karangasem 12.9 14.0 Fair
NTB BimaS 9.6 7.6 Good

Lotim 10.4 9.4 Good
Average 14.0 13.2
a Presented figures are based on responses to the survey question ‘please estimate the average time
needed to obtain necessary business permits – (a) before decentralisation and (b) during the last two
years’. Evaluation scores are explained in detail in appendix 1. The superscripts L and S refer to high-
leadership and high-societal-pressure cases, respectively. The unit ‘days’ refers to calendar rather than
working days, so there are 7 days in a week.
Source: Author’s business survey of 1,000 randomly selected local firms in eight districts.
A second indicator for administrative procedures is the efficiency with which

local bureaucrats process business licences. The field survey of about 125 firms
in each district provides an estimate of how many days per year local businesses
spent obtaining standard government permits. Although bureaucratic formalities
depend on the nature of the business activity in question, most firms are required
to obtain TDP and disturbance permits (hinder ordonantie) for negative externali-
ties. Additional sector-specific requirements include general trade (surat ijin usaha
pedagang, SIUP) and industry licences (TDI).
The survey data indicate that administrative procedures had improved slightly in
recent years. Since the enactment of regional autonomy, local citizens took roughly
13 days to obtain necessary business permits (close to the median processing time
derived from the KPPOD data shown in figure 2), one day less than in the pre-
decentralisation years (table 3). To interpret these improvements as local efficiency
gains would be misleading, however. Since 2001, most administrative procedures
have been fully devolved from the national and provincial level to the district level.
The removal of super-ordinated authorisation (and related waiting periods) could
arguably translate into shorter processing times than those observed in this survey.
Since decentralised licensing procedures have markedly reduced communication
and transaction costs, there seems to be ample room for further improvement in
administrative efficiency.
In the pairwise comparisons, the largest differences in administrative efficiency
emerged in Bali. Firms in Gianyar reported that after the enactment of decen-
tralisation it took them almost four weeks to clear common licence requirements
(almost one week more than before decentralisation), whereas their colleagues
in Karangasem took two weeks. While case differences in administration times
remained insignificant in NTB (just over one week in both cases) and in Central
Java (roughly 16 days in both cases), the comparisons in West Sumatra indicated
moderate differences. Solok administered business permits within seven days
(the best performance in the group), whereas Pesisir’s firms took 10 days to final-
ise administrative paperwork.
Consistent with these survey results (and evaluation scales outlined in appen-
dix 1), administrative efficiencies are rated as ‘poor’ in Gianyar; ‘fair’ in Kebumen,
Klaten and Karangasem; ‘good’ in Bima, Lotim and Pesisir; and ‘very good’ in
Solok. Although less pronounced than was the case for administrative regulation,
observable case differences provide some indication that efficiency in administra-
tive procedures is negatively linked to societal pressure (Gianyar/Karangasem)

and positively linked to government leadership (Solok/Pesisir).
Administrative corruption
A third aspect of local government performance is the extent of public corrup-
tion. The first indicator of this draws on reported estimates of bribery during the
recruitment of civil servants (pegawai negeri sipil, PNS).19 The interview question
‘do some PNS applicants pay bribes in order to obtain local government positions’
received a surprisingly large positive response. Many of the non-government
interviewees were willing not only to confirm the existence of corruption, but
also to give estimates of the value of illegal transactions (table 4).
The responses of non-government observers indicate that ‘upfront career invest-
ments’ in the public sector are not an exception, but rather a recurrent phenom-
enon. On average, eight out of 10 non-government respondents confirmed that
bribery conventions exist and that some PNS candidates invest significant sums
in securing life-long government employment. One NGO worker illustrated this
point by stating:
One of my relatives was eager to join the government. He was offered a PNS posi-
tion in exchange for Rp 35 million. To avoid suspicion, local brokers asked him to
pay the money in four instalments. They call it ‘onion payments’, one layer at a time.
… In the end, he did not get the job, because someone else paid more than Rp 50
million. There is an enormous demand for public service positions. Some farmers
even sell their land and livestock to make these payments for their children.
Reports on recruitment corruption differed considerably across districts. The

interview data in table 4 suggest that the strongest evidence of illegal practices in
19 The Indonesian media have repeatedly reported on bribery in relation to PNS recruit-
ment. The newspaper Kompas, for instance, featured the story of a PNS candidate com-
plaining to President Yudhoyono about being asked to pay Rp 40 million to enter the public
service in Bekasi, West Java (Kompas, 29/10/2004: 5). Other examples include: ‘Penerimaan
CPNS dinilai KKN [Corrupt public servant recruitment]’, Waspada, 24/3/2006: 12; ‘Perlu
pelicin Rp 40–75 juta untuk jadi PNS di Sum-Ut [In North Sumatra, you need 40–75 million
to become a PNS]’, Republika, 3/12/2001: 11; ‘Penerimaan PNS: Joko terindikasi langgar
disiplin pegawai [PNS recruitment: indications that Joko violated the civil service discipli-
nary code]’, Kompas, 4/8/2006: 24.
TABLE 4 Corruption during Public Service Recruitment

