The Correlation between Corruption and Economic Growth in the Indonesian Model

Custom Student Mr. Teacher ENG 1001-04 25 September 2016

The Correlation between Corruption and Economic Growth in the Indonesian Model

The success of any economy is often based on the political stability and the presence of corruption of any country. The government policies that are formulated by any countries leaders or economic advisers are watched and followed closely by every investor. The Economic future of a country is dictated by trading partners that are established and relationships between countries and economic blocs. This paper therefore seeks to show the close relationship between economic progress and the corruption in a country.

The Indonesian model will be utilized because it allows for a direct examination of the impact given the relatively small size of the country. The main question therefore that this study seeks to address is this. What is the impact of the corruption of a country on the country’s economic growth? While the answer is an unequivocal yes, this study will address this question by presenting clear examples of political instability and the resulting effect that it has had on the economy from a macroeconomic perspective.

It will outline the main causes of economic stagnation in relation to the political instability of a country. It will also provide policy suggestions on ways to improve the economy by improving reliability, transparency and accountability. Background: Before entering into a discussion into the economic problem of Indonesia in realtion to corruption, it is important to first give a background on the Indonesian economy. There was so much hype about the potential of the Indonesian Economy that some analyst even dared to label the country as the next Tiger economy of South East Asia (Asean Declaration).

When the Asian financial crisis occurred none of the so-called NIC’s and tigers were able to protect themselves. Over the next few months, the currencies of the countries in the South East Asian region would weaken and so would their respective economic markets. Recovering from this, Indonesia was able to post modest growths since the crisis and Indonesia’s governance has slowly been progressing towards a positive direction since the fall of President Suharto based on institutional indexes. The World Bank defines governance: “as the set of traditions and institutions by which authority in a country is exercised.

This includes (1) the process by which governments are selected, monitored and replaced, (2) the capacity of the government to effectively formulate and implement sound policies, and (3) the respect of citizens and the state for the institutions that govern economic and social interactions among them. ” (Government Matters 2008) Embedded in this are institutions such as rule of law, freedom from corruption, government effectiveness etc. To trace the development of this progress the Worldwide Governance Index is used by the World Bank, the Corruption Perception Index, and the Global Corruption Barometer by Transparency International.

The Indonesian model has been traditionally and intrinsically linked with corruption. Since the era of Suharto, it is commonly accepted that corruption occurs as a matter of fact and this has had an adverse impact on the Indonesian economy. It has been shown that bad governance or widespread corruption will lead to lower GDP growth rates. Before the Asian financial crisis Indonesia was growing at around 7. 8% in 1996 but Indonesia struggled to enjoy sustained GDP growth under Suharto.

In 1998, Indonesia was in a severe recession that brought negative growth rates of about -13. % and while Indonesia has since slowly been recovering despite setbacks such as terrorist attacks and natural disasters post-Suharto Indonesia is struggling with ineffective governance that prevent it from fully achieving its potential. Political stability, government effectiveness, regulatory quality, and rule of law have remained the same or even have gotten worse. While most of these institutions have rebounded from their lows, it has still not progressed towards the level seen during the Suharto era. The political stability index has dropped from 21. 6 in 1996 to 14. 9 in 2007.

The political stability in Indonesia saw a drastic decline between 2000 and 2003 because of successive terrorist attacks. The government effectiveness index has dropped from 64. 5 in 1996 to 41. 7 in 2007. The rule of law index has also seen drop from 39. 5 in 1996 to 27. 1 in 2007. All in all it is evident that Indonesia has struggled through the reformation era and as these results show is in danger of sinking back into the lows that existed during the time of Suharto. Politics and Economics There is a very strong and close correlation between political atmosphere and economics.

As a function of government instability, corruption is a good indicator of the economic difficulties that a country is undergoing. One of the main problems of the Indonesian economy however lies in the governing body. A very unstable political structure is capable of frightening investors away and preventing the injection of much needed capital (Junker 173). Thus this could also bring the depreciation of the local currency and cause an inflation of prices in the products with high import contents. The present governing body is a symbol of that instability.

