1. Reinventing Indonesia
Day 4
Indonesia Rebounds
Graduate S h l f A i
G d t School of Asia and Pacific Studies
d P ifi St di
Waseda University, 16 February 2007
3. Positive Growth Trajectory
Sustained economic growth despite difficult environment
Economy is on a steady
E i t d
> 7% upward trend. Indonesia’s
6-7%
performance is very much
5-6%
comparable in the region
5.25 %
Over the medium term, this
4% acceleration process should
continue assuming that all
reform programs are
implemented.
i l t d
2001-2003 2004-2005 2006 2007 - 2009 2010 -
beyond
Source: CBS .
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4. Macroeconomic Update
p
Indonesia: Economic Growth 1998-2006 Growth steadily recover
2006: reached 5.6%; government
006 a d 5 6%; go
consumption and expert driven;
6.5 6.5
5.7 6
5.6 5.6
5.2
4.9 5.1 4.9 4.9 5.1
4.4
investment remains weak.
5 3.8
0.9 1.2
0 Medium Term
Percen p.a
1998 1999 2000 2001 2002 2003 2004 2005 2006
– 2007 2009 : 6-7 % p.a
2007-2009 6 7 pa
nt
-5
– After 2010 : 7+% % p.a
-10
Confidence has been restored after
-15
15 - 13 8 14.1
13.8-
fuel price adjustment.
GDP Non Oil and Gass Stock prices are historic high
Exchange rates are stable
M a rk e t c o n fid e n c e s tre n g th e n
Reserves stronger and still increasing
R p /U S $ 83=100
11000 1800
10500
s to c k in d e x (R H S ) 1700
Ratings upgraded.
1600
10000
1500 Macroeconomic Stability has been
1400
achieved
9500 1300
1200 Y o y i fl ti
inflation d
down f
from 17% l t
last
9000
1100 year to 6% or less this year
8500
E x c h a n g e ra te s (L H S )
1000
Over Medium Term: 3-4% is the
target
900
8000 800
J a n -0 5 M a y-0 5 S e p -0 5 J a n -0 6 M a y-0 6 S e p -0 6
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6. Other Macroeconomic Development
Fiscal sustainability has been reestablished. D e c lin in g B u d g e t D e fic its
(% o f G D P )
Budget deficits has been contained 0%
around 1% of GDP
-1 %
-2 %
public debt ratio down to about 40% at -3 %
the end of 2006 and will continue falling -4 %
R e vis e d b u d g e t
to below 30% of GDP in 2011.
R e a liz a tio n
-5 %
B udget
-6 %
-7 %
-8 %
FY98 FY99 FY00 FY 01 FY02 FY03 FY04 FY05 FY06 FY07
On spending side (9 m )
Public spending now back to the pre
crisis level around 7-8% of GDP but with Public Investment
different composition. 8% (% of GDP)
Sub-national gov’t control more than 7% Central gov't
District
50% of total 6%
Province
Education spending on the rise and now 5%
comparable to the peer countries around
4-5% of GDP
4%
Spending on health and infrastructure a
3%
also increasing. 2%
Commitment for PPP development. 1%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(E) (P) (P)
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7. Sustainable Macroeconomic Stability
A positive outlook on macroeconomic stability should translate
into a reduction of cost of finance
17 %
7%
6.5 % Stabilization of rupiah at stronger
3-4 % level support declining inflation thus
providing room for policy rates to
decline.
CPI inflation: 6.6%
12000 2005 2006 2007 2007-2009 20
Inflation easing toward targeted level
18
10000
16
8000 14 Risks for destabilizing inflation still
high: rice price has been increasing
12
6000
10
4000 8
6
since last December.
2000
4
0 2
2001 2002 2003 2004 2005 Q106 Q206 Q306 Oct 06
Source: Bloomberg & BI
IDR/USD Inflation rate yoy SBI 1 month - BI Rate SBI 1 month - BI Rate
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8. External Position Remains Promising
Current account position has
Rise in FX reserves
turned around
Months
USDbn USDbn
FX reserves (LHS)
( )
50% 3 50 Months of import and official debt 9.0
repayment (RHS)
45 8.0
2 7.1
30%
% 40
6.6
66 7.0
70
35 5.5
1 6.0
10% 30 5.9 5.0
4.5
5.0
0 25
2001 2002 2003 2004 2005 2006 4.0
-10% 20
36 36 35
-1 32 43 3.0
15 28
-30%
30% 2.0
20
10
-2
5 1.0
Current Account (LHS) Export (RHS) Import (RHS)
-50% -3 0 0.0
Source: Bank Indonesia
06*
2001
2002
2003
2004
2005
200
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9. Continued Improvement in External
Debt Position
External Debt Key highlights
45.0
45 0 80.7 90 0
90.0
40.0 80.0 Debt to GDP ratio decline from
65.7
35.0 70.0
4 2 .1
81% in 2001 to 47% in 2005, and
3 8 .6
56.8 54.2
30.0 60.0
expected to reach 39% in 2006.
3 7 .3
46.0
46 0
25.0 50.0
3 3 .9
3 1 .9
38.6
2 8 .4
2 2 .8
41.4 33.1 There was a significant drop of
2 2 .2
20.0 2 6 .6 40.0
1 9 .5
2 1 .3
15.0 25.8 30.0 DSR in 2005 since there was
32.2
10.0 27.1 20.0 Paris Club moratorium due to
1 4 .6
22.1
22 1
5.0 10.0 tsunami disaster in Aceh.
