conld alsofuel discontent

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AI{ALYSTS OF SYSTEMIC CORRUPTION

Ii\ M{DOI{ESIA'S

DE,MOCRACY

Hendra Manurung President (Jniversity Email : h_manurung2

00 2 7 3 @yohoo.

com

ABSTRACT Indonesia's economy is heavily affected by the global economic situation. Gtobat economic for some time, indicating a prolonged slowdown in the world's economy. This slowdown will obviously reduce demand for Indonesia's goods worldwide. In a direct context, Indonesia do not have a huge export exposure to Europe, rit"h t, "the epicenter of the global economic turntoil". However, Inclonesia iuitl be t"r"r"ly hit indirectly slowing frim demand from China and Japan, Indonesia's largest export destinLtion countries. The crisis in Europe will directly decrease demand for Chinese ord Joponer. goods, which will eventually reduce demand for Indonesia's exports in those two countries. An economic slowdown in China and Japan will pose direct risks to Indonesia's economy, besides East Asian regional stability. Democracy is always u work in progress. At the heart of this research is a lively dibot" among the diverse democratic stakeholders: citizens, politicians, public authorities, poliiicat parties, N"GOs, Worker Unions, and Trade (Jnions. All of these typei of stakeholders ian already be found in Indonesia and they contribute their share to the vibrant Indonesian democracy. Iidonesian government supports democratic policy dialogues and processes together with partners from all these domains. To organize and communicate these dialogunr, pri""rr", and^its outcimes, the mass media play a crucial role as a constittttive element of democracy. Yet, tike in every democracy around the world there are certain interest groupt oid ,toknholders who are in a more favorable position to promote their interests by means of fiiancial and political power. Indonesia is already the world's ITth largest econonxy and the 6th largest o*Zrg developing countries. Indonesia's economy is also very dynamic, having grown at an annuiizea ,oie i7 5 percent between 2001 and 2010. Indonesia has weqthered tie latest global economic crisis rem-arkably well and, in 2010, it was the third fastestgrowing G20 country. Corcuption remains widespread at all levels of the administration, and bureaucracy is still too burdeisome. Greater transparency and predictability are needed in the policy-making process. And the security situqtion, ilthougl far better than in the past, is still a concern to the business community. Growth will not make any of these problems disappear and could indeed exacerbate some of them. Indonesia cannot therefore be complacent. Its vigorous development generates new needs and sets new standards among businesses, investors, and consumers, making a situation deemed satisfactory today not acceptable a few years from now. Also,'with one-fifth of the population still living in "rtyn*n poverty and half barely above the thrishotd, rising inequatity, and high prices fo, food., fuei, and gas, th,ere is a risk of social unrest. If the economy cannot create bnougi iibs oi*tde the agriculture sector for the growing population of educated youths, the consequences could be dire and Indonesia's demographic dividend;become a liability. Pervasive corription, if not tackled, conld alsofuel discontent.

growth has been contracting

,

Keywords : Indonesia's economy, gtobal economic situation, democracy, corruption,bureaucracy, transparency, policy-making process, business community, businesses, investors, consumers

PENDAHULUAN Investments in developing countries can be particularly risky due to the unpredictability of the political and economic conditions. The extensive role of the government in the economy means arbitrary decision making can be problematic for business for which maintaining consistency and judging long term economic trends is important. Therefore, comrption, a previously neglected issue, became one of the greatest preoccupations of

Pro-ri;,ng S e m inar Nas i o nal -l!:e::u J{os-varakat Madani dan Lestari 1,1stern powers tryrng to bring stability and prosperity to global markets. This paper seeks to

