Christian von LuebkeCrawford School of Economics and Governance,

The Australian National University

Christian von LuebkeCrawford School of Economics and Governance,

The Australian National University

Accounting for Indonesian Local GovernanceAccounting for Indonesian Local Governance

A Field Experiment on Variant Business Conditions A Field Experiment on Variant Business Conditions in Central Java, West Sumatera, Bali and NTBin Central Java, West Sumatera, Bali and NTB

The PuzzleThe Puzzle

The Puzzle The Puzzle

What explains (local) government change?What explains (local) government change?

What explains variant policy outcomes What explains variant policy outcomes across time & space? across time & space?

Propositions in the Literature:Propositions in the Literature:

1) different 1) different economic pressureseconomic pressures??

2) different 2) different institutionsinstitutions??

3) differences in which 3) differences in which interests are voicedinterests are voiced? ?

4) different 4) different leadership?leadership?

1) Economic Pressures1) Economic Pressures

1) Subnational Competition (1) Subnational Competition (TieboutTiebout 1956)1956)

Mobile/informed taxpayers vote with their feetMobile/informed taxpayers vote with their feet

2) Global Competition for FDI (WB, Kaufman)2) Global Competition for FDI (WB, Kaufman)

Investors seeking Investors seeking ‘‘stablestable’’ governancegovernance

3) Economic Shocks (3) Economic Shocks (GourevitchGourevitch) )

Asian Crisis driving governance changeAsian Crisis driving governance change

Different Policies = Different Economic PressuresDifferent Policies = Different Economic Pressures

2) Institutions2) Institutions

1) Political Institutions (Classic1) Political Institutions (Classic--Mod Scholars) Mod Scholars)

Free elections, checks & balancesFree elections, checks & balances

2) Economic Institutions (2) Economic Institutions (WeingastWeingast, Williamson), Williamson)

Property Rights, openness to tradeProperty Rights, openness to trade

3) Embedded 3) Embedded vsvs New Institutions (North, Putnam) New Institutions (North, Putnam)

Different Policies = Different Different Policies = Different ‘‘Sets of RulesSets of Rules’’

3) Voiced Interests3) Voiced Interests

1) Citizens1) Citizens’’ voice hold governments to accountvoice hold governments to account

(Hirschman, Kaufman, Shah, Putnam)(Hirschman, Kaufman, Shah, Putnam)

2) Organizing of interests (special 2) Organizing of interests (special vsvs common)common)

(Geddes, Olson, (Geddes, Olson, LowiLowi))

Different Policies = Differently Voiced InterestsDifferent Policies = Differently Voiced Interests

4) Leadership4) Leadership

1) Classical (Aristotle, Machiavelli, Mill)1) Classical (Aristotle, Machiavelli, Mill)

2) Management (HBR, 2) Management (HBR, HerseyHersey & Blanchard)& Blanchard)

3) Policy Reform (3) Policy Reform (GrindleGrindle, , RodrikRodrik, , OlkenOlken))

4) Coalition Building (Dahl, Stoner4) Coalition Building (Dahl, Stoner--Weiss)Weiss)

Different Policies = Different Executive LeadershipDifferent Policies = Different Executive Leadership

Applied to the Indonesian Case Applied to the Indonesian Case

1) Econ: Restricted Mobility & Information (Tiebout)

2) Inst: Invariant across jurisdictions (Laws & Rules)

3) Voice: Variant organized interests across jurisdictions

4) Lead: Variant local leaders across jurisdictions

Focus /Explanatory Variables:(A) Voiced Interests and (B) Executive Leadership

1) Econ: Restricted Mobility & Information (1) Econ: Restricted Mobility & Information (TieboutTiebout))

2) Inst: Invariant across jurisdictions (Laws & Rules)2) Inst: Invariant across jurisdictions (Laws & Rules)

3) Voice: Variant organized interests across jurisdictions 3) Voice: Variant organized interests across jurisdictions

4) Lead: Variant local leaders across jurisdictions 4) Lead: Variant local leaders across jurisdictions

Focus /Explanatory Variables:Focus /Explanatory Variables:(A) (A) Voiced InterestsVoiced Interests and (B) and (B) Executive LeadershipExecutive Leadership

The QuestionThe Question

Research Question/ Hypotheses Research Question/ Hypotheses

RQ:RQ: How do we explain that Local Governance How do we explain that Local Governance

in in some Indonesian districts some Indonesian districts creates better creates better

Business Conditions (BC) than in others ?Business Conditions (BC) than in others ?

