Cleaning Up

Indonesia

Economic News

22 Jul 2010
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The government's anti-corruption drive went up a gear this week, with the Indonesian parliament reprimanding 18 legislators and dismissing one for alleged misconduct.



Yet while widely welcomed as a commendable move to increase public confidence in the legislature, worries are also growing that the anti-graft drive might have an adverse effect on economic growth.



This was the first time in its existence that the People's Representative Council (DPR) had publicly punished so many lawmakers for unethical conduct. With offences ranging from regularly being absent at parliamentary meetings to fraud and extortion, the deputies predominantly received punishments from the DPR's disciplinary committee.



Among those punished was the special working committee that discussed the Aceh Governance bill, passed by parliament earlier this month. They were reprimanded for receiving Rp5m ($550) per member from the Home Affairs Ministry's funds in order to speed up the deliberations on the bill.



While this money has been returned and the respective legislators will be allowed to continue their activities, another member has been dismissed by the committee for his role in a scandal involving religious funds. This was first brought to public attention by Religious Affairs Minister Maftuh Basyuni earlier this month.



Aziddin from the Democratic Party - the party that nominated President Susilo Bambang Yudhoyono in the 2004 elections - was found guilty by the disciplinary committee of arranging a government contract to build a pilgrimage dormitory in Mecca to house more than 35,000 pilgrims.



In what is claimed to be a separate move, the Democratic Party decided to withdraw Aziddin from parliament, based on an investigation by the party's own disciplinary committee. While some viewed the move as an effort to save political face, the chairman of the Disciplinary Board of Parliament, Slamet Effendi, welcomed it, characterising it as a "fresh breeze for a developing democracy".



Yet while the Democratic Party's move could be considered illustrative of the commitment to combat graft prevailing among the President's ranks, the issue of payments to expedite the passing of a bill reveals the long road both parliament and the administration still have to walk in this campaign.



At the same time, some are warning that the government's drive for clean government could prove counterproductive.



Against the background of a great number of high-profile corruption cases, with several CEOs of large state-owned companies in jail, many government officials are becoming wary of spending any money at all. Fear of graft allegations is causing caution among administrators in allocating and granting projects.



Indicative of this, late last month, Vice President Jusuf Kalla urged regional administrations to start spending regional development funds that have been disbursed. The central bank reported that in 2005 only 20% of total budgets had been spent by regency and municipality administrations. This year more than Rp40 trillion ($4.5bn) of disbursed funds to the regions has not been spent. Instead, the regions are buying government bonds with the funds, creating only more costs for the central bank and the central administration in the form of interest payments.



While some of the delays in spending can be attributed to new, more complicated approval procedures aimed at increasing co-ordination of spending among the regions, these are just part of the problem. Investigations into the spending of administrations are deepening, causing anxiety.



"The reason why they can't spend it is because the top level is clean," as a senior professional executive from the property sector, who would not be named given the sensitivity of the topic, recently explained to OBG. "The infrastructure below that does not know how to do a contract without corruption, or at least being accused of corruption. The remedy is very difficult."



This year particularly, slower spending of government funds will likely be damaging for economic growth.



Consumer spending - in 2005 still the motor behind the higher than expected growth of 5.6% - has dropped dramatically since the fuel price hikes of late last year. While the government has succeeded in curbing inflation as a result of these price hikes, consumers are not expected to start spending again before the end of this year.



In addition, the long-awaited boost to foreign investment, another potential driver behind economic growth, has not yet materialised. Important initiatives in this field such as new legislation in the fields of tax, labour and investment are not expected to bear significant fruit before 2007, mainly due to the complex nature of Indonesian politics.



For 2006, economic growth has therefore to come principally from increased government spending. While prudent fiscal policies during the first 20 months of this government have ensured enough spending power to realise this, its strong anti-corruption drive, on which the president was elected, is now threatening to prevent this.



In a bid to expedite spending, the government in the meantime is looking for ways to encourage regional officials to take on projects with lesser reserve.



Plans were announced to protect government officers against prosecution for implementing flawed policies. In the draft regulation, criminal investigations can only be started after the government's Internal Oversight Body has conducted a preliminary probe, and the investigation is permitted by relevant government officials.



While a number of lawmakers have welcomed the plan, several organisations and individuals have voiced their worries that such a regulation would only facilitate corrupt practices and are pressing the government not to go ahead.



The speaker of the People's Consultative Assembly (MPR), Hidayat Nur Wahid, told the Jakarta Post earlier this week that Indonesia does not "need a ruling that would prevent us from creating a good and clean government... one of the main goals of the current regime".



If, however, the rebuking of the 19 lawmakers would be a harbinger of increased internal oversight within the legislative and executive bodies of government, then perhaps a temporary implementation could accelerate economic growth this year.



This would alleviate currently rising unemployment figures, and thereby provide the government with more political and popular clout, paving the way for successful implementation of more reforms.

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