esablish the relationship between corruption and Indonesia's democracy development. The tbcus of this paper will be the future of Indonesia's democracy. The researcher suggest that u'hilst it is difficult to ascertain the exact impact of comrption on development, in the absence of comrption, even greater and more sustained levels of development can flourish. The researcher argue that despite arguments to the contrary, all comrption is inimical to the process of sustainable development. The researcher suggest that the impact of comrption on development is clearly discernable though examination of the Asian Financial Crisis of 1997 . From the mid-1960s to the early 1970s, Soeharto was widely regarded for his repressive approach to political Islam. Himself a Javanese Muslim, Soeharto considered political Islam a serious threat that was hazardous to his power, both ideologically and politically. Consequently, Islam was seen as "political enemy number two" (after communism). This led to mutual distrust and hostility between Islamic groups and the New Order regime. Although Islamic goups had contributed to the fight against communism and the establishment of the New Order, these groups were marginalized in the political arena. In the words of M. Natsir, former Prime Minister and Chairman of Masyumi, the modernist Muslim part% the New Order regime "treated us like a cat with ringworm". Corruption creates unsustainable inefficiencies and inherent weakness in the economy for the long term. The post Cold War, globalized era of the 1990's saw a renewed interest in comrption and its impact. Corruption, a previously neglected issue, became one of the greatest preoccupations of Western powers trytng to bring stability and prosperity to global markets. But is the pursuit of an anticomrption agenda really conducive to development? Comrption has always existed, in all societies and at all stages of development. The dominant discourse suggests that systemic comrption is a major impediment to sustainable economic development yet despite extensive normative discussion on the merits of the absence of comrption, little academic discussion based on empirical evidence demonstrates the validity of this argument. This paper seeks to establish the relationship between democracy and comrption. The focus of this discussion will be Indonesia. NICs are countries exhibiting considerable industrialisation having switched from agriculture to industrial production. South East Asian economies, including South Korea, Taiwan, Hong Kong and Singapore, achieved exponential growth from the 1960's to the late 1990's when the Aiian financial crisis took effect. The transforniation from poverty to affluence was widely heralded as the success of capitalism over communism and a demonstration of the sucqpss of liberal, free market principles. However, while the goveflrments were ostensibly laissez-faire, in practice they were quite active in their economies. It is within this context that the study of comrption in NICs is so fascinating. Despite bureaucracy within the market and widespread comrption, remarkable economic development prevailed. What remains unclear is to whether this was because of or in spite of comrption. Can some comrpt activities actually be beneficial to rapid development ?. However, with more than 237 million inhabitants, lndonesia is the world's third-largest democracy after India and the United States. The implosion of the so-called New Order dictatorship in 1998 triggered a broad range of institutional reforms, such as the introduction of elections and various constitutional changes. This improvement of formal institutions has made further progress since 2009. In reality, however, a lack of political will means that enforcement of reform laws is weak and the quality of democracy remains low. In addition, T) 1AA

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there

is no comprehensive

agenda for how to address Indonesia's many political and socioeconomic challenges. Instead, most political elites rely on vote-buying and other forms of political comrption to garner political support and influence. The image in both domestic and foreign media of President Susilo Bambang Yudhoyono as an honest broker and committed reformer is highly exaggerated. Recently, there have been indications of a democratic roll-back. Indonesia is 85 percent Muslim, with a majority Sunni population. There are approximately one million Shia and various Sufi communities in the country, as $'ell as other religious minorities. Indonesia has been considered a prime example

of

the

compatibility of Islam and democracy and a success story for peaceful coexistence of different religions within a secular state. However, inter-religious and intrareligious tensions have increased significantly in recent years. The Indonesian government has failed to provide protection to the most vulnerable religious groups and has occasionally even actively

obstructed autonomous religious worship. In the months immediately after the collapse of the New order, deadly clashes took place between ethnic groups in certain parts of the archipelago. Throughout the past decade, however, the political salience of ethnicity subsided in the context of democratic consolidation, turning Indonesia into. a ,.weakly ethnicized polity''. Foreign direct investment remains low, especially in the manufacturing sector, due to a poor business environment, inefficient government institutions, low levels of education, and