- 0.0
2001 2002 2003 2004 2005 2006*
Govt Ext Debt / GDP (LHS) Private Ext Debt / GDP (LHS)
Total Ext Debt / GDP (RHS) DSR (LHS)
Note : External debt consists of central government, central bank and private debt
government
Source: Bank Indonesia
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10. Improving Ratio of
Short T
Sh t Term Debt to Reserve
D bt t R
35000 120.00%
112.6%
30000 100.00%
25000 73.9% 80.00%
62.0% 57.4%
20000 59.3%
60.00%
15000 45.9%
10000 23.89% 20 74%
20.74% 18.72% 40.00%
40 00%
6.42% 11.29% 20.00%
5000 4.70%
0 0.00%
2001 2002 2003 2004 2005 Jul-06
Short term debt (OM) Short term debt (RM)
Short term debt (OM) to Reserve Short term debt (RM) to reserve
Note : OM = Original Maturity
RM = Remaining Maturity
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11. Exchange Rate
Modest Appreciation - Low Volatility
Average Exchange Rate Highlights
Rupiah t bili d d
R i h stabilized and average exchange
g h g
rate during Q3 2006 was Rp. 9,125.
Relatively unchanged from Rp. 9,115 in
the preceding quarter
p gq
Average exchange rate in October
depreciate 0.26% to Rp. 9174 from Rp
9153
Volatility stable at 0.5%
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12. Fiscal Consolidation Outcomes
Sovereign Debt to GDP Ratio
100%
90% Compare to Other Emerging Countries
80% Domestic 70.0
63.1
70% 60 0
60.0
59.0
54.4
60% 50.0 46.5 46.5
45.3 45.4
47.3
45.1
42.4
40.9
% dari PDB
50% External 40.0 37.5 2005
2006
40%
d
30.0
30 0 2007
30% 20.0
20% 10.0
10% 0.0
Indonesia Malaysia Philippines Thailand
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, World Economic Outlook, Sept 2006
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13. Banking Indicators:
Banks Maintaining Reasonable Performance
Main Banking Indicators Highlights
Average CAR Gross NPL Net NPL 14.0
NPL ratios decline during the course of
23
2006
% 22.4 %
22.5
12.0 Banks ll it li d ith
B k well capitalized with CAR at around
t d
22 12.1 21.7 21% as of August 2006, far above the
21.5 21.0 10.0 required level of 8%
9.4
8.3
21
8.1
8.7
87 LDR1 relatively stable during 2006 at
8.2 8.5
20.5
20.5 8.0 around 64-65 %. In September 2006 LDR
19.9 5.8 recorded at 65%.
20 19.5 6.0
19.4 19.4
9 Net interest income (NII)2 in September
19.5
19 5 5.1
51
4.8
5.6 4.9 2006 was Rp 6.2 trillion, similar to
19 4.0 December 2005 figure, despite slowing
18.5 3.6 credit expansion
3.0 2.0
18 2.1 RoA stable at around 2.6% with significant
2 6%
1.7
rise in total assets.
17.5 0.0
Qi'06
Q2'06
2001
2002
2003
2004
2005
'Sep 06
1 Loan calculations include channeling loans
2 Calculated as NII for the particular month divided by earning
p y g
Q
assets for the corresponding period
GSAPS-2007-Day4 www.ginandjar.com 13
Source: Bank Indonesia
14. Economic Update
In 2006 Indonesia settled the remaining debt to IMF
amounting $ 7 billion, 4 years ahead.
In January 2007, GOI announced the dissolution of CGI.
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15. The Problems
M
Macroeconomic d l
i development h not b
t has t been f ll
followed b
d by
improvements in the microeconomic (real) sectors; major
constraint for economic development.
p
Lagging investment.
Social Impact: increase of p
p poverty from 16 % to 17.75 %
y
(equivalent to 19.1 million poor households in 2006) and
10.85 million unemployed.
Tax Policy.
Policy
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16. The Problems . . .
Manpower:
labor law,
low income,
euphoria of freedom of expression (demonstrations and strikes).
Infrastructure:
inadequate infrastructure constitute a major constraint to
economy as well as social life.
Unstable and high oil prices in international markets had
given impact to socioeconomic life of the people
people.
Political and security instability impact on economic
development, particularly to investment.
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17. Outlook 2007
Tabel
Projected Economic Growth
2004 2005 2006 2007
W ld O t t
World Output
Developed Countries
5,3
53
3,2
49
4,9
2,6
5,1
51
3,1
4,9
49
2,7
Global economy
US
Jepang
3,9
2,3
3,2
2,6
3,4
2,7
2,9
2,1
slowing down
Euro Area 2,1 1,3 2,4 2
Asia 8,8 9 8,7 10 Domestic demand
China 8 8,5 8,3 7,3
India 5,8 5,1 5 5,6 should be the driver
Asean-4 5,5 5,7 5,8 5,4
for economic growth
g
World Trade Volume 10,6 7,4 8,9 7,6
Impor Public investment
Developed Countries 9,1 6 7,5 6
Expor and private
Developed Countries
p 8,8
, 5,5
, 8 6
investment
Inflation
Developed Countries 2 2,3 2,6 2,3 Private consumption
Emerging and Developing Countries 5,6 5,3 5,2 5
LIBOR
on USD 1,8 3,9 5,4 5,5
on Yen 0,1 0,1 0,5 1,1
on Euro Deposit 2,1 2,2 3,1 3,7
Source: IMF
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18. Outlook 2007 . . .
Economic Growth: 6 – 6,5% (Budget: 6.3%; Consensus
around 6 %)
Inflation: 6-7%
I fl ti 6 7%
Policy Rate: 8-9,5% (Budget: 8,5% in current pace;
policy rate to go down to becomes 7 5% at the end of
7,5%
2007); a stimulus for reducing bank’s lending rate.
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19. Outlook 2007 . . .
The
Th problem of purchasing power can b
bl f h i be
compensated in 2007 by:
increase of civil servant’s salary
servant s salary,
minimum wage,
consumption credits,
good control of inflation and lending rate by Bank
Indonesia.
The goal of economic development for 2007:
reducing unemployment to 9.9 % and number of poor
p p
people to 16,4 %.