HY:HY: This relates to variant degrees to whichThis relates to variant degrees to which

1)1) Interests are organized / voiced / represented !Interests are organized / voiced / represented !

2)2) Chief Executives lead / build policy coalitions !Chief Executives lead / build policy coalitions !

MethodologyMethodology

Decentralised Indonesia Decentralised Indonesia ––Ethnic & SocioEthnic & Socio--Cultural Diversity Cultural Diversity

Methodology Methodology –– Data Collection Data Collection

SolokSolok

Pesisir Pesisir

KebumenKebumen

KlatenKlaten

GianyarGianyar BimaBima

KarangKarangLombokLombok

Data from 8 Districts & Jakarta (4/2005 Data from 8 Districts & Jakarta (4/2005 –– 6/2006):6/2006):1000+ Local Business Questionnaires (125/District)1000+ Local Business Questionnaires (125/District)130 In130 In--depth Interviews (15/District + Jakarta)depth Interviews (15/District + Jakarta)Secondary Data (Government Reports, KPPOD, News)Secondary Data (Government Reports, KPPOD, News)Direct Observations (OneDirect Observations (One--Stop Services / Local Markets) Stop Services / Local Markets)

Methodology Methodology -- Case SelectionCase Selection

Distinct Cases & Repetition Distinct Cases & Repetition -- ““Nat. ExperimentsNat. Experiments”” (Yin 2003)(Yin 2003)

Case Selection: (1) Distinct in Case Selection: (1) Distinct in Independent Variables Independent Variables (2) (2) ““c.pc.p..”” Controlling for other influences Controlling for other influences

8 District Cases = 4 District Sets 8 District Cases = 4 District Sets

2 Sets for 2 Sets for LeadershipLeadership ( Sum / Java) ( Sum / Java) –– 2 for 2 for Voice Voice (Bali/NTB)(Bali/NTB)

Example:Example:

Assessment Assessment ??????LowLowKlaten

Assessment Assessment ??????SimilarHigh High Kebumen

Business Climate ?Control Variables

Civic Voice

Gov. Lead. Central Java

Similar

See: King/See: King/Keohane/VerbaKeohane/Verba (1994), Yin (2003a,b), Geddes(1990) (1994), Yin (2003a,b), Geddes(1990)

Empirical Data Empirical Data ““Field ExperimentField Experiment””

Local Business Conditions VaryLocal Business Conditions Vary

Variation of tax policies & licensing practices!Variation of tax policies & licensing practices!

New Distortionary Taxes in Bima /Lombok / PesisirNew Distortionary Taxes in Bima /Lombok / Pesisir

Variant Capture Practices during LicensingVariant Capture Practices during Licensing

Variant OneVariant One--Stop Licensing Services Stop Licensing Services

Variant Tender Practices & Road Qualities Variant Tender Practices & Road Qualities

Variant Bribe Payments for Entry into Public ServiceVariant Bribe Payments for Entry into Public Service

Business Climates vary strongly across IndonesiaBusiness Climates vary strongly across Indonesia’’s Districtss Districts

Variation Across 400+ DistrictsVariation Across 400+ Districts

P E RI NGKAT DAY A T ARI K I NV E ST ASI 156 KABUP AT E N DI I NDONE SI A

0.0000 0.05 00 0.1 000 0.1 5 00 0.2 000 0.2 5 00 0.3 000 0.3 5 00

K A B . F L O R E S T IM U R (1 4 8 )

K A B . JE M B E R (1 4 4 )

K A B . M O JO K E R T O (1 4 0)

K A B . B A N Y U M A S (1 3 6 )