(interview perceptions, Rp million per transaction)
Respondent No. Ø Evaluation
1 2 3 4 5 6 7 8 9 10
Central Java
KebumenL 15 8 8 0 0 exists exists – – – 6 Fair
Klaten 90 75 75 75 70 60 55 50 50 45 65 Very poor
West
Sumatra
SolokL 0 0 0 0 0 0 0 0 0 – 0 Very good
Pesisir 30 28 23 23 20 15 exists exists – – 23 Poor
Bali
GianyarS 30 25 exists exists exists exists exists 0 – – 18 Poor
Karangasem 40 30 20 15 15 12 8 exists exists – 20 Poor
NTB
BimaS 45 45 40 40 38 35 30 30 25 exists 36 Very poor
Lotim 50 50 35 35 35 30 30 25 – – 36 Very poor
a Presented figures are based on the interview question ‘please provide an estimate of the bribe pay-
ments that some PNS [civil servant] candidates make to obtain a government position’. Ø = average of
responses with a numerical value. Respondents in each district are displayed in descending order of
reported bribes. The response ‘exists’ indicates that respondents affirm bribe payments without pro-
viding clear estimates; ‘–’ indicates non-responses; evaluation scores are explained in detail in appen-
dix 1. The superscripts L and S refer to high-leadership and high-societal-pressure cases, respectively.
Source: Data from interviews with 10 non-government respondents in each district.
the surveyed districts is to be found in Klaten. Here, all 10 respondents confirmed

the existence of upfront bribe payments and estimated that some civil servants
have invested Rp 45–90 million (an average of Rp 65 million) in securing their
government positions. Given that monthly starting wages of PNS barely exceed
Rp 1 million, these outlays are equivalent to roughly 4–8 years of official salaries.
These simple, rough calculations suggest that new government officials have an
incentive to engage in illegitimate practices in order to secure a return on their
investment. In Kebumen, by contrast, only a few interviewees reported such
irregularities. With estimates ranging from 0 to Rp 15 million (average Rp 6 mil-
lion), Kebumen’s interviewees observed distinctly lower bribe conventions.
A similar contrast can be seen in the two Sumatran cases. In Pesisir, inter-
view respondents estimated ‘entry fees’ in the range Rp 15–30 million (average
Rp 23 million), and declared that the prevalence of corruption had increased
since 2001. Solok’s recruitment process, in contrast, received an exceptionally
good evaluation. All interviewees in Solok – without exception – asserted that
bribe payments were unheard of in recent years. While some acknowledged that
irregularities occurred in the 1980s and early 1990s, there was general agreement
that incoming officials had been selected in a fair and transparent manner since
the introduction of decentralisation.
The interviews in Bali and NTB suggested high, but less divergent, levels of
corruption. In both Bima and Lotim, average bribe payments were reported at
Rp 36 million. A striking feature was the similarity not only of these average fig-
ures, but also of individual statements: six respondents in Bima and five in Lotim
reported bribery payments of Rp 30–40 million. The survey data in Bali also point
to rather uniform levels of corruption, indicating that average PNS recruitment
bribes amounted to Rp 20 million in Karangasem and Rp 18 million in Gianyar.
Undoubtedly, given the limited number of observations, these figures should
be interpreted with some caution. They serve not as proof, but rather as an indica-
tion, of bribery practices. Such qualifications notwithstanding, the results help to

