This paper describes and analyses the challenges encountered in attempting to reform public sector accounting in Indonesia, the main objective of which is to combat corruption and thus help improve governance. Our observations suggest that this reform has been seriously hindered by a lack of staff with adequate accounting skills — a problem exacerbated by the decision to continue to prepare old‐style cash‐based reports alongside the new accrual‐based reports. Our key contribution is to demonstrate the danger of rushing to copy public sector financial management techniques from quite different country contexts, especially when there are significant differences of opinion as to the appropriate design of these reforms among the influential policy‐making agencies.
TTndonesia has a reputation as one of the most corrupt countries in the world I (Transparency International, 1999). Unlike many others that are regarded as highly corrupt, however, this was not incompatible with rapid economic progress over three decades, and Soeharto's New Order regime clearly brought considerable material benefits to the majority of the population. Some argue that endemic corruption was unsustainable and that it was responsible for the unravelling that has been seen since mid 1997, but while the nature of government-business relationships undoubtedly contributed in important ways to the crisis, the mechanisms by which this occurred have yet to be adequately described. The present paper attempts to fill this gap.
Soeharto era concern about corruption was deflected by the establishment of toothless anti-corruption committees, and by suppression of anti-corruption activism and media comment. With Soeharto's demise, activists began to publicise their concerns more openly - at first speaking in general terms, but later making increasingly specific allegations. The sporadic activism of the Soeharto years was consolidated, first through cooperative action among similarly motivated informal groups, and later through establishment of formal civil society organisations (CSOs) intent on rolling back corruption. The CSOs have played a key role in pushing for new laws and institutions to help eradicate corruption, and many corrupt officials have been imprisoned. This paper finds little evidence, however, that corruption has declined significantly. It argues that further progress depends on CSOs gaining a better understanding of the underlying causes of corruption, and that these are to be found in public sector personnel management practices.
Soeharto used the Indonesian bureaucracy to generate rents that could be harvested by 'insider' firms, while also encouraging it to extort money from 'outsider' firms and individuals. This necessitated incentives that would ensure strong loyalty and minimize internal opposition. Government entities were provided with insufficient budget funding to cover their costs, and their officials were expected to generate cash from illegal activities, making public sector employees financially dependent on corruption. Any employee who opposed this system could expect to be restricted to earning no more than the pitifully low formal salary entitlement. The system therefore became strongly self-reinforcing.
Indonesia's depreciation vastly exceeded that of all other countries hit by the Asian crisis. Indonesia also experienced far higher inflation. This paper argues that there is a close medium to long-term relationship between money growth and inflation in Indonesia, and that this has not been greatly disturbed by the crisis. It argues that the country's disappointing performance in relation to maintaining the value of the rupiah can be explained by the central bank's failure to sterilise the monetary impact on base money of its last-resort lending to the banks. The fundamental lesson is that Bank Indonesia would be well advised to adopt slow and steady growth of base money as the nominal anchor for monetary policy, now that the pre-crisis policy of slow and steady depreciation of the rupiah has been abandoned.
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