a crumbling

infrastructure. In September 2012, the World Economic Forum lowered Indonesia's economic competitiveness rating in the global competitiveness index to 50 from I 14 nations, from 46 out of 142 nations in 2011. Rising inequality and the country,s dismal performance on a range of social indicators-an tndonesian child, for instance, was nearly three times as likely as a Vietnamese child to die before its fifth birthday at the time of $'riting-lualify the optimism about Indonesia's development trajectory. Indonesia,s achievements during the previous five years have been impressive. Its economy appears to have weathered the worst effects of the current global financial crisis, which is the second to have hit Indonesia in the last decade. The level of poverty as calculated by the poverty head count ratio or the percentage of the population living below the national poverty has also been reduced from a baseline level of 15.10 percent in 1990 to 14.15 percent in 2009 and further to 13.33 percent in 2010 (BPS, SUSENAS 2010). Between 2002 and.2008, lndonesia's Human Development Index (HDI) has risen by an average of 1.4 per cent per year. Based on I-INDp,s revised Human Development Index released in 2010,Indonesia is highlighted as one.of the top global movers, ranking fourth in terms of countries that have made the fastest progress in human development. Indonesia is on track to achieve many of the Millennium Development Goals (MDGs) by 2015, including targets related to health and education, gender equality, poverty reduction and environmental sustainability. Indonesia has made remarkable progress in strengthening democratic institutions. The Government of Indonesia has successfully ended a decades-long conflict in Aceh province.

RESEARCH METHOD The researcher hypothesise that all corruption, no matter what its form is tnimical to long term and sustainable development. Measuring specific impacts from comrption is difficult due to the vary nature of corruption, unless the comrption is brought into the public

Prosiding Seminar Nasional Menuiu Masyarakat Madani dan Lestari

be known' In order to prove the validity domain, the exact impact of comrption cannot

of

researcherhypothesis,theresearcherintendtoinvestigatetheeconomicdevelopmentof levels explanation can be given for concurrent high Indonesia to ascertain whether or not an seek to explain the broader of comrption and development. Therefore the researcher phenomenaofthecoexistenceofdevelopmentandcorruptioninlndonesia.Theinvestigation and evidence from the internet. The will rely on secondary evidence from io.,,nul articles to be ""'increases in a country's real per researcher will undersiand economic development of of th. population and in which the productivity capitaincome that affect broad segments of resources are generated." Although rransparency resources is enhanced as new stocks perceptions Indicator (cpf to measure the extent of Internationar now offers the comrption data available' of phenomenal growth' there is no such perceptions of corruption, in the period comrption allegations of widespread and systemic consequently, it wii be assumed that the are in fact true.

REsuLT AND DISCUSST.N lf Hong Kong's L '-'oo o r^rrner r{er AccordingtoTonyKwok,whichwasaformerdeputycofllmlssloner( (ICAC), "A strong anti corruption agency needs Independent commission against comrption Indonesia has built a democracy' and now to be established, before democracy "u,, *o'k' needsastronganticomrptioncommission(KPK)thatissofeareditbecomesadeterrent' a know that corruption would return within Kongpolice tlong \cAC, withoutthe Therefore, to investigate political cases and political week. Indonesia,s KPK needs "*purrA"Jfowers is needed' ICAC and the government of Hong parties. But beyond eradication, education taught from kindergarten' This was Kong developed an anti comrption curriculum, To campaign, using mass media' and exhibitions' supplemented by a major public awareness

keepitsindependenc",HorrgKong'sICACismonitoredbytwooversightagencies'the (oRC)' (ICC) and operation Review committee Independent complaint committee AccordingtoErryRiyanaHardjapamekas,HeadoftheNationalBureaucraticReformTeam' ..Indonesiahasmanyactivists,practitionersandanticomrptionanalystswhoarecleverand because Indonesia can learn from Hong Kong' capable, but there's a tu"t of commitment,"' Despite progress on many fronts' critical comrption is comrption, wherever it happens' developmentchallengesremain.lndonesia,semergenceasalowermiddle.incomecountryhas of a population Approximat ery 32,5 m'rion people out been characterised by uneven growth. below the nationar poverty line ($1'55 of 230 m'lion (equivarent to 14.15 percenq rive However, in some regions - where wlnerability purchasing power parity (PPP)/persor/day). diseases impede progress towards human to external shocks, natural disasters and infectious change poses poverty rate is as high as 40 percent' climate development and the MDGs - the

anadditionalthreattotheachievementofMDGs'ComprisingmbrethanlT'000islands' IndonesiaisespeciallywlnerabletorisingSealevelsandfloods,whileerraticweather farmers and fishermen'

especially among small-scale pattems impact ugri"oltorul production, deforestation and the greenhouse gases, laigery caused by Indonesia is also a major emitter of livelihoods' contribute to global warming and threaten burning of peat lands. These practic,ls political decentralization has brought decision-making closer biodiversity, peace and stability.

