Governance and poverty reduction : evidence from newly decentralized Indonesia

TitleGovernance and poverty reduction : evidence from newly decentralized Indonesia
Publication TypeBook Chapter
Year of Publication2003
AuthorsSumarto S, Suryahadi A, Arifianto A, Shimomura Y
Book TitleThe role of governance in Asia
PublisherInstitute of Southeast Asian Studies etc.
Call NumberM 2004 A 2582
Keywordscase studies, corruption, decentralization, Economics, Excerpta Indonesica, GOVERNANCE, INDONESIA, poverty, poverty reduction, statistical analysis

This paper analyses the impact of bad governance on poverty reduction in Indonesia. First, the authors review theories of governance and its links with poverty reduction and corruption. Several international studies show a positive correlation between good governance and economic and social indicators such as income distribution equality, income growth, child mortality, and school drop-out rates. There is also a clear link between decentralization and good governance. The authors present a number of cases which illustrate how bad governance has hurt the Indonesian poor, both before and after deregulation and decentralization. During the New Order regime, the proliferation of taxes and levies and a plethora of regulations intended to create de facto monopolies for companies and instutions owned or controlled by members of the presidential family led to artificially low prices for oranges in West Kalimantan, cocoa, cashew nuts, and cloves in South Sulawesi, and exorbitant costs for the inter-island livestock trade in Nusa Tenggara Timur, among many other cases. After Soeharto's fall, reforms intended to remove such market distortions initially had some success, but the new decentralization and regional autonomy policies soon introduced new distortions created by the regional governments. The authors also attempt a more systematic analysis of how governance affects poverty reduction by means of a multivariate regression analysis performed on data derived from three main sources: a large-scale survey on the implementation of regional autonomy commissioned by KADIN (the Indonesian Chamber of Commerce); a survey conducted by LPEM (Institute for Social and Economic Research) on bureaucracy and the cost of doing business; and official poverty statistics from the BPS (Central Bureau of Statistics). The authors conclude that the adverse effects of bad governance on the poor are substantial and undermine efforts to reduce poverty. The quantitative analysis provides indications that regions which practice relatively good governance have faster rates of poverty reduction, and vice versa. Clear guidelines and incentives as well as civil society initiatives will be needed to combat bad governance in the future.