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20. Three Policy Packages
1 Investment Law & Procedure
Investment 2 Tax & Custom Reform
Climate
Improvement 3 Labor I
L b & Immigration
i ti
4 Trade Licenses
5 Cross Sector Strategic Policy Reform
6 Sector Restructuring, Corporatisation and Policy Reform
Infrastructure
7 Regulation on monopoly & investment protection
8
Clear separation on the role of policy maker, regulator,
contracting agency and operator
agency,
9 Coordination Monetary & Fiscal Authority
Financial 10 Financial Institution (Banking & Non Banking)
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Capital Market and SOE Privatization 20
21. New Reform Packages and Special Programs
SME Policy Reform Package
Focus on particularly four areas:
− Access to Finance
− Access to Market
− Human Resource Development and
Entrepreneurship
− Regulatory Reform and Deregulation
Poverty Reduction Program
Focus 1: Mainstreaming Budget for Poverty
Focus 2: Integration and expansion of KDP (Kecamatan
Development Program) and P2KP (Urban Poor) into
PNPM (National Program on Community Empowerment)
Focus 3: Shifting Cash Transfer to Conditional Cash
Transfer
Focus 4: Others like Biofuel, Housing and Rural
Infrastructures
Crash Program for Electricity Expansion
Crash Program for Energy Conversion
LPG for Kerosene
Gas for Gasoline
Coal and Gas for Power Generation
Bioenergy
Note : KDP = Kecamatan Development Program
P2KP = Program Penanganan Kemiskinan Perkotaan
PNPM= Program Nasional Pemberdayaan masyarakat.
g y y
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22. Socio-Political Development
Socio-
Indonesia i emerging f
I d i is i from llong period of authoritarian
i d f th it i
rule to consolidate its status as one of the world’s largest
democratic country. y
Indonesia’s political and economic development after the
REFORMASI (1998) seems to be on the right track.
Socio-political development: amendment of 1945
Constitution, improvement of checks and balances
system,
system direct presidential and regional executives
elections, legal reform and decentralization, human
rights, freedom of the press, bigger role of civil society.
Peace in Aceh.
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23. Major Problems
1. Institutions:
1 I tit ti
ambiguity between presidential and parliamentary
systems;
establishment of quasi-government institutions,
and
confusion of role and f
f i f l d function i th j di i l b
ti in the judicial branch
h
of government.
2. Political ethics and behavior:
institutionalization of political acts versus
personification of political figures;
money politics,
liti
manipulation of masses.
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24. Major Problems . . .
3. Major problems in governance includes:
Reform of the bureaucracy.
Quality of civil servants.
Corruption.
Inefficiency.
Low salary.
Impact of problems in bureaucracy on socio-
economic domains.
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25. Major Problems . . .
4. New phenomena in political life:
Internalization of political issues by g
p y grass root.
politicians: weakening of government’s position in
international forum.
Ethno-nationalism: as negative impact of
decentralization policy (euphoria: from special
autonomy to independence).
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26. Major Problems . . .
Political trust d
P liti l t t and social t t problem i l
i l trust: bl in law
enforcement (frequently constrained by issues of
human rights and freedom of expression).
g p )
Pluralism: negative impact of pluralism in the form of
horizontal conflicts based on religious, ethnics, socio-
economic, and political i
i d liti l in-groupness f li
feelings).
)
Terrorism.
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27. Major Problems . . .
5. Major ecological problems: Tsunami, earthquakes,
volcanic eruptions, mud eruptions, deforestation, illegal
logging, forest fires, floods and landslides.
6. Major health problems: avian flu and dengue fever.
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28. Japan-Indonesia Relationship
Japan-
High expectation after the signing of Economic
g p g g
Partnerships Agreements during the visit of the
President of Indonesia to Japan in November 2006.
Remaining problems to investment.
The trend of reduction in Japan’s ODA.
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29. Japan Indonesia Relationship . . .
Japan-Indonesia
Generally Japanese p p and the Japanese Business
y p people p
Community are “losing interests” in Indonesia, giving
more attention to China and India.
Japan is a traditional and natural economic partner and
political ally of Indonesia. Good relation and mutual
interest between the two countries have to be
i t tb t th t ti h t b
maintained.
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31. Introduction
Although Indonesia has not been on “the road to
democracy,” for long, there is much that has been
achieved for which many citizens may be proud.
The constitutional amendment process having been
completed, citizens may observe a “software upgrade” in
the difficult system that is their g
y government.
At the time of this writing, relative economic and social
stability has been maintained and the country has
completed general elections in 2004 the first under the
2004,
amended constitution.
Citizens have some reasons to be optimistic.
However many problems remain.
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32. Introduction . . .
In the post transition period the Indonesian polity has to
post-transition
grapple with two key issues in consolidating its nascent
democracy:
how best to strengthen the political culture, deepen
democracy, and enhance political institutionalization
how improve
ho to impro e the performance of the ne lnewly
established democratic regime
The failure in meeting the challenges may result in the
disenchantment and reversal in legitimacy of the
democratic system of government, or at the least the
nation struggling with the negative effects of a low quality
democracy.
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33. Introduction . . .
With th constitutional reform and th general election
the tit ti l f d the l l ti
based on the reformed constitution, Indonesia has
embarked in a second stage of its democratic p
g process:
Consolidation.
The SBY government has been of to a good start, albeit
the t
th tough challenges it f
h h ll faced i it early d
d in its l days, such as
h
the tsunami in Aceh and the shock to the economy
caused by the s eep hike in the o p ce Both these
e steep e e oil price. o ese
hurdles have been overcome, but democratic
consolidation still faces enormous challenges that need
to be overcome, especially under the leadership of the
overcome
new democratically elected government.
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34. Improving economic performance
Ad
Adam P Przeworski et al h
ki t l have presented some quantitative
t d tit ti
evidence from their observation of the survival and
failure of political regimes in 135 countries between 1950
p g
and 1990, as they researched the question, What makes
democracy endure?
Th f
They found empirical evidence th t once a country h a
d i i l id that t has
democratic regime, its level of economic development
has a s o g e ec o the p obab y o the de oc acy to
as strong effect on e probability of e democracy o
survive; poor countries, however, particularly those with
annual income per capita of less than $1,000, are
extremely fragile
fragile.