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to the people, but it has also exposed technical dnd administrative capacity gaps at local levels of government, especially in less developed regions.

Indonesia's Democracy Comrption weakens Indonesia's democracy and its ability to promote development and social justice. It is regressive in the sense that its costs and negative economic impact tend to fall more heavily on small enterprises and an on individuals in a weak economic position. The World Bank suggests: "Corruption is a double jeopardy poor the and unprotected. They for pay a high share of monopoly rents and brtbes, while they are often deprived of essential government services." It pushes firms into the black market, which effectively reduces the state's ability to raise capital and thus leads to ever-higher taxation on fewer and fewer taxpayers. This in turn reduces the state's ability to provide essential public goods, including the rule of law. Moreover, comrption undermines development by distorting the rule of lawand weakening the institutional foundation on which economic growth depends. The harmful effects of corruption are especially severe on the poor, who are hardest hit by economic decline, are most reliant on the provision of public services, and are least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic privileges. Thus comrption can be seen to be' "...one of the greatest enemies of development." Following the Asian f,rnancial crisis and the end of Suharto,s regime in 199g, Indonesia has embarked on an impressive growth trajectory and is poised to become an economic heavyweight very soon. Indonesia is already the world's 17th largest economy and the 6th largest among developing countries. Indonesia's economy is also very dynamic, having grown at an annualized rate of 5 percent between 2001 and z}l}.Indonesia has weathered the latest global economic crisis remarkably well and, in 2010, it was the third fastest growing G20 country. Indonesia has witnessed some economic growth in recent years, mainly on the basis of booming private investment and consumption. Foreign investment is on the rise in Indonesia, and there are significant improvements to be seen with regard to the general investment climate. Despite the deregulation process being successfully implemented, investors still point

at comrption, red tape and an uncertain legal environment as the main challenges for conducting business in the country. Companies continue to be concerned about concessions based on personal relationships and demands for irregular fees to obtain government contracts, permits or licences. According to the tndonesia Competitiveness Repoft 2011,

of the 20th World Economic,Forum on East Asia, which takes place in Jakarta for the first time. The Reporl takes stock of Indonesia's competitiveness landscape, drawing on the results of the Global Competitiveness Index (GCD. It identifies the notable advantages it can build upon as well as the obstacles to the country's development and the threats to its growth. Introduced in 2005, the GCI is a comprehensive composite ind"icator that cabtu;es the microeconomic and macroeconomic foundations of national competitiveness. Competitiveness is' defined as the set of institwtions, policies, and factors that determine the level of productivity of a country. Productivity, in turn, influences the level of prosperity that can be attained. The GCI comprises 110 indicators organized in 12 categories, the 12 pillars of competitiveness. Those are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor ahead

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readiness, market size' market. development, technological financial efficiency, market the GcI of Indonesia's The overarl picture painted by innovation. and sophistication, business assessment is mostl1' over the years' and the latest brightening been has competitiveness since 2005' Indonesia economies in the GCI 2010' o^f out 44th ranks Indonesia positive. 1139 of these positive dynamics' the 12 pillars. As a result of each on score its has improved improved country among G20 10 places, -utti"g it the most by improved rank Indonesia's than most countries at a rndonesia is better positioned Therefore, period. this over countries by a sizeabre margin, the consistently outperforms, often It deveropment. of stage sim'ar Asia region' Indonesia income goop u,,a tn" Developing middle low"i the for avefages (27th). It precedes tt notable exception of china *itt' BRIgs, the with favorably compares " by a small margin' Within Braztl (59th), and RussialO:ta; (54CI, Africa So,rtt (51st), of India Indonesia tu{t in the middle diversity, p*roorra uv ASEAN, a trade area characterized of the Philippines (3rdi and Malaysia lloitrl but far ahead Singapore behind well pack, the (38th) are relatively Vietnam (59th), and Thailand tndo,,"sia, (10%h). Carnbodia and the (ssth) Among Indonesia's strengths' differ competitiveness their of close, but the driving forces Fast growth and sound fiscal stands o.ri i:s,t out of 139). environment macroeconomic footing. The debt burden has been fiscal strong a on country the management have put

drasticallyreduced,andlndonesia'screditratinghasbeenupgraded'