identify diverging corruption trends: in one district there is no indication, in one
district there is some indication, and in six districts there are strong indications,
that some civil servants have secured office by paying bribes rather than perform-
ing well in entrance exams. Based on these trends (and consistent with the evalu-
ation scale in appendix 1), the level of integrity in public recruitment is evaluated
in this study as ‘very good’ in Solok, ‘fair’ in Kebumen, ‘poor’ in Pesisir, Gianyar
and Karangasem and ‘very poor’ in Klaten, Bima and Lotim. These results indi-
cate a clear alignment with underlying leadership differences, but no relationship
between corruption scores and pairwise distinctions in societal pressure.
The results for the second corruption indicator, administrative integrity during
licensing procedures, were less clear cut. In West Sumatra, Solok’s good recruit-
ment practices coincided with low levels of licensing irregularities (table 5).
Respondents in Solok reported that illegal add-on fees for business permits had
fallen significantly, from 5.2% of total charges during the pre-decentralisation
years to 2.9% in recent years. In contrast, business people in Pesisir had expe-
rienced rising extortion since decentralisation, and had recently been paying
average corruption premiums of 7.4%. Bureaucratic extortion in the two Central
Javanese cases was higher and remained fairly equal across the two cases. Accord-
ing to our surveys, local firms in Kebumen encountered average corruption fees
of 9.8%, whereas their colleagues in Klaten reported fees of 8.4%. Although the
figures were slightly lower in Klaten than in Kebumen, they had increased more
steeply since decentralisation. In view of these corruption tendencies, administra-
tive integrity is ranked as ‘good’ in Solok and as ‘poor’ in Pesisir, Kebumen and
Klaten (appendix 1).
The survey results for the societal pressure cases in Bali and NTB provide
an inconsistent picture. Respondents in Gianyar stated that average corruption
fees had more than doubled, from about 5.5% to 12.3%, since the beginning of
decentralisation (table 5). In the other three districts, business people faced far
less government extortion. In Karangasem, Bima and Lotim, survey participants
reported recent add-on fees of 2.6–4.1%, figures that had hardly changed since
decentralisation. Based on these corruption indicators in the societal pressure
cases, administrative integrity is evaluated as ‘very poor’ in Gianyar, as ‘fair’ in
Lotim and as ‘good’ in Karangasem and Bima. Interestingly, Gianyar’s case shows
that administrative corruption can prevail regardless of high OSS standards. An
NGO representative in Gianyar explains this as follows:
TABLE 5 Corruption Fees during Licence Administration

(estimated % of total charges)
Before Last Evaluation

Decentralisation Two Years
West Sumatra SolokL 5.2 2.9 Good

Pesisir 6.3 7.4 Poor
Central Java KebumenL 8.9 9.8 Poor
Klaten 6.2 8.4 Poor
Bali GianyarS 5.5 12.3 Very poor

Karangasem 2.9 2.8 Good
NTB BimaS 2.3 2.6 Good
Lotim 4.4 4.1 Fair
Average 5.2 6.3
a Presented figures are based on responses to the survey question ‘please estimate average unofficial
costs (as percentage of official prices) for business licences’. Evaluation scores are explained in detail in
appendix 1. The superscripts L and S refer to high-leadership and high-societal-pressure cases, respec-
tively.
Source: Author’s business survey of 1,000 randomly selected local firms in eight districts.
The information brochures at Gianyar’s one-stop licensing service [which outline

licence fees and times] can be misleading. Once we talk to licence officials, we are
offered ‘special assistance’ for ‘special fees’. In fact, they do exactly the same thing –
just in less time … Actual licence procedures could be much faster … But as long as
the bureaucratic system remains unchanged, there is little hope of improvement.
Despite mixed results, administrative corruption seems to be somewhat lower

in districts with good leadership. While pairwise results are relatively indistinct
in Java and NTB and strongly contradictory in Bali, the comparisons in Sumatra
provide some, albeit modest, support for the leadership hypothesis.
Summary
All in all, the results from these controlled comparisons in Sumatra, Java, Bali
and NTB suggest that the quality of government leadership plays a greater role
in explaining performance differences than does the presence of societal pres-
sure. The empirical data give little indication that levels of pressure from local
firms and societal representatives constitute a key explanation for diverging
district outcomes. The selected cases in Bali and NTB – which differ markedly in
levels of higher education, business association activity and political awareness
– do not reveal a coherent pattern. Taken as a whole, the evaluations of admin-
istrative regulations, administrative procedures and corruption suggest that the
high-societal-pressure cases are, if anything, characterised by lower govern-
ment performance than the high-leadership cases. As summarised in table 6,
although both Balinese governments demonstrated a fair overall performance,
TABLE 6 Local Governance Evaluation of Societal Pressure Cases

in Bali and NTBa
Province Bali NTB
District Gianyar Karangasem Bima Lotim

Societal pressure level High Low High Low
1 Tax-induced distortions
(distortion in new tax bills) None None Very strong Strong
Rating ´´´´´ ´´´´´ ´ ´´
2 One-stop services
(observation score, 1 to 5) 3.7 1.8 1.0 2.8