K A B . B A N G K A L A N (1 3 4 )

K A B . T A N A H L A U T (1 3 0)

K A B . K A P U A S H U L U (1 2 6 )

K A B . D O M P U (1 2 3 )

K A B . P O S O (1 1 9 )

K A B . M A N G G A R A I (1 1 5 )

K A B . B U T O N (1 1 1 )

K A B . T A K A L A R (1 07 )

K A B . L A M P U N G U T A R A (1 03 )

K A B . B O G O R (1 00)

K A B . T A N A H K A R O (9 7 )

K A B . L O M B O K T IM U R (9 3 )

K A B . C IR E B O N (8 9 )

K A B . S A M B A S (8 5 )

K A B . K U A N T A N S E N G G IG I (8 1 )

K A B . S U B A N G (7 8 )

K A B . S A N G G A U (7 4 )

K A B . B E N G K A L IS (7 0)

K A B . K U T A I T IM U R (6 6 )

K A B . P A S A M A N (6 2 )

K A B . G R E S IK (5 8 )

K A B . T A P A N U L I U T A R A (5 4 )

K A B . K A M P A R (5 0)

K A B . S O R O N G (4 6 )

K A B . R O K A N H U L U (4 2 )

K A B . L A B U H A N B A T U (3 8 )

K A B . B A D U N G (3 4 )

K A B . G IA N Y A R (3 0)

K A B . B E L U (2 6 )

K A B . P E L A L A WA N (2 2 )

K A B . M IN A H A S A (2 0)

K A B . S A N G IH E (1 6 )

K A B . IN D R A M A Y U (1 2 )

K A B . JE N E P O N T O (8 )

K A B . JE M B R A N A (4 )

Faktor Kelembagaan Faktor Sosial Politik BudayaFaktor Ekonomi Daerah Faktor Tenaga KerjaFaktor Infrastruktur Fisik

Source: KPPOD 2005Source: KPPOD 2005

Variation of License ProvisionVariation of License Provision

““One Stop ServicesOne Stop Services””

SolokSolok

KlatenKlaten

Another Angle:Another Angle: “Debt TrapDebt Trap””

Reported Bribing Conventions of New Public Servants (PNS)Reported Bribing Conventions of New Public Servants (PNS)

1) Leadership1) LeadershipSumatera & Java SetSumatera & Java Set

Leadership Sets Leadership Sets

KebumenKebumen & & SolokSolok –– distinctively higher Leadershipdistinctively higher Leadership

BC Remain Critical but VaryBC Remain Critical but Vary

(e) Road Quality 5.5 6.0 7.5 6.6 7.8 8.0 `6.9 5.5

(f) Fair Tendering 2.3 4.0 5.8 5.7 5.4 6.1 3.9 4.8

(g) Entry Bribe 64 6 0 23 18 17 36 36

BC Remain Critical but VaryBC Remain Critical but Vary

(e) Road Quality 5.5 6.0 7.5 6.6 7.8 8.0 `6.9 5.5

(f) Fair Tendering 2.3 4.0 5.8 5.7 5.4 6.1 3.9 4.8

(g) Entry Bribe 64 6 0 23 18 17 36 36

2) Voiced Interests 2) Voiced Interests Bali & NTB SetsBali & NTB Sets

Voice Sets Voice Sets

GianyarGianyar & & BimaBima –– distinctively higher distinctively higher ‘‘Voice ProxiesVoice Proxies’’

(e) Road Quality 5.5 6.0 7.5 6.6 7.8 8.0 `6.9 5.5

(f) Fair Tendering 2.3 4.0 5.8 5.7 5.4 6.1 3.9 4.8

(g) Entry Bribe 64 6 0 23 18 17 36 36

(e) Road Quality 5.5 6.0 7.5 6.6 7.8 8.0 `6.9 5.5

(f) Fair Tendering 2.3 4.0 5.8 5.7 5.4 6.1 3.9 4.8

(g) Entry Bribe 64 6 0 23 18 17 36 36

Explaining Explaining Empirical ResultsEmpirical Results

(e) Road Quality 5.5 6.0 7.5 6.6 7.8 8.0 `6.9 5.5

(f) Fair Tendering 2.3 4.0 5.8 5.7 5.4 6.1 3.9 4.8

(g) Entry Bribe 64 6 0 23 18 17 36 36

LL LL VV VV

Voiced PrivateVoiced Private--Sector InterestsSector Interests

Overall: Prevailing Collective Action / Power ProblemsOverall: Prevailing Collective Action / Power Problems