Corruption The Paradox of Democracy and ThecostsofcomrptioninSouthEastAsiahavebeenrevealedinanumberofstudies. due to philippines are estimated to have lost $49 billion the years, over the rast twenty Indonesia will be the debt of $40 billion' By 2030' f"';i; entire its comrption, surpassing Britain' over the Germany, Mexico, Ffance and ,,rrpu"rri.rg economy, world,s sixth-biggest because more than $50 b*rion, primarily by farlen have assets Indonesia, last decade in worth in exchange for deliberately undervarued their have assets state trading comrpt ofrrcials twenty and one govemments have paid between that revear Studies substantial kickbacks. paid' An extensive should have otherwise have they than goods for more hundred percent and comrption has strongly affected "Graft concluded: Asia in study of comrption of inefficient producers, ...comrption leads to the favouring negatively efforts development the leakage of revenue scarce public resources' and of distribution inequitable the unfair and is painfully The impact of this on development hands'" private to coffers from government development projects' less able to spend on genuine is government the which obvious, the long term impact is of comrption may appear minimal' impact superflcial the Although it has been shown that development. Ho*"u"ri empirically to inimical and inflationary as well comrption are unlikery to perform of revers high relatively during countries tolerating In a study of over seventy countries they would hau" Lrr" otherwise.

economica*y as strongly negatively suggested that comrption, ""'is Mauro 1gg0s, early and the late 1g70s of red tape"' Mauro's model rate, regarJL* or the amount investment the with to an associated in the, 'comrption index' translates itprou"*.nt deviation standard one a indicates that annual per capita rate and a r.3o/o increase in the investment the in GDp z.9o/oof increase of of Huntington and Leffs demonstrates the weakness ,t"u'ty This growth. rate of GDP is supported to attract investment. This anarysis beneficiar be courd comrption argument that

byotherrecentst.,dies.Usingdatafromthirty-nineindustrialanddevelopingcountriesthe El.1NR

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World Bank found that countries that were perceived to have relatively low levels of comrption were always able to attract significantly more investment than those perceived to be more prone to comrpt or illicit activity. This result held true for both countries where corruption was highly syndicated and predictable, and countries where it was not. These findings are unambiguous; comrption is costly for development in terms of squandered government capital and in terms of lost capital from investors. Savings and investments are also increasing. In the current context of rising global commodity prices, inflation represents the most immediate threat to the stability of the macroeconomic environment. ln other areas, access to basic education is nearly universal, and its quality has been improving (49th on the primary education pillar). Efforts now should be directed at raising secondary and tertiary education enrolment (66th on the higher education and training pillar). Among the factors that rvill become critical in the coming years, the efficiency of the goods market is also relatively rvell assessed (49th), thanks to a competitive tax regime and intense competition, but bureaucracy and trade barriers of all sorts still stand in the way. Businesses are becoming increasingly sophisticated (37th) thanks to relatively deep clusters, efhcient management, and the migration of firms to higher segments of the value chain. Finally, the large size of the market confers a notable advantage (lsth). As one of the world's 20 largest economies, Indonesia boasts a large pool of potential consumers, as well as a rapidly growing middle class, of great interest to both local businesses and foreign investors. However, much more must be done to improve Indonesia's competitiveness and therefore fully reap the benefits of intemational trade- In addition, a more integrated ASEAN would offer opportunities for streamlined regional supply chains, while offering new channels of distribution. As the 2011 Chair of the otganization, Indonesi a can play a catalylic role in the realisation of the ASEAN Economic Communityby 2}L1.Indonesia has a civil law system based on Dutch, French, and German models. Judicial candidates are proposed by the Judicial Commission to the national parliament for approval and then confirmed by the president. Nine judges comprise the Constitutional Court, three of whom are nominated by the Supreme Court, three by the national parliament, and three by the president. The Constitutional Court has continually asserted its independence over recent years, issuing multiple decisions on controversial and important issues. Partly as a result, it has been exposed to criticism from a variety of political actors, including leaders of major political parties and prominent members of civil society. Comrpt actions typically generate far more costs than benefits. A study of comrption in one African country, for example, concfuded that corruption intensified ethnic conflict, ruined the 'efhciency of municipal goveffirnent and federal agencies, crippled the merit system of hiring and promotion, and generated an "atmosphere of distrust which pervades all levels of administration." The Asian Development Bank similarly recognises a number of the inimical

by-products of corruption which although not quantifiable have a clear impact for development. They note how scarce resources are squandered on uneconomical projects because of their potential to generate lucrative payoffs at the expense of priority sectors such as education or health which suffer disproportionately. Furthermore, when investment does produce results, they are often of inferior quality; public safety is often endangered due to substandard contracting and construction which can render a project completely worthless. Therefore due to the potentially lucrative rewards from comrption, the Asian Development Bank suggests that legitimate entrepreneurial activity has been hindered. Individuals u-ho