Rating ´´´´ ´´ ´´ ´´´
3 Administrative efficiency
(licence processing, in days) 27 14 8 9
Rating ´´ ´´´ ´´´´ ´´´´
4 Public recruitment corruption
(reported mean, Rp million) 18 20 36 36
Rating ´´ ´´ ´´ ´´
5 Licensing corruption
(% of official fees) 12.3 2.8 2.6 4.1
Rating ´ ´´´´ ´´´´ ´´´
Overall evaluation Fair Fair Poor Fair

Average rating (stars) (2.8) (3.2) (2.2) (2.6)
a Summary evaluation ratings range from very poor (1 star) to very good (5 stars); evaluation scales
are explained in detail in appendix 1.
Source: Author’s business surveys, interviews and observations.
the evaluation of ‘high societal pressure’ Gianyar (2.8 stars) remained slightly
behind that of Karangasem (3.2 stars), where societal pressure is less marked.
Likewise, despite higher levels of associational and educational access, Bima’s
citizens faced less favourable government practices (2.2 stars) than their coun-
terparts in Lotim (2.6 stars).
The leadership comparisons, on the other hand, exhibit a relatively consistent
pattern. The controlled case studies in West Sumatra and Central Java show that
districts with better government leadership also displayed fewer regulatory tax
distortions, more efficient licence administration and less public sector corruption
(table 7). The comparisons in West Sumatra provide a particularly striking indi-
cation of this relationship. While the good leadership qualities of Solok’s district
head coincided with very good average performance (4.6 stars), the poor quality
of Pesisir’s government leadership corresponded with poor average regulatory
and procedural standards (2.2 stars). It is remarkable, moreover, that Solok dis-
played better results in OSS services, administrative efficiency and public recruit-
ment practices than any of the other districts. The positive leadership–governance
nexus is also confirmed, albeit less resoundingly, in the Javanese case comparison.
While Kebumen’s good leadership was aligned with fair average local government
TABLE 7 Local Governance Evaluation of Leadership Cases

in West Sumatra and Central Javaa
Province West Sumatra Central Java
District Solok Pesisir Kebumen Klaten

Reform-oriented leadership level High Low High Low
1 Tax-induced distortions
(distortion in new tax bills) None Very strong None Fair
Rating ´´´´´ ´ ´´´´´ ´´´
2 One-stop services
(observation score, 1 to 5) 4.2 1.7 2.5 1.0

Rating ´´´´ ´´ ´´´ ´
3 Administrative efficiency
(licence processing, in days) 7 10 16 16
Rating ´´´´´ ´´´´ ´´´ ´´´
4 Public recruitment corruption
(reported mean, Rp million) 0 23 6 65
Rating ´´´´´ ´´ ´´´ ´
5 Licensing corruption
(% of official fees) 2.9 7.4 9.8 8.4
Rating ´´´´ ´´ ´´ ´´
Overall evaluation Very good Poor Fair Poor

Average rating (stars) (4.6) (2.2) (3.2) (2.0)
a Summary evaluation ratings range from very poor (1 star) to very good (5 stars); evaluation scales
are explained in detail in appendix 1.
Source: Author’s business surveys, interviews and observations.
outcomes (3.2 stars), Klaten’s poor executive qualities were associated with poor
average governance conditions (2.0 stars).
POLITICAL ECONOMY OF LOCAL GOVERNANCE

To explain the effects of government leadership and societal pressure it is nec-
essary to take a detailed look at the political economy of local governance. The
analysis of sub-national actors and their interests starts with an acknowledgment
of Indonesia’s historical context. Clearly, decentralisation and democratisation
took place not on a ‘blank slate’, but on an authoritarian foundation spanning the
period from the Javanese kingdoms through Dutch colonialism (1619–1942) to
Soeharto’s New Order (1965–98). It is well known that the New Order regime sys-
tematically suppressed political and societal movements (Crouch 1978; Thee, Hof-
man and Rodrick-Jones 2004) and established patronage networks that reached
from the presidency down to the village level (Liddle 1996; McLeod 2000). The
high level of corruption and preferentialism – readily observable in the irregulari-
ties of public recruitment and contracts revealed by our survey – confirms that
democratic norms compete with patrimonial conventions.
As I will argue in this section, initial impulses for improvements in govern-