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35. Improving economic performance . . .
Przeworski et al hypothesized that the chances of
democracy to survive and be consolidated will increase
when the country’s economy grows faster than 5%
annually compared with th
ll d ith those th t grow more slowly.
that l l
The faster the economy grows, the more likely it is that
democracy will be able to survive.
y
Economic instability also threatens the survival of
democratic regimes.
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36. Improving economic performance . . .
They concluded that democracies are more likely to
survive when the annual inflation rate could be
maintained at a level below 6%.
They confirmed Albert Hirschman s 1981 hypothesis that
Hirschman’s
a moderate rate of inflation promotes democratic stability.
They also found evidence that democracy is much more
likely to i in ti h
lik l t survive i countries where i income iinequality i
lit is
declining over time.
There is a virtuous circle in the correlation People expect
p p
democracy to reduce income inequality and democracies
are more likely to survive when they do.
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37. Improving economic performance . . .
The economy is showing positive signs of recovery
recovery.
However it is still on slippery ground.
The biggest challenge is to restore g
gg g growth to a level that
can bring the economy more rapidly to its pre-crisis level
and to sustain it during the consolidation period.
A minimum growth of 6% should be targeted To achieve
targeted.
that objective, there are certain pre-conditions that need
to be established and objectives that need to be attained.
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38. Improving economic performance . . .
First and foremost is maintaining the hard won but still
hard-won still-
fragile macro-economic stability.
To strengthen macroeconomic stability, the reforms of
g y
the financial sector should be accelerated.
A healthy financial sector is a vital element for both
stability and growth of the economy
economy.
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39. Improving economic performance . . .
The banking sector is emerging from the crisis but the
crisis,
progress needs to be consolidated.
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40. Improving economic performance . . .
The government needs to work closely with the central
bank to address some basic issues in the reforms of the
banking sector, such as developing an effective —and
moral hazard free
moral-hazard free— lender of last resort facility, the
replacement of the blanket guarantee with a deposit
insurance protection scheme and strengthening
governance in the banking sector particularly in state
sector,
owned banks.
Those are among the most important aspects of a strong
banking sector that would facilitate sustainable growth
and prevent recurrence of another banking crisis.
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41. Improving economic performance . . .
As the cost of bank restructuring constitutes a large item
on the government budget to ensure fiscal sustainability,
every effort should be made to maximize asset recovery
y y
and minimize the fiscal cost of banking restructuring.
The economy has passed from the stage of fiscal
stimulation to fiscal sustainability.
Maintaining fiscal sustainability will be one of the biggest
challenges t th I d
h ll to the Indonesian economy i th years
i in the
ahead.
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42. Improving economic performance . . .
Long-term fiscal sustainability could only be ensured by
Long term
continued fiscal consolidation and improvement in tax
administration.
The challenge is to increase tax revenue by 20 to 25%
25%,
from 12% of GDP in year 2002, to 15 to 16% of GDP
within five years.
Th focus should b on th l
The f h ld be the large t
taxpayers, who f
h from
past experience have proven to be the source of the
greatest leakages in tax revenues.
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43. Improving economic performance . . .
Growth should not only be rapid to regain momentum
and cover ground lost during the crisis, but should also
be sustainable for the long term.
The nascent growth of recent years was produced by
increased consumption. But investment is still lagging.
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44. Investment Climate
Among the biggest challenges faced by the SBY
government is to restore Indonesia’s climate for
investment.
Although there are some indications of renewed FDI
interest in Indonesia, new investment has been lagging
far behind compared with coming to Indonesia s
Indonesia’s
neighboring countries.
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45. Infrastructure
Future investment is also constrained by major
bottlenecks in infrastructure, particularly power
infrastructure power.
There is now already a power scarcity in some regions in
which a rotating p
g power supply has become necessary.
pp y y
Growth in power continues to outpace supply, and
building power generating plants and the related
distribution networks requires time
time.
Other infrastructure needs also have to be addressed,
like roads and bridges, which were neglected during the
crisis,
crisis as well as harbors water supply infrastructure and
harbors,
telecommunication.
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46. Education
The development of skills that are needed in the new
economy, with its heightened competition due to
globalization and opening of markets, and the arrival of
new entrants in low skilled manufacturing industry, are a
challenge to Indonesia’s education and skill training
programs.
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47. Equity
Growth is not an end in itself. Through growth, new jobs
will be created, the country’s debt would be better
serviced,
serviced macroeconomic stability would be
strengthened and most importantly, poverty would
decline.
It is important to ensure that growth will not result in
increases in inequality, as often occurs in many
developing countries.
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48. Equity . . .
During the New Order growth was pursued religiously.
Although the results were remarkable in transforming the
economy, there was a strong feeling of injustice at the
pattern of development.
There was the perception of a widening gap between the
rich and poor, among income groups, ethnic groups and
regions.
regions
Populist rhetoric aside, it is important to ensure that the
positive lessons should be taken from the experience of
the N
th New O d not the mistakes.
Order, t th i t k
GSAPS-2007-Day4 www.ginandjar.com 48
49. Equity . . .
The pattern of growth is just as important as the rate of
growth.
Growth should not only aim for a vertical trickle down
effect,
effect but should allow for the horizontal flows of benefit
benefit,
i.e. broad-based, employment intensive and non-
compartmentalized growth.
GSAPS-2007-Day4 www.ginandjar.com 49
50. Interaction between politics and economics
One of the key issues in democratic consolidation is how
to improve the performance of the newly established
democratic regime. Regime performance can be seen as
both liti l t t
b th political outputs and th character of th regime as
d the h t f the i
well as the material conditions it generates; in short
political as well as economic performance (see
di i d
discussion on democratic consolidation i Di
ti lid ti in Diamond, d
1999; 64-116).
