The Many Faces of Public Management Reform in the Asia-Pacific Region (Research in Public Policy Analysis and Management)

THE MANY FACES OF PUBLIC MANAGEMENT REFORM IN THE ASIA-PACIFIC REGION RESEARCH IN PUBLIC POLICY ANALYSIS AND MANAGEME...

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THE MANY FACES OF PUBLIC MANAGEMENT REFORM IN THE ASIA-PACIFIC REGION

RESEARCH IN PUBLIC POLICY ANALYSIS AND MANAGEMENT Series Editor: Lawrence R. Jones Recent Volumes: Volume 1–9:

Research in Public Policy Analysis and Management

Volume 10:

Public Management: Institutional Renewal for the Twenty-First Century – Lawrence R. Jones and Fred Thompson

Volume 11A & B:

Learning from International Public Management Reform – Edited by Lawrence R Jones, James Guthrie and Peter Steane

Volume 12:

The Transformative Power of Dialogue – Edited by Nancy C. Roberts

Volume 13:

Strategies for Public Management Reform – Edited by Lawrence R. Jones, Kuno Schedler and Riccardo Mussari

Volume 14:

Public Ethics and Governance: Standards and Practices in Comparative Perspective – Edited by Denis Saint-Martin and Fred Thompson

Volume 15:

Comparative Public Administration: The Essential Readings – Edited by Eric E. Otenyo and Nancy S. Lind

Volume 16:

Cultural Aspects of Public Management Reform – Edited by Kuno Schedler and Isabella Proeller

Volume 17:

Comparative Governance Reform in Asia: Democracy, Corruption, and Government Trust – Edited by Bidhya Bowornwathana and Clay Wescott

RESEARCH IN PUBLIC POLICY ANALYSIS AND MANAGEMENT VOLUME 18

THE MANY FACES OF PUBLIC MANAGEMENT REFORM IN THE ASIA-PACIFIC REGION EDITED BY

CLAY WESCOTT Asia Pacific Governance Institute, Washington, DC, USA

BIDHYA BOWORNWATHANA Chulalongkorn University, Bangkok, Thailand

LAWRENCE R. JONES Naval Postgraduate School, Monterey, California, USA

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2009 Copyright r 2009 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84950-639-7 ISSN: 0732-1317 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

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CORRUPTION, ANTI-CORRUPTION POLICY AND MANAGEMENT REFORM L. R. Jones, Clay Wescott and Bidhya Bowornwathana

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PART I: CORRUPTION AND ANTI-CORRUPTION POLICY REFORM COMBATING CORRUPTION IN THE ASIA-PACIFIC COUNTRIES: WHAT DO WE KNOW AND WHAT NEEDS TO BE DONE? Jon S. T. Quah

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CORRUPTION IN INDIA: CAN IT BE CONTROLLED? Krishna K. Tummala

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THE POLITICS OF COMBATING CORRUPTION WHEN BIG BUSINESSMEN ARE AT THE HELM: LESSONS FROM THAKSIN AND BERLUSCONI Bidhya Bowornwathana

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COMPETITION AND TRANSPARENCY IN GOVERNMENT PROCUREMENT IN SOUTHEAST ASIA David S. Jones

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CONTENTS

WHY DID ANTICORRUPTION POLICY FAIL? IMPLEMENTATION OF THE ANTICORRUPTION POLICY OF THE AUTHORITARIAN NEW ORDER REGIME IN INDONESIA, 1971–1998 Roby Arya Brata

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PART II: PUBLIC FINANCIAL MANAGEMENT REFORMS ASSESSING WORLD BANK SUPPORT FOR PUBLIC FINANCIAL MANAGEMENT AND PROCUREMENT Clay Wescott

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UNLOCKING CAPACITY AND REVISITING POLITICAL WILL: CAMBODIA’S PUBLIC FINANCIAL MANAGEMENT REFORMS, 2002–2007 Robert Taliercio

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MAKING INDONESIA’S BUDGET DECENTRALIZATION WORK: THE CHALLENGE OF LINKING PLANNING AND BUDGETING AT THE LOCAL LEVEL Geoff Dixon and Danya Hakim

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THE CAUSAL DYNAMIC EFFECTS OF A PERFORMANCE-BASED BUDGET ON THAI PUBLIC SPENDING: A REEXAMINATION Arwiphawee Srithongrung

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PART III: PUBLIC MANAGEMENT REFORMS WITH EMPHASIS ON PERFORMANCE AND RESULTS MANAGING PERFORMANCE IN A CONTEXT OF POLITICAL CLIENTELISM: THE CASE OF THAILAND Suchitra Punyaratabandhu and Daniel H. Unger

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Contents

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DO LEADERSHIP AND MANAGEMENT FOR RESULTS MATTER? A CASE STUDY OF LOCAL E-GOVERNMENT PERFORMANCE IN SOUTH KOREA Soonhee Kim