ment are most likely to come from district heads. Indonesia’s regime change has
not only further enlarged the official powers of district leaders, but also provided
them with new incentives to improve governance. Reform impulses from societal
forces, on the other hand, remain less significant: in Indonesia’s early transition
to democracy, local firms, associations and council members continue to be con-
strained by collective action problems and perverse political incentives.
In order to illustrate the constraints facing local firms it is helpful to distin-
guish three groups: first, a very large group of small indigenous firms – local trad-
ers, shop-keepers and craftsmen – of various ethnic origins and representing a
large part of civil society; second, a small group of ethnic-Chinese firms, engaged
mainly in wholesale and retail trade; and third, a small group of large indigenous
firms that generate revenue from construction, procurement, resource extraction

and manufacturing. In relation to the first group, field observations suggest that
small firms are constrained by common collective action problems and deep-
seated risk aversion. First, consistent with Mancur Olson’s (1965) argument, this
group’s large and dispersed structure hinders attempts to organise (high coordi-
nation costs) and enforce (high detection costs) joint activities among small firms.
As a result, individual members tend to free-ride on others’ efforts and render
joint initiatives ineffective. Second, small firms remain sceptical about the effec-
tiveness of reform petitions. Based on their experiences during the Soeharto era,
many interviewees concur that the personal risks involved in criticising govern-
ment shortcomings clearly outweigh the possible benefits of doing so. Even today,
a majority of small firms share the view that their complaints fall on deaf ears – or,
worse, evoke bureaucratic retaliation.
Scepticism is equally strong among Chinese Indonesian firms. Notwithstand-
ing their small and coherent group structure, which allows for effective collec-
tive action, ethnic Chinese communities strictly refrain from engaging in public
debate. This cautious behaviour emerges as a response to social hardship in recent
decades. Many of the local Chinese firms (particularly in NTB and Java) report
experience of ethnic violence and discriminatory treatment. Some witnessed anti-
communist and anti-Chinese riots in the 1960s; others experienced anti-Chinese
demolition and looting in the late 1990s. Against this background of social vul-
nerability, Chinese minorities are concerned primarily with maintaining friendly
and stable relationships with local power-holders. As one Chinese entrepreneur
in Kebumen summarises it: ‘Many Chinese people are afraid to speak out in pub-
lic. They believe that criticising officials harms their business … Anxieties have
strongly increased since Chinese shops were burnt down in the 1998 riots.’ Thus,
despite their economic power in rural economies,20 Chinese business communities
are reluctant to participate in societal efforts to improve government outcomes.
Apart from social vulnerabilities, there are also monetary disincentives to
pressing for reform. These are particularly obvious in the case of large indigenous
firms. In light of the small size of rural consumer markets, many indigenous
entrepreneurs in the eight districts studied derive a substantial proportion of their
20 In Bima, for instance, most supermarkets, restaurants and hotels are in the hands of
ethnic Chinese. Also in Lotim, Klaten, Kebumen, Gianyar and Karangasem, respondents
report that Chinese entrepreneurs dominate local markets.
revenue from public sector contracts. Government projects remain very attractive,
as they promise high returns and involve relatively low risks. Against this back-
drop, it is unsurprising to find that many large firms prefer to maintain close ties
with government officials rather than to criticise administrative shortcomings. As
one businessman in Bima noted, ‘government contracts for the construction of
local schools, hospitals and roads are so lucrative that they easily compensate for
the costs of bad governance’. Especially in the absence of credible law enforce-
ment, firms involved in public sector projects have stronger incentives to cooper-
ate (or collude) with government officials than to push for administrative reform.
Indeed, one of the objectives of reform is fair procurement, which would result in
more genuine competition for – and lower profits from – government contracts.
A lack of reform pressure is also evident in local chambers of commerce and
industry (Kadinda). With the public tender legislation introduced by the Mega-
wati administration,21 local Kadinda units lost much of their former influence: the
discontinuation of their coordination function and the lack of tangible services for
business communities resulted in sharp declines in membership. Even relatively
active chambers such as those in Bima and Gianyar seem to have had limited
success in mobilising the private sector in support of reform initiatives. The direc-
tor of Bima’s Kadinda, for instance, acknowledges that joint activities often fail
because chamber members lack cohesion. Despite the introduction of democratic
rights, he contends, ‘many firms avoid anything that may cause friction with gov-
ernment officials – either because they are socially vulnerable or because they
have large stakes in public contracts’.
Perverse incentive structures have also undermined representative functions in
district councils (DPRD). In the first years of decentralisation, the combination of
centralised party structures and non-transparent compilation of party lists nota-
bly weakened local electoral accountability. Studies show that national party elites
continue to exert great influence on local politics, particularly through the com-
pilation of local party lists (Sherlock 2004; Ufen 2008). The persistence of political
centralisation can be attributed partly to the stipulations of the electoral laws. The
1999 parliamentary elections were based on ‘closed party lists’, which gave voters
no choice between candidates and provided national parties with ample room
to establish clientelistic networks with local politicians. Even the ‘semi-open list’
elections in 2004, which introduced candidate names onto the ballet paper, pre-
served the influence of national party boards, because electoral outcomes contin-
ued to be biased heavily towards top-listed candidates.22 According to local NGO
21 New public tender regulations were outlined in Presidential Decrees (Keppres) 18/2003
and 80/2003.
22 Sherlock (2004: 40) explains how the electoral rules disadvantaged low-listed candidates
in the 2004 elections: consider a situation where ‘Party B receives 50,000 votes in an electoral
district. The quota for that district is 50,000 votes – therefore Party B is allocated 1 seat. Can-
didate 1 on the party list receives no individual votes. Candidate 4 on the party list receives
49,000 votes (i.e. just under the quota). [As a result] Candidate 1 is elected, despite having
received no individual votes’, whereas Candidate 4 loses all his votes to the top-listed can-
didate (and does not take a seat). A December 2008 Constitutional Court ruling abolishing
party-internal vote transfers reduced this list-position bias in the 2009 elections, but party
boards still wield considerable power by determining which candidates appear on the lists.
and media observers, these clientelistic party structures have created a situation
where list positions are auctioned off to local candidates who make considerable
‘donations’ to party headquarters. In the absence of punitive voting mechanisms,
many DPRD politicians were preoccupied with managing internal party relations
and campaign funding – often through illegitimate means23 – and often neglected
the interests of local constituencies.
District heads, on the other hand, face incentives that align them more closely
with local citizens, for three basic reasons. First, government leaders stand in the
spotlight of local and national media. In contrast with council members, whose
actions can be obfuscated by party agreements and coalitions, district heads’
achievements and failures are more clearly discernible in local news reports. Sec-
ond, and relatedly, Indonesia’s decentralisation reforms have prompted a nota-
ble rise in the number of donor-funded governance projects, with corresponding