There is a d e
e e s dilemma. O the o e hand, to bu d a viable
a On e one a d, o build ab e
democracy with all its essential elements—basic security,
rule of law, responsible political parties, a well informed
citizenry, a professional bureaucracy and so on – will
take a long time. On the other hand, people expect
improvements in their living standards now.
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51. Interaction between politics and economics . . .
Experience in the developing economies suggests that
democracy may constrain good economic policy in at
least three ways.
First, the political process in a democracy tends to
have an inherent bias toward the short term.
Politicians put a premium on policies that deliver
results now and postpone costs until later.
Second, too much politics can result in distortion of
economic policy th
i li through th undue i fl
h the d influence of f
sectional and narrow interests. Pressure from political
parties, business and other trade lobbies, loud noises
in the t t
i th streets or soft whispers in the president’s or a
ft hi i th id t’
minister’s ear, and other devious forms of pressure
can and do have distorting effects on economic policy.
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52. Interaction between politics and economics . . .
Third,
Third democracy as we see it in practice seldom goes
together with decisive, swift action when such action is
required. One could find several examples of this in
I d i d th
Indonesia and other countries, although i some cases
ti lth h in
lack of leadership and bureaucratic inertia may also have
contributed to the problem.
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53. Strengthening the political institutions
Indonesia’s march on “the road to democracy” has only
started and many problems remain.
F t i th ti
Foremost, is the question of how best to strengthen the
fh b tt t th th
political culture, deepen democracy, and enhance
political institutionalization.
institutionalization
A strong political culture supports adherence to
de oc a c p ocedu es, a g democracy e o y
democratic procedures, making de oc acy the “only
game in town.”
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54. Strengthening the political institutions
Deepening democracy demands:
g
greater executive accountability to the law, to other
y ,
branches of government, and to the public;
a reduction in the barriers to political participation and
mobilization by marginal groups;
decentralization of power to facilitate broader political
access and accountability;
vigorous independent action by civil society; and
more effective protection for the political and civil
ff ti t ti f th liti l d i il
rights of citizens.
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55. Strengthening the political institutions
Political institutionalization calls for the
strengthening of the three areas of political
institutions:
the institutions of democratic representation and
p
governance (political parties, legislatures, and the
electoral system),
horizontal accountability, constitutionalism and the
rule of law, and
the State administrative apparatus (the bureaucracy).
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56. Strengthening the political institutions . . .
Diamond surmises that democracy will not become
broadly valued, and thus consolidated, unless it also
becomes more liberal, transparent and institutionalized.
Because of the disappointment at the performance of the
democratic governments, there is a movement to return
to the original 1945 Constitution.
g
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57. Strengthening the political institutions . . .
A 2006 survey conducted b G ll I t
d t d by Gallup International on
ti l
behalf of Transparency International showed how big is
the challenge to improve the image of the p
g p g political
institutions in democratic Indonesia.
With the sharp swing of power from the executive to the
legislative branch of government, th
l i l ti b h f t there i also a growing
is l i
disillusion among the people toward the parliament.
The survey discovered that Indonesians regarded the
parliament as the most corrupt institution in the country.
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58. Strengthening the political institutions . . .
Diamond describes the role of political elites in post
democratic transition succinctly, saying that “In many of
the third-wave democracies, competitive elections do not
ensure liberty, responsiveness, and a rule of law.”
law.
The wide spread impression among the polity that short-
term political ends were more dominant than the long-
term interest of the country and the quality of its
democracy.
It does not speak well of the quality of the political elites
at the very critical moment of crafting a new and truly
t th iti l t f fti dt l
democratic political system.
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59. Strengthening the political institutions . . .
Indeed,
Indeed one very serious issue that had to be addressed
is corruption.
While corruption is not peculiar to Indonesia, various
reports suggested that corruption in Indonesia was a
serious problem that led to a waste of resources and
inhibited the economic impact of many government
programs.
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60. Strengthening the political institutions . . .
Diamond suggest that in such circumstances, “of
entrenched corruption and repression, the elites who
come to govern have a stake in the existing system and
system,
those who favor real reform are too weak to accomplish
it by themselves.
y
Only the mass public can generate the political pressure
and power necessary to bring about reform.”
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61. Civil Society
The question is, Who are the public? “The public like
The public”
“the people” is the term often used by politicians for their
own ends, and demagogues manipulate it in attempts to
grab power.
Thus without organization, structure, and principles, the
public may not matter for democracy or its impact may
be negative.
negative
Democracy requires a public that is organized for
democracy, socialized to its values and norms, and
committed not just to its owned myriad narrow
itt d t j t t it d i d
interests—although they are important and are the
raison d’etre for their existence—but to a larger, common
g
set of civic ends.
And such a public is only possible with a vibrant “civil
society.
society ”
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62. Civil Society . . .
Indonesia’s civil society has grown in recent years and
has played a role in the political change.
However, as a real countervailing force to the state, it is
g
still weak.
Not only is it a relatively new concept in Indonesia’s
polity,
polity and thus yet to mature the quality of the people
mature,
who are attracted to join it does civil society little good.
Only recently has civil society attracted better-qualified
people from among the graduates of top universities and
among the top ranks.
In the past, this class of y
p young p p was more
g people
attracted to the bureaucracy, the academia, business
and even the military.
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63. Civil Society . . .
The existence of such a civil society is particularly
important to Indonesia at the present stage of
democratic consolidation, as clean, open, transparent
, , p , p
and accountable governance has yet to be established.
The general opinion of the public, as reflected in various
polls and the media is that democracy has not produced
media,
better governance.
The efforts to uphold the principles of democracy and
rule of l
l f law cannot be l ft to the politicians alone, f th i
t b left t th liti i l for their
visions may be overshadowed by short-term political
interests.
The country needs an active, informed, selflessly
motivated civil society to strengthen the institutions of
g
governance, for checking, monitoring and restraining the
, g, g g
exercise of power of the state, its institutions and office
holders and holding them accountable to the law and
public expectations of responsible government.