Military servicemen turned politicians who are running the country do not inspire investors to bring in capital and reinvest in Indonesia. This decrease in the infusion of foreign capital into the country is what is causing the ongoing economic crisis that Indonesia is experiencing right now. Investors are being repulsed by all the red tape and bureaucracy that one has to go through to do business here in Indonesia. Basically, this suggests inefficiency in the implementation of fiscal and monetary policies due to the incapability of the present government leaders. Needless to say there is a strong link between politics and economics.

It cannot be denied that a weak governing body rocked by instability causes a poor economic performance as well (Boyce 129). This study will attempt to shed light on the strong link between politics and economics as well as provide an example as to the effect corruption and its direct and evident effect on the Indonesian Economy. The selection of Indonesia as the basis for this study is due to the fact that this country has recently undergone many political changes over the past 30 years and given the relatively small size of the country, the economic effects of political changes can easily be identified.

Suharto’s unique system of rule allowed sustained widespread corruption to go hand in hand with lead to greater political instability, government ineffectiveness, and disappearance of the rule of law. Indonesia became economically stagnant in an environment of political turbulence, filled with Islamic parties, the nationalists and the Communists. At a time where there was a need for a clear national leadership, Indonesia was under “chronic instability typified by a succession of different governments” (Snape 591).

This paved the way for Sukarno to pursue a more authoritarian government and ultimately sealed by him reinstating the “1945 constitution which vests all power and responsibility in the hands of the President” (Snape 591). Suharto came into power in 1965 in the aftermath of Indonesia’s failed attempts at democracy. Schwarz believed that the failures of parliamentary democracy in the 1950s and Sukarno’s Guided Democracy “convinced many in the military of the need for a much stronger government” (Schwarz 28).

The New Orders patrimonial style of rule has been perpetuated by Suharto’s need to “secure his position by enabling key figures in the bureaucracy and the military to benefit economically from their loyalty” (Snape 590). Suharto believed that the “dangerous cocktail of different loyalties” (Snape 591) was dangerous to the political stability of the country. The New Order believed in a strong state that had control over social and political forces was the “essential condition of present-day industrialization” (Schwarz 29).

In a system where one party always wins and there is a suppression of voice and transparency corruption will ultimately thrive. This is evident in the indexes that clearly show a positive correlation between freedom from corruption and voice and accountability. Through the centralization of the regime, Suharto was able to implement an intricate system of patronage. Suharto was able to maintain his position at the apex of power not so much through the “power of the gun, but rather [through] the power of the purse” (Vatikiotis 592).

One cannot deny the political wizardry of Suharto in his ability to effectively use his system of patronage in all levels of society and for so long. He made sure that the benefits of what Harold Crouch calls his system ‘patrimonialism’ “were dispersed widely through the pyramid, so that the bureaucrats at all levels had a stake in the system” (Snape 592). Suharto had inherited a country that was in economic backwardness, and saw it essential to put economic development and growth as the highest priority for his regime.

It was essential not only for the legitimacy of his regime, but also to sustain such a system of institutionalized corruption. As Schwarz puts it “political order and economic development were seen as two sides of the same coin” (Schwarz 29). Continuity Problem The Indonesian government is suffering from a continuity problem which is definitely affecting the economic state of the country. The projects of past administrations and of government officials are almost never allowed its full maturity time because of the elections and military coups (Montinola 134).

When a new leader or official comes into office, there are many projects which are put into effect, many of these long-term projects. The problem here is that when election time comes and that senator or official loses, another project is put into effect and the old project is discarded without it being able to be effective. There is no doubt that the Indonesian politicians have many brilliant plans and projects but the problem is that these are never allowed to be effective because of the constant changes. This in turn can have a very detrimental effect on the economy because nothing is really actually accomplished.

Instead, with the replacement in government officials, there is a system of corruption that is created because the new leaders will not respect the previous arrangements and contracts. They are also looking out for themselves which requires a whole other “transaction cost. ” Evidence of this can be seen all over the country. Many irrigation projects and infrastructure projects in the rural areas have been left abandoned because of this. It is not the funding which is the problem here because these projects have remained unfinished for many terms already (Mendoza 7).

The solution to this problem lies in ensuring continuity in the projects and allowing them to mature to become effective in aiding the economy. Therefore, the importance of good leadership and policy-making must be stressed because this is really the key in alleviating our present economic crisis. A good and able leader capable to enforcing the practice of good governance by lessening cases of graft and corruption and bureaucracy is a must if the economy is to be revitalized.