opportunities to gain national acknowledgment and additional project funding.24
Third, the introduction of direct elections for district heads (pilkada) in 2004 has
provided those elected with additional political incentives to attend to broad-
based interests. In contrast to the non-transparent party-list system of DPRD elec-
tions, the plurality (first past the post) system of the pilkada exposes government
leaders to greater electoral competition. Above all, it enables local citizens to vote
out non-performing or corrupt district heads.
Motivated by electoral pressure, media exposure and donor funding, some dis-
trict heads have attended closely to the interests of society in general and small
business owners in particular. The case evidence suggests that district heads who
are imbued with political ambition and good managerial skills have been strong
driving forces for policy reform. Consistent with reformist leadership accounts
in other Asian, Latin American and African transition countries (Grindle 2004;
2007; Gray and McPherson 2001; Mahbubani 2007), the district heads in Solok and
Kebumen have skilfully used their official powers to forge strategic reform pacts.
They have successfully aligned the interests of local communities and national
supporters and, in doing so, have created a valuable momentum to break bureau-
cratic resistance to government reforms. Backed by these reform coalitions, they
have employed an effective mix of monitoring (call-in talk shows, SMS com-
plaint boxes); penalties (demotion and dismissal of corrupt staff); and reward
systems (merit-based promotion, performance awards) to improve bureaucratic
practices.
23 Between 1999 and 2006, Indonesia Corruption Watch (ICW) identified over 80 DPRD
corruption cases – amounting to a total welfare loss of roughly $50 million (DRSP 2006:
118).
24 As the two examples in Solok and Kebumen illustrate, projecting a ‘reformist image’
can be a promising strategy for attracting financial support from donor agencies. Between
2000 and 2005, district heads Rustriningsih of Kebumen and Gamawan of Solok formed
good-governance partnerships with The World Bank, USAID and the German aid agency
GTZ. Both heads were repeatedly invited to conferences and study tours. District head
Gamawan, for instance, attended the International Anti-Corruption Conference in Seoul in
2004 (financed by German donors) and the International City Management Conference in
San Diego in 2005 (financed by USAID).
The finding that district heads are well positioned and motivated to push for
public reforms should not lead to the conclusion that societal forces are irrelevant.
Quite the contrary is true. Although district heads initiate reform coalitions, soci-
etal groups constitute an important pillar within these coalitions. And although
common channels of societal pressure – local firms, business associations and
district councils – are currently compromised by perverse incentive structures,
local citizens nonetheless play a key role in monitoring bureaucratic practices and
signalling shortcomings to local government leaders. Moreover, as local democ-
racy and information technology progress, local citizens will increasingly compare
the performance of their incumbents with other benchmark cases. Although Indo-
nesia may have been endowed with a mere handful of reformist district heads
at the outset of decentralisation, succeeding election cycles and rising political
awareness are likely to encourage better leadership standards over time. More-
over, since the Constitutional Court abolished the dysfunctional DPRD list system
in December 2008, there is hope that local council members will provide addi-
tional checks and balances.
CONCLUSIONS AND POLICY IMPLICATIONS