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64. Political Leadership
It is evident th t currently there is a l d hi d fi it li k d t
i id t that tl th i leadership deficit linked to
the persistence of so many of the problems faced by the
country.
The debate t th t i l d
Th d b t at the centre is played amid complex and shifting
id l d hifti
power relations—factionalism even within the main parties,
some along ideological lines and others just based on political
opportunism.
opportunism
To explain the disunity and fragmentary nature of its current
politics, one might hypothesize that Indonesia lacks individual
leaders with the right combination of vision character and
vision, character,
political savvy.
There may be positive effects to this lack of charismatic
leadership beca se as Haggard and Ka fman asserts o er the
because, Kaufman asserts, over
long term “executive authority must eventually be
depersonalized”.
H the i
However, th experience of I d f Indonesia at th past few years
i t the tf
show that inept leadership have led to more failures of policy
than successes, more instability and “wasted” energy in political
conflict than peaceful progress and coherence
coherence.
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65. Political Leadership. . .
As such, not only should reforms install an effective and
transparent set of rules-based institutions, they should
l l l b
also evolve rules-based mechanisms b which th b t
d h i by hi h the best
of each generation are brought into the political
leadership.
Put in simplistic terms: a good system is nothing without
good people to run it.
It is not to say that the system is less important than the
persons who run it, on the contrary democratization
entails first and foremost establishing the system—the
institutions,
institutions the processes and procedures
procedures.
However, at the end of the day, a system is as good as
the people who run it.
It may help to recall Huntington’s aphorism, that
economic development makes democracy possible, but
it is “political leadership that makes it real.
political leadership”
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66. Keeping the country together
One f th h ll
O of the challenges f i I d
facing Indonesia i k
i is keeping th
i the
country united.
The threat of separation has always plagued the country
since the first days of independence.
One of the main grievance is income and regional
g g
disparity. It is a complex problem and would take time
and effort to resolve, but at the heart of the problem was
the overly centralized government structure and decision
making process.
Devolvement of central authority should be the first step
y p
toward addressing the problem.
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67. Keeping the country together . . .
As discussed above decentralization constitutes one of
above,
the most important aspect of “reformasi” in Indonesia.
Decentralization enhances the efficacy, quality and
y q y
legitimacy of democracy; hence decentralization is a
necessity for democracy.
It is even more so for large—and particularly multiethnic
large and
and multicultural— countries such as Indonesia, as
decentralization will close the distance between the
citizens,
citizens the stakeholder and the power and the process
stakeholder,
of policy making.
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68. Decentralization
Decentralization is not merely political expedience t
D t li ti i t l liti l di to
deal with rebellious regions. It has more basic value to
democracy and democratic consolidation.
y
Many scholars have presented argument that
decentralization enhances the legitimacy and hence
stability of d
t bilit f democracy.
Decentralization is not just a political necessity to keep
the country from falling apart or to foster democracy; if
managed well decentralization can bring important
benefits to the communities and the economy as a whole.
However if managed b dl it could h
H d badly ld harm th people and
the l d
squander resources and bring instability instead.
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69. Decentralization . . .
Many observers h d worried about th effect of fi
M b had i d b t the ff t f fiscal l
decentralization on the still fledgling economy.
With decentralization some rich regions are doing fine
decentralization, fine,
in fact they have more money that they can spend; there
is a danger, and there are already some indications of
the
th revenues not being used effectively and efficiently.
tb i d ff ti l d ffi i tl
On the other hand, poor regions are chafing under the
new responsibility that co es with au o o y
e espo s b y a comes autonomy.
And as pointed by the World Bank (2001) the risks of an
increase in corruption following decentralization are high.
It has been widely observed th t so f th t not only
h b id l b d that far that t l
power and revenue that have been decentralized but
also corruption.
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70. Decentralization . . .
It seems that Indonesia is not the only country faced with
this problem when it attempted to decentralize.
On the basis of their observation of experience of some
p
Latin American countries, some analysts comment that
decentralization has strengthened the position of the
local elites and their clientelistic networks (Huber,
( ,
Rueschemeyer and Stephens, 1999: 182).
Furthermore, many regions had increased local taxes
and imposed new levies that have become a significant
concern for investors.
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71. Decentralization . . .
There is a need to clarify the rules and regulation
regarding decentralization that would affect the investors.
There have to be clear guidelines on the authority and
responsibility of the central government the provincial
government,
government and the district or city government with
regard to investment.
It is important to clarify th extent to which the
i i t t t l if the t t t hi h th
government has the right to intervene in the conduct of
private business.
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72. Decentralization . . .
Both regional autonomy and direct regional elections are
also expected to put an end to the unbalanced
relationship between the central and local g
p governments,
as well as to promote political equality among all citizens,
regardless of their background, giving them a sense that
they
th are not being l ft out of a process that has in the
t b i left t f th t h i th
past been dominated by the elite in Jakarta.
In most parts of the country, the elections went smoothly
country
and peacefully, in some parts local elections did not go
as well as could have been hoped.
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73. Decentralization . . .
Reports of vote buying power plays poll fraud and
buying, plays,
problems with voter registration, combined with a lack of
accountability and credibility showed by some local
y y y
elections commissions, surfaced in media, tarnishing the
legitimacy of the long-awaited regional elections.
The limited time allowed for campaigning --making it
difficult for voters to truly measure the quality and
platforms of the candidates as well as a lack of
candidates--
available media outlets to educate the public about
substantive campaign issues, were among the factors
blamed for the elections' shortcomings.
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74. Decentralization . . .
Physical clashes occurred in some areas, including in
Kaur regency in Bengkulu province where some 10 000
province, 10,000
people went on the rampage and set fire to government
offices and houses in July to express their
disappointment with the regency election results.
In North Sumatra province, a mob attacked the General
p ,
Elections Commission office in Central Tapanuli regency
in October after the commission refused to allow a
candidate f regent contest the election because of
did t for t t t th l ti b f
questions over the legitimacy of her high school diploma.
