This document outlines a strategy to combat corruption in Indonesia based on a diagnosis of the country's challenges. It recommends a multi-pronged approach including (1) improving structures, leadership, and incentives; (2) a whole-of-government collaboration; (3) involving business and citizens; (4) prevention initiatives; (5) subverting entrenched corruption; and (6) emphasizing the moral arguments against corruption. Specific initiatives highlighted include strengthening the Corruption Eradication Commission and implementing integrity pacts between government and private sector.

1. Diagnosis  Initiatives  Strategy Prof. Robert Klitgaard Paramadina University, 6 July 2011

2. Overview The Costs of Corruption Diagnosing Indonesia Initiatives Strategy

3. 1. The Costs of Corruption Corruption once called “the grease and the glue” (1965) Contrary evidence mounts Case studies Econometric studies Bottom line: “Corruption is a primary obstacle to development” (World Bank).

4. The Kinds of Costs How corruption undermines development: Economic costs (distorted incentives) Social costs (inequity and injustice) Political costs (undercuts popular rule)

6. Policy “Value Chain” Measures of corruption and good government. But what specifically improves those measures? Missing links from measures back to specific initiatives… Once we have a list of initiatives, we need a strategy. Diagnosis  Initiatives Strategy

7. Overview The Costs of Corruption Diagnosing Indonesia Initiatives Strategy

8. Progress in Governance Global Competitiveness Report 2010-2011 Some good news about the Indonesia Compared with 139 countries of the world

9. Overall Competitiveness 2010-11: 44 2009-10: 54 2008-9: 55 2005: 69

10. Capacity for Innovation Indonesia 30 in world Equal to Ireland Better than Spain, Hong Kong

11. Pay and Productivity Indonesia 20 in world Equal to Czech Republic Better than Denmark, Germany

12. Control of International Distribution Indonesia 33 in world Equal to Belgium Better than China, Italy

13. Buyer Sophistication Indonesia 35 in world Equal to Czech Republic Better than India, Brazil, Spain

14. Breadth of Value Chain Indonesia 26 in world Equal to Spain Better than Norway, Canada, India, China

15. Favoritism in Decisions by Public Officials Indonesia 28 in world Equal to Belgium Better than France, Taiwan, Israel

16. Wastefulness of Gov’t Spending Indonesia 30 in world Equal to Austria Better than Germany, Canada

17. Burden of Gov’t Regulation Indonesia 36 in world Equal to Taiwan Better than Chile, Austria, USA

18. Equal to or Better than… Norway, Spain, Austria, France, Canada, Iceland, Singapore, Italy, Belgium, Hong Kong, Ireland, Czech Republic, Denmark, Germany, USA … Not to mention China, Brazil, India, Korea … VIVA INDONESIA!!

19. Equal to or Better than:

20. Per Capita GDP of Indonesia? ?

21. Per Capita GDP of Indonesia? $2329 Rank # 100 in world (Paraguay, Sri Lanka)

22. Why $2329 and Not $32,329?

23. Not Macroeconomics Indonesia (44th) posts an impressive gain of 10 places, mainly driven by a healthier macroeconomic environment... Indonesia managed to maintain a relatively healthy macroeconomic environment (35th, up 17) throughout the crisis. While most other countries saw their budget deficits surge, Indonesia kept its deficit under control. Public debt remains low at 31 percent of GDP, and savings rose to 33 percent of GDP. In addition, inflation in 2009 slowed down to 4.8 percent, half the rate of 2008. —Global Competitiveness Report 2010-11

24. One Hypothesis: Institutions Global Competitiveness Report 2010-2011 Some bad news about the Indonesia Compared with 139 countries around the world

25. Irregular Payments and Bribes Indonesia 95 in world Equal to Lesotho Worse than Senegal, Bulgaria, Mozambique

26. Transparency of Gov’t Policymaking Indonesia 91 in world Equal to Mauritania, Guyana Worse than Honduras, Mali

27. Burden of Customs Procedures Indonesia 89 in world Equal to Malawi Worse than Albania, Zambia

28. Legal Rights ProtectingBorrowers and Lenders Indonesia 103 in world Equal to Egypt, Senegal Worse than Angola, Nepal, Zimbabwe

29. Time to Start a Business Indonesia 121 in world Equal to Bosnia Worse than Bangladesh, Bolivia, Nigeria

30. Organized Crime Indonesia 98 in world Equal to Uganda Worse than Cambodia, Albania, Cameroon

31. Reliability of Police Indonesia 80 in world Equal to Egypt Worse than Zambia, Ghana

32. Ethical Behavior of Firms Indonesia 99 in world Equal to Benin Worse than Cambodia, Syria, Guatemala

33. Equal to or Worse than… Cambodia, Senegal, Guatemala, Syria, Mongolia, Zambia, Senegal, Nigeria, Bangladesh, Bolivia, Burkina Faso, Uganda, Zimbabwe, El Salvador, Benin, Bulgaria … OH NO INDONESIA!!