Have Indonesia’s democratic decentralisation reforms led to improvements in
local governance? The answer offered in this study is ‘yes’, but only in some dis-
tricts. Both nation-wide snapshots and case study results indicate that overall per-
formance levels remain relatively low. During the first years of decentralisation,
many districts continued to exhibit high levels of tax distortion, red tape and pub-
lic corruption. Beneath this aggregate perspective, however, we find considerable
variation. While some local governments have provided efficient and responsive
services, others have burdened local economies with administrative uncertainty,
inefficiency and extortion.
These district-level variations reflect ongoing dynamics in local political econo-
mies. In the early years of decentralisation, local actors have been exposed to both
democratic and non-democratic norms – with free elections and rights of associa-
tion on the one hand and pervasive preferentialism and patronage on the other.
The case findings in Bali and NTB show that societal pressures from local firms,
business associations and council members are less significant as an influence on
local governance than traditional good-governance literatures suggest. For most
local firms, the benefits of engaging in reform efforts rarely justify the costs of
doing so: this holds true for small business owners who face high coordination
and retaliation costs, for Chinese Indonesian entrepreneurs who foresee dispro-
portionate social risks, and for large construction and procurement firms that
expect high benefits from sustaining close government ties. Thus far, neither local
business chambers nor district councils have provided the means to solve these
incentive problems. The former have been weakened by a declining mandate and
membership, whereas the latter have been attending more to party elites than to
local citizens.
Local government leaders, on the other hand, have stronger incentives to push
for policy reform. The field interviews indicate that district heads increasingly
realise that ‘reformist agendas’ attract voter support, national acknowledgment
and donor funding, thereby enhancing prospects for career advancement. Reform
orientations have been strengthened further by the introduction of direct elec-

tions for district heads and the growth of independent media. Government lead-
ers are increasingly scrutinised by local journalists and, unlike their legislative
colleagues, require a majority vote to attain office. Responding to these politi-
cal incentives, the district heads of Solok and Kebumen have become catalysts
for change, translating citizen interests into policy initiatives, sustaining reform
momentum with local and national support networks and supervising the prac-
tices of district bureaucracies. The results of these efforts are readily observable
in the controlled case comparisons. The case studies in West Sumatra and Central
Java demonstrate that higher leadership qualities are accompanied by less distor-
tionary tax regulations, more efficient administrative services and more effective
controls on corruption.
The findings of this study carry several implications for scholarship and
policy. In the context of current governance debates, the empirical results chal-
lenge the view that government improvements and public reform are primarily
the result of demand-side pressures. After 30 years of social and political sup-
pression, Indonesian citizens need time to gain confidence in democratic values.
As long as societal actors remain dependent on the goodwill and patronage of
government officials, they are ill-positioned to push for improvements in gov-
ernance. Field observations indicate that many public sector jobs, government
contracts and party-list positions have continued to be allocated on the basis of
non-transparent, elite-centric agreements. Thus, in early post-authoritarian tran-
sitions, where democratic norms co-exist with patrimonial conventions, it is not
so much the pressure of societal groups as the presence of good (or bad) leader-
ship that explains local policy outcomes.
The significance of government leadership should not, however, lead to the
conclusion that societal factors are irrelevant. The case findings from Solok and
Kebumen show that district heads increasingly respond to public opinion and
electoral incentives. Arguably, incentives for reformist leadership become more
pronounced with rising transparency and societal awareness. Policy measures
that make local government performance more comparable and competitive are
likely to encourage public reform in other Indonesian districts. These measures
may include more widely disseminated good governance rankings,25 a functional
framework for local ‘minimum service standards’ (in education, health and infra-
structure services) and an expansion of support programs for independent and
investigative journalism.
25 Sub-national performance indicators can be drawn from the World Bank (2007) Public
Finance Management Framework, the KPPOD (2008) local economic governance survey,
the Jawa Pos Institute of Pro-Otonomi (JPIP 2008) rankings and the LPEM–FEUI (2007) in-
vestment climate assessment, just to name a few sources.
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APPENDIX 1 Evaluation Scores for Local Government Performance
Very Good Good Fair Poor Very Poor
Tax-distorting taxation None Little Some Strong Very strong