In the city of Sibolga the election was delayed at the last
Sibolga,
minute for three days because voter cards had not been
distributed.
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75. Decentralization . . .
Another example of the troubles faced by elections was
a high profile case involving a long legal battle in Depok
city, near the capital Jakarta, where one of the p
y p political
parties that came out on the losing end of the election
challenged the results in court. In its lawsuit, the losing
party claimed th l
t l i d the local elections commission h d
l l ti i i had
committed violations in implementing the election
process.
process
In Papua there are dispute between the two provinces
(Papua and Irian Jaya Barat) about the validity of
general elections in the two provinces, in relation to the
special status given to the provinces.
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76. Decentralization . . .
Therefore it is a challenge for the Indonesian democracy
to take hold in the grass level that the nation is able to
undertake elections in the regions peacefully, cleanly,
and democratically.
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77. Keeping the country together . . .
The threat to the unity and integrity of country has
recently been perceived as not only to come f from ethnic
or regional separatism but also from fundamental and
p
political Islam.
Many authors have speculated about the political
implication of the rise of the social standing of Islam in
Indonesia.
Indonesia
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78. Keeping the country together . . .
In actuality, however, Indonesian Islam is embedded in a
culture of tolerance that can be traced back to the history
f
of Islamization of the archipelago.
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79. Keeping the country together . . .
Islam originally came to Indonesia and religiously
“conquered” the people not through war, but through
“ ”
trade, marriage and education.
Hence the absorption of Islam by the societies in this
vast archipelago was generally peaceful and involved
little coercion.
In fact, in the propagation of Islam there was a tendency
fact
to adjust the new religion to older beliefs that resulted in
moderate and tolerant—some may say syncretic—
attitudes among the majority of Indonesian Muslims
Muslims.
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80. The Role of Islam
It is true that fundamentalist Islamic groups some of
groups,
them militant, do exist in Indonesia, but they are
marginal and have little popular support.
Despite the recurrence of incidents involving some
Islamic extremists, for many years, Indonesia, the
country with the largest Muslim p p
y g population in the world,
,
has been well known as a pluralistic society
characterized by religious moderation and tolerance.
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81. The Role of Islam . .
Islam.
With the constitutional amendments completed, the
debate on the inclusion of the Jakarta Charter into the
f C
constitution has been more or less been concluded.
The votes against it were overwhelming, cutting across
political fault lines.
Although the possibility of future attempts to reintroduce
the Jakarta Charter is ever present the political support
present,
for such a move would be confined to a small minority.
Not only are the secular nationalist parties against it,
many parties with I l i credentials are also not
ti ith Islamic d ti l l t
supporting it.
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82. The Role of Islam. . .
Even if the Jakarta Charter does not pose an immediate
threat to the unity of the country, adjusting to and coping with
a deepening religious awareness and religious piety within the
Muslim population is still a challenge for Indonesia
Indonesia.
Although Indonesia is a predominantly Muslim Country,
Islamic political parties in Indonesia has never been able to
attain more than 40% of the votes, since the election of 1955
up to the last election in 2004. Therefore, most Indonesian
Muslim voted for parties not based in religion
religion.
The different from one election to another is the composition
of the votes garnered by the Islamic p
g y parties, which constantly
y
changes reflecting the political mood and environment of the
time.
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83. The Role of Islam . .
Islam.
In the short run, however, the revival of Islamic values in
the minds and lives of the population, most importantly
f
among the intelligentsia and the political elite, and the
y
young, may affect attitudes or responses to p
g y p political
issues that involve Islam such as international terrorism.
The September 11 act of terrorism against the US was
almost unanimously condemned by organized Muslims
and by the public in general.
Except for a few very vocal fanatics, Indonesia’s Muslims
were outraged by with happened in New York York.
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84. The Role of Islam . .
Islam.
The feeling of outrage against terrorism that had taken
the lives of innocent people was heightened when
f
Indonesia also became a victim of international terrorism
with the bombing in Bali on 12 October 2002, the more
g
recent Marriot bombing in Jakarta on 5 August 2002, and
the second Bali Bombing in 2005.
For many Indonesian Muslims terrorism had only
Muslims,
succeeded in creating the wrong image of Islam and
Islamic values.
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85. The Role of the Military
Observers of Indonesia have paid much attention to the
role of the military in post-New O
f Order politics and how
the military perceive its role in democracy.
Events surrounding the fall of Suharto showed that the
military had been supportive of political change. Its role
was crucial in the peaceful transition from an
authoritarian regime to real democracy
democracy.
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86. The Role of the Military . . .
In the transition during the Habibie period, the military
lent its political weight to the institutionalization of
f
democracy by supporting the creation of laws and rules
that dismantled the old authoritarian structures and
replaced it with a democratic system.
The military has shown its commitment to democracy
when it accepted the consensus of the polity that it
should no longer take an active role in politics and
therefore no longer hold seats in the elective political
institutions.
institutions
Under Wahid, the military had been steadfast in refusing
to be used as an instrument to subvert the constitution
and resisted the pressure to reverse to authoritarianism.
authoritarianism
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87. The Role of the Military . . .
Although many retired senior officers were against
changing the constitution, the serving military
establishment fully supported the amendments that have
become the foundation for a stronger and more stable
g
democracy.
Therefore it is safe to say that the military is not a threat
but an asset to Indonesia s democracy
Indonesia’s democracy.
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88. Political Reconciliation . . .
More needs to be done in order for the country to be
able to live with and be proud of its past and not be
f
burdened by it.
Efforts to reconcile the past should transcend ideology
and politics.
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89. Conclusion
Much has been achieved, but even more remains to be
achieved
done.
The past few y
p years have been extremely eventful for
y
Indonesia.
Following the maelstrom of political, economic and social
crises,
crises economic stability has now returned though the
economy has not returned to the heady levels of the
boom years.
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90. Conclusion ...