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rvould not otherwise engage in illicit behaviour have decided there is no alternative but to focus their intellectual energy away from legitimate productive, but less rewarding pursuits to figuring out ways to 'get around the system.' Risks of Corruption Indonesian SMEs are relatively more affected by a comrpt environment than larger compani-es due to their limited capacity and market power, as they report paytng a larger percentage of their income in facilitation payments. Bribery typically occurs during licensing procedures, as the level of bribes is positivelycorrelatedto the number of business licences a company must obtain in order to comply with regulations. Despite improvements in recent years, tax and customs administrations in Indonesia are perceived by many in the business community as comrpt, and many regulations as onerous. Indonesia has a complex regulatory and legal environment that leads many foreign and domestic companies to avoid the justice system. Companies are often advised by legal experts to resolve disputes through arbitration outside Indonesia, because thejudicial system operates irregularly and opaquely. Indonesia is trying to break a long tradition of comrption by implementing transparent and accountable governance. However, the former political, administrative and business elites continue to seek influence and consolidate their position in the new democratic system through informal networks. Decades of collusion between business and government have created a relatively stable, but highly unaccountable system, which does not benefit the general population. Indonesia is ethnically and religiously heterogeneous, with great socioeconomic inequalities and large regional economic differences. Institutionally, Indonesia has a federal structure and there has been wide-ranging decentralisation over the past years. The party system and executive-legislative relations remain unstable and a strong institutional framework is absent, although improvements have been seen in recent years. Hard hit by the Asian economic crisis of 1997-1998, Indonesia has been slow to recover. Indonesia has also suffered from several natural disasters that have had large human and economic consequences, notably the tsunami ltr:,2004.Indonesia has furthermore suffered from communal violence and terrorism. President Yudhoyono won a landslide victory in2004, gaining 6lYo of the votes based on a campaign platform focusing on economic growth and fighting comrption. In April2009, Indonesia held its first direct legislative elections. Yudhoyono's Democratic Party came out as the winner with 2lYo of the votes, giving the party the right to nominate a presidential candidate on its own for the election in July 2009. In July 2009, elections President Yudhoyono won with approximately 600/o of the vote in the first round, securing him re-election without a run-off. The President has stated repeatedly that eliminating comrption is one of his administration's top priorities. Even though several politicians, legislators and former ministers have been sentenced on comrption charges under his rule, Yudhoyono has been criticised for failing to net key figures from the tenure of former dictator Suharto. Nonetheless, Transparency International's Global Comrption Barometer 2009 reveals that the general public consider their government to be effective in its fight against comrption, with 74Yo of the respondents citing the government's efforts to fight corruption as effective and IgYo as ineffective. This shows a large improvement compared to the Transparency International Global Comrption Barometer 20A7, in which 47%o of the respondents considered the govemment's efforts to fight comrption as ineffective. According to BBC News correspondents in 2009, President

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Yudhoyono's re-election was boosted by the comrption-free image he enjoys in the country. Indonesia's recently democratised system, however, contains some legislative and institutional shortcomings that allow for continued comrpt practices. At the same time, many legal and institutional initiatives have been undertaken to combat comrption, although many of these measures still require effective implementation. Several reports indicate that corruption has now been decentralised to a Iarge extent, due to policies of political and administrative decentralisation which were initiated in 2001. The institutions cited in the Transparency Intemational Global Comrption Barometer 2009 as most comrpt are public officials, the legislature, the judicial system and political parties. There seems to be a general and strong public sentiment condemning comrption and calling for the prosecution of comrpt officials and seizure

oftheir

assets.