Negative Effect of Military Control It is often said that a military turned politician is one of the most dangerous entities to lead government because it leads to abuses and corruption. Through the general enforcement of political inactivity and the backing of the military, Suharto had enforced a rule of law. Mcleod states that “to say that the rule of law under Suharto was weak would be a gross understatement” (Mcleod 102). This led many to point out that the clear ineffectiveness of law enforcement and the courts would lead to a weak rule of law and result in economic collapse. The police and the courts were in essence an extension of Suharto’s system of control.

And the lack of a legitimate formal law, paved the way for “informal arbitration, with Suharto and his civil service and military franchisees playing the role of arbitrators and enforcers” (Mcleod 102). It was a system that worked and essentially replaced the traditional rule of law with Suharto himself. Negative political stability was the prime product of the armed forces. Indonesia’s armed forces “are the only military organization in the region with a solid legal and ideological basis for their role in civilian affairs” yet are still regarded as oppressive.

This ‘dual function’ allowed Suharto to extend total military control over the instruments of the state. The perception that Suharto would once again “unglove the iron fist of the military” (Mcleod 103) kept everyone more or less in check and paved the way for greater abuses by those in power. Addressing the Problem of the impact of corruption in the Indonesian Model The direct solution for the government is to immediately quell the protests and establish a firm control over the opposition.

If the government is able to stop these protests in a very brief period then it will signal investors that the country is under a very capable and stable leadership. Sensing that there is a more stable government in the country, investors, whose injection of capital into the economy will aid the market, will now be more confident to reinvest in the country (Montinola 131). This is not the most effective solution to the problem however as its effects are only temporary. In order to encourage investors to bring capital back into Indonesia, there is also a need to lessen bureaucracy and provide incentives for investors.

As it is, the cost of production is greatly increased by the hidden expenses caused by all the red tape. These hidden expenses which do not show up in accounting books come in the form of bribes and so called donations (Li Choy 14). These expenses have to be added to the final cost of the products that are produced. In effect, the consumers are the ones who carry this burden. Thus if these transaction costs such as bribes can be prevented it can mean that more investors can be encouraged to put in money into the economy. It must be remembered that corruption will also place downward pressure on tax revenue and hence on the governments budget.

As Prawiro writes: “It was well known that a job as a tax collector was one of the surest roads to richest in the government bureaucracy [of Indonesia]” (Snape 595). In Indonesia, corruption has led to widespread tax evasion and improper use of discretionary tax exemptions. The lack of tax revenue will affect the level of public expenditure which in effect leads to economic stagnation as the national budget struggles to find the funds necessary to spur economic growth. Corruption will also lead to inferior public infrastructure and services as public officials try to cut cost and ‘pocket’ the remaining amount.

Mauro believes that corruption will also affect “the composition of government expenditure” (Mauro 88). Officials will spend on projects that will have greater corruption opportunities. Kuncoro also further illustratates that many of the new laws enacted “are designed to create artificial complementary regulations” (Kuncoro 14). Kuncoro believes that “the list of new complementary permits may continue to increase as corruption opportunities stimulate the entry of other permit issuers armed with new regulations” (Kuncoro 14).

This will further deteriorate business conditions in Indonesia, as investors are constantly faced with new obstacles that need to be ‘paid off’. Conclusion: As mentioned earlier, the problem with the Indonesian economy can be intrinsically linked with political situation in the present. There is irrefutable evidence that it is the present political instability and corruption that is one of the main causes of the Indonesian economic crisis. As the rest of the countries affected by the East Asian Crisis begin to pick up the pieces and move on, Indonesia is simply left arguing amongst each other who will begin picking the up pieces.

In the present situation, there is simply too much politicking and finger pointing that no job of trying to revitalize the economy can ever be put into effect. Also put into consideration the fact that the nation never seems to learn from the mistakes that they make and continually continue to vote for corrupt politicians and militant leaders, it seems that Indonesia might just be a hopeless case. The solution to this problem lies within each and every one of citizen. Though it is cliche it still holds a certain amount of truth within it. “It is better to light one candle than to curse the darkness. ”


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  • University/College: University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 25 September 2016

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