(observation based)
Licensing efficiency X≤7 7 < X≤ 14 14 < X≤ 21 21 < X≤ 28 X > 28
(in processing days)
Recruitment corruption X=0 0<X≤5 5 < X ≤ 15 15 < X ≤ 30 X > 30
(Rp million)
Licensing corruption X=0 0 < X ≤ 3.3 3.3 < X ≤ 6.7 6.7 < X ≤ 10 X > 10
(% of total licence fees)

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On: 15 December 2013, At: 07:10

Bulletin of Indonesian Economic Studies

The political economy of local governance: findings

To link to this article: http://dx.doi.org/10.1080/00074910903040310

PLEASE SCROLL DOWN FOR ARTICLE

THE POLITICAL ECONOMY OF LOCAL GOVERNANCE:

Christian von Luebke*

ISSN 0007-4918 print/ISSN 1472-7234 online/09/020201-30 © 2009 Indonesia Project ANU

basis for testing contending good-governance arguments.

VARIATIONS IN DISTRICT PERFORMANCE

FIGURE 1 Variation in District Policies and Practicesa

Tax distortion Licence administration

1c Fairness of Tender Process 1d Licence Corruption

Tender fairness Licence corruption

Source: KPPOD (2004a; 2005) survey data.

FIGURE 2 Relationship between Bribe Payments and Administration Times

In view of these diverging degrees of corruption, it is useful to test whether

FIGURE 3 Location of the Eight District Cases

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

CONTROLLED CASE STUDY METHODOLOGY

TABLE 1 Government Leadership and Societal Pressure Cases

1a Matched district pairs with strongly differing government leadership indicators

West Sumatra Central Java

Solok Pesisir Kebumen Klaten

Government leadership indicators

Overall leadership quality High Low High Low

TABLE 1 (continued) Government Leadership and Societal Pressure Cases

1b Matched district pairs with strongly differing societal pressure indicators

Gianyar Karangasem Bima Lotim

Societal pressure indicators

Overall societal pressure High Low High Low

property sales; Basir for misappropriation of agricultural and micro-credit funds.9

LOCAL GOVERNMENT PERFORMANCE:

COMPARATIVE CASE FINDINGS

14 Regional perspectives were complemented with national narratives in Jakarta, includ-

admitted in a private conversation, many government and military officials are

16 Ministry of Forestry Decree 310/Kpts-II/1999 (‘Guidelines for Granting Forestry

by arbitrary taxes on fishers and local cooperatives. Accordingly, the regulatory

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

Indicator West Sumatra Central Java Bali NTB

TABLE 3 Licensing Times Before and After Decentralisationa

Before Last Evaluation

West Sumatra SolokL 10.0 7.1 Very good

Central Java KebumenL 16.4 15.9 Fair

Bali GianyarS 21.3 26.6 Poor

NTB BimaS 9.6 7.6 Good

A second indicator for administrative procedures is the efficiency with which

tive procedures is negatively linked to societal pressure (Gianyar/Karangasem)

Reports on recruitment corruption differed considerably across districts. The

TABLE 4 Corruption during Public Service Recruitment

Respondent No. Ø Evaluation

Source: Data from interviews with 10 non-government respondents in each district.

the surveyed districts is to be found in Klaten. Here, all 10 respondents confirmed

tion, of bribery practices. Such qualifications notwithstanding, the results help to

TABLE 5 Corruption Fees during Licence Administration

Before Last Evaluation

West Sumatra SolokL 5.2 2.9 Good

Bali GianyarS 5.5 12.3 Very poor

The information brochures at Gianyar’s one-stop licensing service [which outline

Despite mixed results, administrative corruption seems to be somewhat lower

TABLE 6 Local Governance Evaluation of Societal Pressure Cases

Province Bali NTB