34. Per Capita GDP of Indonesia $2320 Median of these other countries: < $1000.

36. Other Evidence (3) In 1997, corruption cost Indonesia 63% of GDP Axel Dreheret al., “Corruption Around the World: Evidence from a Structural Model,” Journal of Comparative Economics, 2007

37. Overview The Costs of Corruption Diagnosing Indonesia Initiatives Strategy

38. From Diagnosis to Initiatives The analogy from health Diagnostic information does not lead automatically to prescriptions Corruption prevalence is not corruption seriousness. The benefits and costs of reform initiatives need to be calculated.

41. World Class KPK Honesty shops

42. Initiatives Look Excellent Laws: INPRES 5/2004, UNCAC 7/2006 National action plan on corruption (RAN/PK) Initiatives include: KPK, wealth declaration, performance targets, quality of public services, procurement reforms, simplicity, corruption prevention studies, GCG, anti-corruption education (including “honesty shops”), e-government, islands of integrity, one-stop service, and more.

43. KPK Report “Officials still behave in a corrupt manner.” “Initiatives for giving of incentives also come from users.” Level of freedom of information about services still low. Too little transparency about time and costs of services. Channels for complaints are not properly administered. “No serious corruption prevention efforts detected.”

44. Regional Variation, 2008 13 cities and regencies have all indicators above average: Ex.: Yogyakarta, Banda Aceh, Padang, Gorontalo… Ex.: Jepara, Magelang, Barito Kuala and Barito Utara… 12 have all indicators below average: Ex.: Bandung, Pontianek, Tanjung Pinang… Ex.: Sumenep, Sambas, Bandung…

45. Institutional Variation, 2007 Top 9 agencies include: BKN (State Employees Board), Home Affairs, PT Pertani, Cooperatives and SMEs, National Education Bottom 9 agencies include: Ex.: Supreme Court, Religious Affairs, Transportation, Manpower and Transmigration, Police, BPN (National Land Agency), Law and Human Rights Worst 5 organizations on “experience integrity score”: Customs, Penitentiary, No. Jakarta court, W. Jakarta court, KPPN (Treasury)

46. Learn from Success Whyand how are some agencies, some cities and some businesses doing better? From generalities to checklists. An example from Peru. Scorecards. Awards. Case studies and checklists. Training and technical assistance.

47. Overview The Costs of Corruption Diagnosing Indonesia Initiatives Strategy

48. 4. Strategy Beyond a list of initiatives: Colombia 2011. Fit with other policies, threats, sources of support. Sequence and priority. Who does what. What should President focus upon? Public-private-citizen collaboration.

50. Prevention 2.0Subverting corruption The role of morality

51. a) Structures, Leadership, and Incentives Corruption is an economic crime. A crime of calculation: risks and rewards Corruption = Monopoly + Discretion - Accountability C = M + D – A

53. a) Structure, Leadership, and Incentives The principle of the big fish We need leaders who are brilliant in prevention, ruthless in prosecution, and exemplary in morality.

54. a) Structures, Leadership, and Incentives “Incentive myopia” If we pay peanuts, we get monkeys. Public sector pay levels  80% of private sector Beyond levels, incentives linked to good performance (and penalties linked to bad performance)

56. Prevention 2.0Subverting corruption The role of morality

57. b) A Whole-Government Approach Not just one agency. Many government departments must collaborate in the fight against corruption. Leadership meansenabling creative collaboration.

59. Prevention 2.0Subverting corruption The role of morality

63. Prevention 2.0Subverting corruption The role of morality

64. d) Subverting Corruption The analogy from disease: prevention vs. cure If we have the disease of systemic corruption, prevention is not enough. We need to subvert corruption, using ideas from the war on organized crime. An example: road building in Colombia New technologies will help, especially social networking and information sharing

66. Prevention 2.0Subverting corruption The role of morality

67. John T. Noonan’s Prediction “As slavery was once a way of life and now has become obsolete and incomprehensible, so the practice of bribery…will become obsolete.” Bribes, New York: Macmillan, 1985

68. Why? Noonan argues that bribery will continue to be morally condemned: Bribery is shameful everywhere in the world. Bribery is a sell out to the rich. Bribery is a betrayal of trust…which is a precious necessity of every social enterprise. Bribery violates a divine paradigm.

69. e) The Role of Morality In addition to structure, leadership, and incentives; whole-government reforms; involving business and citizens; and subverting corruption We must declare that corruption is immoral and we’re not going to allow it any more

70. Indonesia’s Successful Future Technological revolutions The rise of the South The design economy To succeed, Indonesia needs even more progress against corruption. Better diagnoses linked with practical initiatives, embedded in a strategy that includes politics and public-private-citizen collaboration