current developments in relation to corruption and investment Indonesia is trying to break a long tradition of comrption by implementing transparent and accountable governance. Several politicians, legislators and former ministers have been sentenced on comrption charges under the rule of current President Yudhoyono. There seems to be a general and strong public sentiment condemning comrption and calling for the prosecution of comrpt officials and seizure of their assets. Indonesia has a relatively open foreign investment regime. Recent reforms have put greater emphasis on improving the business climate, enhancing regional competitiveness, and creating a more vibrant private sector. In a comprehensive national survey conducted by the Comrption Eradication

Commission in February 2009, the judiciary rated among the most comrpt government branches, highlighting the woeful image of the court system. The Attorney General,s office suffers from chronic mismanagement and leadership failure. An ICW report showed that the office of the Attorney General handed down unusually light sentences in many anticomrption trials under its responsibility. In addition, the Attorney General's Office adopted a controversial policy of not detaining graft suspects if they agreed to return the stolen money. Misconduct and unprofessional behavior by judges are rarely investigated. In December 2010, parliamentarians delivered a major setback to judicial reform by appointing Supreme Court Justice Abbas Said to the Judicial Commission. Said is linked to various business tycoons and has instigated attacks against the Comrption Eradication Commission in the past. In August 20ll' a draft law that would give the Judicial Commission the authority to sanction judges who commit misconduct met with stif? resistance from the Supreme Court. During the New Order, the executive interfered regularly in the course of justice through personnel, budget, and administrative decisions. [n response to this experience, the judiciary pushed for a oneroof system after 1998, which means self-management in financial, administrative, and personnel terms. Hence, the judiciary in present-day Indonesia is much more independent in formal terms than in other countries. Giving an unreformed judiciary such wide budgetary and other controls, however, has lowered outside reform leverage considerably and is arguably the main reason for Indonesia's slow progress in judicial reform. Comrption prevails in the judiciary and is thoroughly pervasive. The judiciary can be a prompter of comrption but is often at the receiving end of pressures from powerful outside interests, such as politicians and entrepreneurs as well as lawyers acting on their behalf.

Prosiding Seminar Nasional Menuju Masyarakat Madani dan Lestari

Business and Corruption But let me start with the basics. Energy matters to Indonesia's foreign policy for three fundamental reasons. First, it rests at the core of geopolitics, because fundamentally, energy is an issue of wealth and power, which means it can be both a source of conflict and

cooperation. Indonesia has an interest in resolving disputes over energy, keeping energy supplies and markets stable through all manner of global crises, ensuring that countries don't use their energy resources or proximity to shipping routes to force others to bend to their will or forgive their bad behavior, and above all, making sure that the Indonesian peopleos access to energy is secure, reliable, affordable, and sustainable; Second, energy is essential to how Indonesia will power its economy and manage its environment in the 21't century. Indonesia therefore have an interest in promoting new technologies and sources of energy, especially including renewables, to reduce pollution, to diversify the global energy supply, to create jobs, and to address the very real threat of climate change; Third, energy is key to economic development and political stability. And Indonesia have an interest in helping the 1.3 billion people worldwide who don't have access to energy. Indonesia believe the more they can access power, the better their chances of starting businesses, educating their children, increasing their incomes, joining the global economy, all of which is good for them and for us. However because corruption is often a factor in energy poverty as well as political instability, we have an interest in supporting leaders who invest their nations' energy wealth back into their economies instead of hoarding it for themselves. Countries have been fighting over resources for centuries. Humankind has always been on the hunt for new and better sources of energy. And yet this is a moment of profound change and one that raises complex questions about the direction we are heading. Indonesia has witnessed some economic growth in recent years, which accelerated to a 10 year high of 6.lYo in 2008, mainly on the basis of booming private investment and consumption, as reported by the World Bank East Asia and Pacific Update 2008. Foreign investrnent is on the rise in Indonesia, and there are signif,rcant improvements to be seen with regard to the general investment climate. Despite the deregulation process being successfully implemented, investors still point at comtption, red tape and an uncertain legal environment as the main challenges to doing business in the country. Companies continue to be concerned about concessions based on personal relationships and demands for irregular fees to obtain governme.nt confracts, permits or licences. According to Transparency International Indonesia 2008, companies identify the judiciary and police as the two top priority institutions for the fights against corruption. According to a natiorpl survey on comrption cited by Credit-to-Cash Advisor, 35% of the interviewed companies reported that they avoided investing in Indonesia because of widespread comrption. According to the World Bank & IFC Enterprise Surveys 2009,14.6% of the surveyed companies expect to pay bribes to public officials to'get things done' and 14olo state that corruption is a major problem for doing business in Indonesia. In the World Economic Forum Global Competitiveness Report 2009-2010, the company executives surveyed point to corruption as one of the four areas of primary concem for doing business and identify the diversion to public funds to individuals, companies, or groups due to comrption as fairly common. In contrast, business executives report that the extent to which government offrcials favour well-connected companies and individuals when deciding upon policies and contracts constitutes a competitive business advantage for Indonesia. In