1)1) ‘‘Local Iron TrianglesLocal Iron Triangles’’ & Uncontested Markets& Uncontested Markets

2) Low performance of local parliaments (DPRD)2) Low performance of local parliaments (DPRD)

3) Weak Local Chambers (KADIN)3) Weak Local Chambers (KADIN)

4) Voice depends on Social/Economic Status4) Voice depends on Social/Economic Status

5) History of 5) History of ‘‘Authority & ControlAuthority & Control’’ -- Initially Rough Initially Rough Soil for Young Democracy (Mobilizing by Elites)Soil for Young Democracy (Mobilizing by Elites)

Many Complaints / Corruption Cases in Local Parliaments Many Complaints / Corruption Cases in Local Parliaments

Local Representatives 2000Local Representatives 2000--2004 2004 –– Party List not DParty List not D--VoteVote

DPRD Budget Raise was linked to PAD Raise (PP110/02)DPRD Budget Raise was linked to PAD Raise (PP110/02)

Overall: Counterproductive Institutional SettingsOverall: Counterproductive Institutional Settings

…… which detach DPRD from local citizenswhich detach DPRD from local citizens

…… negneg rather than pos effect on BCrather than pos effect on BC

Perception of Local ParliamentsPerception of Local Parliaments

Impact of Executive Leadership Impact of Executive Leadership

Overall: Possible CounterbalanceOverall: Possible CounterbalanceIn times of civic and legal weaknessIn times of civic and legal weakness……

1) Can curb PNS Bribing Conventions (Debt Trap)1) Can curb PNS Bribing Conventions (Debt Trap)

2) Can curb Iron triangles (more market contestability) 2) Can curb Iron triangles (more market contestability)

3) Can compensate (in the short term) for weak law 3) Can compensate (in the short term) for weak law enforcement and national oversight problems enforcement and national oversight problems

4) 4) SolokSolok: Strong push for better (One: Strong push for better (One--Stop) ServicesStop) Services

5) 5) KebumenKebumen: Strong push for media: Strong push for media--based transparency based transparency

Quantitative Analysis Quantitative Analysis

Regression ResultsRegression Results

N= 205 Districts ; DataN= 205 Districts ; Data--Sources: KPPOD, Asia Foundation, World BankSources: KPPOD, Asia Foundation, World Bank

Licensing & Voice10

2030

40Li

cens

ing

Pra

ctic

e

0 2 4 6 8Voice

Licensing & Leadership10

2030

40Li

cens

ing

Pra

ctic

e

2 4 6 8Leadership

In Summary In Summary ……

1.1. Business Conditions Business Conditions vary stronglyvary strongly (sample/population)(sample/population)

2.2. Unsatisfactory Business Conditions partly caused by:Unsatisfactory Business Conditions partly caused by:Dept TrapDept Trap / / Parliament DetachmentParliament Detachment / / Vague Tax LawVague Tax Law

3.3. Executive LeadershipExecutive Leadership appears to explain variance betterappears to explain variance betterthan than PrivatePrivate--Sector VoiceSector Voice –– at least during first 5 Years at least during first 5 Years

4.4. Decentralization : Voice of PrivateDecentralization : Voice of Private--Sector still Sector still uncertainuncertain;;yet Leadership has become yet Leadership has become contestablecontestable across districtsacross districts……

5.5. In the In the immediate termimmediate term –– Leadership Leadership maymay compensate compensate for low voice /law enforcement /national monitoringfor low voice /law enforcement /national monitoring

Thank You Very Much For Your Kind Attention !Thank You Very Much For Your Kind Attention !