To overcome the challenges ahead whether from
ahead,
political corruption, violent communal strife and terrorism
in the name of God or external economic shocks, the
new t l of government and democratic governance will
tools f t dd ti ill
face their definitive test.
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92. Governance
Questions:
Do governments know what they are doing?
Why should we trust them?
The demand for good governance has a long history. But
seldom have the forms of governance been under
g
greater challenge.
Dissatisfaction and disillusionment about political
solutions are rife.
l ti if
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93. Governance . . .
Problem of modern governance is not so much an
insufficiency of instruments relative to the changing on
y g g
objectives, but rather the degree of incompatibility
between objectives .
Why
Wh governance, and not merely government?
d t l t?
Governance is a broader and more fundamental
concept than that of government alone
alone.
The concern is with the links between parts of the
political system as with the institutions themselves.
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94. Governance . . .
The
Th concept of governance is broader th government,
t f i b d than t
covering non-state actors (Rhodes 1997).
It accepts that the management of the nation s affairs
nation's
might need more than government to ensure
effectiveness; it sees parties, courts and interest groups
t bl that
not as problems th t governments must overcome but as
t t b t
part of the broader process.
Governance is the exercise of political power to manage
a nation's affairs (The World Bank, 1992).
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95. Governance . . .
The current Public Governance debate places a new
emphasis on ‘what matters is not what we do, but how
people feel about what we do’ and that ‘processes
do processes
matter’ or put differently, ‘the ends do not justify the
means’.
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96. Governance . . .
Whereas the governance discussions in the public
sectors is relatively recent, the term governance is much
more common in the private sector where a debate
about Corporate Governance has been going on for
quite some time
time.
Corporate Governance refers to issues of control and
decision-making powers within the private (corporate)
organizations.
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97. Governance . . .
'Corporate Governance’ is the watchword of those who
wish to improve the accountability and transparency of
the actions of management, but without fundamentally
altering the basic structure of firms.
(Roe, 1994)
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98. Governance . . .
Another development is the globalization of the economy
and the growing importance of transnational political
institutions like the European Union (EU) World Trade
(EU),
Organization (WTO), Association of South East Asian
Nations (ASEAN), and North American Free Trade
( ),
Agreement (NAFTA).
GSAPS-2007-Day4 www.ginandjar.com 98
99. Governance . . .
The deregulations of capital in the 1980s set in train a
massive restructuring of both domestic economies and
the international economic system.
What seems to be the main consequence of
globalization in the present context is the erosion of
traditional, d
t diti l domestic political authority.
ti liti l th it
International forces appear to override the ability of
national governments to solve their own problem.
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100. Governance . . .
New demands of accountability to international
markets and standards may clash with the traditional
lines of accountability
accountability.
Some commentators (Rhodes 1994, 1997; Davis
1997) have characterized these trends as a 'hollowing
hollowing
out of the state', in which the combined effects of
globalization, international obligations, privatization
and reduced regulation d l t th capacity of
d d d l ti deplete the it f
government to shape and organize society.
GSAPS-2007-Day4 www.ginandjar.com 100
101. Governance . . .
Pessimist suggest that globalization means that
t h
government everywhere h have bbecome powerless and
l d
that managing globalization is impossible, since
globalization is shaped by markets, not by government.
Some have suggested that this powerlessness is
reinforced by the coming of the internet age –that there
is no governance against the electronic herd (Friedman,
2000).
Global Governance h th b
Gl b l G has then become very t i l
topical.
In a nutshell, global governance is about how to cope
with problems which transcend the borders (such as air
pollution, narcotics, terrorism or the exploitation of child
workers) given the lack of a world government.
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102. Public Administration in A Democracy
Chief Executive
EXECUTIVE STAFF
SOCIOCULTURAL
AGENCIES
NORMS
OUTSIDE
AUDITORS LEGISLATURE
PUBLIC
ADMINISTRATORS: LEGISLATIVE
MEDIA
DEPARTMENT AND STAFF AGENCIES
AGENCY HEAD
INTEREST COURTS
GROUPS
POLITICAL PARTIES OTHER AGENCIES,
OTHER AGENCIES, SAME LEVEL
DIFFERENT
LEVELS
(
(Rosenbloom, Kravchuck, 2005)
)
GSAPS-2007-Day4 www.ginandjar.com 102
103. Public Administration in A Democratic
Political System: The Conversion Process
ENVIRONMENT INPUTS ADMINISTRATIVE OUTPUTS
• CULTURAL CHANGES LINE AGENCIES
• DEMANDS FOR • GOODS
AND EVENTS PROGRAMS AND “WITHIN-PUTS”
• SERVICE
• ECONOMIC CHANGES SERVICES
• RULES
AND EVENTS • POLICIES
SUPPORT
• POLITICAL CHANGES • PROCEDURES
• PROGRAMME
AND EVENTS • MONEY
• GOALS
• INFORMATION
• SOCIETAL CHANGES • STAF
• STRUCTURE
AND EVENTS
ROLES PLAYED BY
• PERSONAL
• PARTY
• EXPERIENCE LEAD TO
• INTEREST GROUP
• STAFF AGENCIES
(Rosenbloom, Kravchuck, 2005)
GSAPS-2007-Day4 www.ginandjar.com 103
104. Governance . . .
Above figure presents a conceptual framework that sees
public administration taking the central role or stage in a
broader political system (the conversion process in the
systems model).
The model emphasizes the interrelated nature of the
parts and how change in an external environment
(cultural, economic, political, social) causes change in
the structures and internal processes of p
p public
administration.
These changes, in turn, influence the outputs of the
b that i h t
bureaucracy; th t is, what goods, services, policy
d i li
programs, rules, and regulations are implemented by
bureaucracy.
bureaucracy
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105. Governance . . .
As in any system, a feedback loop develops in which the
outputs affect the environment, which causes further
change and often new demands from the environment to
continue, increase or decrease, modify, or occasionally
even cease a public policy or program
program.
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