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Transparency International's Global Comrption Barometer 2009 survey, 15% of the respondents also consider the private sector to be 'extremely comrpt,. According to the World Bank Indonesian Rural lnvestment Assessment 2006, decentralisation has led to smaller markets and restrictions on inter-regional competition, and this has encouraged collusion and anti-competitive behaviour by companies and local governments in several regions. Nearly 50o/o of companies polled report local level comrption as a major business obstacle. Companies in the World Bank World Development Report 2005, stated that bribes are frequently paid in business operations and indicate that the annual cost of bribes amount to 4'6%a of sales' Indonesian SMEs are relatively more affected by a comrpt environment than larger companies due to their limited capacity and market power, and they report paying a larger percentage of their income in facilitation payments. Bribery typically occur during licensing procedures, as the level of bribes is positively correlated to the number of business licences a company must obtain in order to comply with regulations. service sector companies in resource rich and urban areas pay higher amounts in bribes. More established and larger companies pay lower bribes. The financial sector regulation is reported to be effective, however, most listed companies are either family-owned or government-controlled and systems of corporate governance and auditing are well below international standards. According to the World Bank & IFC Enterprise Surveys 2009, 65%o of the service companies surveyed report that they compete against unregistered or informal companies. Many political parties rely on support from private companies and corporate donations are often associated with influence-peddling in the form of kickbacks from companies or state agencies seeking to get legislation approved. In general, companies are skongly recommended to develop, implement and strengthen integrity systems and to conduct extensive due diligence when considering to do or when already doing business in Indonesia.

CONCLUSION It has become recognised that comrption is rarely an isolated phenomenon found only within a specific institution, sector or group of actors. Rather, it is usually of a systemic nature, and therefore fighting it also requires a holistic and systemic strategy. In turn, a successful anticomrption strategy is.premised on the involvement of multiple stakeholders, including government, civil society, and other governance actors, since it reQuires both, supply-side political will as well as demand-side civic pressure for greater transparency and

accountability. - Over the past decade, Indonesia has been experiencing remarkable growth and has &

become a major player in the world economy. One of the most glaring shortcomings is the state of Indonesia's infrastructure. Its roads and railroads are generally in poor condition, and the capacity of seaports is extremely limited. The insufficient supply of electricity is also of major concern. The uptake of information and communication technologies uGo ,"*uin, limited among businesses, as well as within the population at large. Mobile telephony is spreading fast, but Internet with regard to human capital,the health situation is holding back Indonesia's competitiveness, demonstrated by a high infant mortality rate, the burden of communicable diseases, and the prevalence of malnutrition. Another major area of concem

relates

to the allocation of human resources due to the labor market,s rigidity, which

contributes to a high degree of informality and precarious working conditions, and hinders the

Prosiding Seminar Nasional Menuju Masyaraknt Madani dan Lestari

reallocation of the labor force to more productive sectors as Indonesia develops. Finally, although public institutions are better assessed than in the past, corruption remains widespread at all levels of the administration, and bureaucracy is still too burdensome. Greater transparency and predictability are needed in the policy-making process. This situation also makes it more difficult to achieve the improvements needed in the areas described above. Growth will not make any of these concerns disappear and could exacerbate some of them. Growth may generate new needs and set new standards among businesses, investors, and consumers, making a situation deemed satisfactory today not acceptable in a few years. It could raise the expectations of the population at large, those of Indonesia's youth, its workers, its consumers, and the many people who have yet to benefit from the economy's growth. Indonesia must therefore rise to the challenge.

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