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COULD A DECENTRALIZED HUMAN RESOURCE MANAGEMENT SYSTEM IN CAMBODIA STRENGTHEN PERFORMANCE AND ACCOUNTABILITY? Eng Netra and David Craig

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ASSESSING THE IMPACT OF CRISES ON THE PERFORMANCE AND GOVERNANCE OF ASIAN COUNTRIES Gene A. Brewer, Yujin Choi and Richard M. Walker

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LIST OF CONTRIBUTORS Bidhya Bowornwathana

Department of Public Administration, Faculty of Political Science, Chulalongkorn University, Bangkok, Thailand

Roby Arya Brata

The Office of the President of Indonesia, Presidential Working Unit for Reform and Program Management, Jawa Barat, Republic of Indonesia

Gene A. Brewer

Department of Public Administration and Policy, University of Georgia, Athens, GA, USA

Yujin Choi

Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY, USA

David Craig

University of Auckland, Dunedin, New Zealand

Geoff Dixon

Department of Finance, Government of Australia (formerly), and consultant on Budget Reform in the Asia and Africa Regions, Gundaroo, NSW, Australia

Danya Hakim

GFMRAP, Jakarta, Indonesia; Bangkok, Thailand

David S. Jones

Faculty of Business, Economics and Policy Studies, Department of Public Policy and Administration, University of Brunei, Brunei

L. R. Jones

Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, CA, USA ix

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LIST OF CONTRIBUTORS

Soonhee Kim

Maxwell School of Citizenship and Public Affairs, Syracuse University, Department of Public Administration, Syracuse, NY, USA

Eng Netra

Cambodia Development Resource Institute (CDRI), Phnom Penh, Cambodia

Suchitra Punyaratabandhu

School of Public Administration, National Institute of Development Administration, Bangkok, Thailand

Jon S. T. Quah

Anti-Corruption Consultant, Singapore

Arwiphawee Srithongrung

School of Public Administration, University of Nebraska at Omaha, Omaha, NE, USA

Robert Taliercio

Poverty Reduction and Economic Management, Europe and Central Asia, World Bank, Washington, DC, USA

Krishna K. Tummala

Graduate Program in Public Administration, Kansas State University, Manhattan, KS, USA

Daniel H. Unger

Department of Political Science, Northern Illinois University, DeKalb, IL, USA

Richard M. Walker

Kadoorie Institute, University of Hong Kong, Hong Kong; Cardiff University, Wales, UK

Clay Wescott

Asia-Pacific Governance Institute, Washington, DC; World Bank, Washington, DC, USA; Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, NJ, USA

CHAPTER 1 CORRUPTION, ANTI-CORRUPTION POLICY AND MANAGEMENT REFORM L. R. Jones, Clay Wescott and Bidhya Bowornwathana INTRODUCTION During the last decade, globalization and democratization have been the major forces that helped transform the structures, functions and processes of Asian public sectors. These transformation efforts of Asian countries vary considerably depending on local context, and have met with different degrees of success. Some countries experienced smooth transformations. For others, the reform process has been more volatile. These issues were explored at a conference 7–9 July 2008 in Bangkok, Thailand, hosted by the Faculty of Political Science, Chulalongkorn University, and co-sponsored by the International Public Management Network, the Asia-Pacific Governance Institute, and Thailand Democracy Watch. This book presents some of the works contributed by participating scholars and practitioners at the conference. The contents fall into three categories: corruption and anticorruption initiatives, public financial management (PFM) and public management reforms with emphasis on performance and results.

The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 1–11 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018003

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CORRUPTION AND ANTI-CORRUPTION INITIATIVES Chapters 2–6 in this volume focus on corruption. The second chapter analyzes approaches to combating corruption in the region. Professor Jon S. T. Quah reviews the literature to identify the major strategies adopted by Asia-Pacific countries to combat corruption. He goes on to evaluate these anti-corruption strategies to identify their strengths and weaknesses and to suggest how their weaknesses can be rectified. Quah explains that corruption is a serious problem in the Asia-Pacific region, judging from the rankings and scores of the 33 Asia-Pacific countries included in the Transparency International’s Corruption Perceptions Index of 2007. The governments in these countries have initiated various anti-corruption measures since the 1950s but, with few exceptions, they have not been effective in curbing corruption. In 1968, the Swedish economist, Gunnar Myrdal, attributed the lack of research on corruption in South Asian countries to the existing research taboo on corruption. Fortunately, this research taboo on corruption in the Asia-Pacific countries no longer exists and this is manifested in the tremendous increase in the number of country studies on corruption since the 1990s. Indeed, in contrast to the dearth of research on corruption in the 1960s, research on corruption in these countries has mushroomed into a growth industry during the last two decades. Given the vast literature on corruption in the Asia-Pacific countries, the purpose of Quah’s work is two-fold. First, it reviews the literature to identify the major strategies adopted by the Asia-Pacific countries to combat corruption. Second, the chapter provides an evaluation of these anti-corruption strategies to identify their strengths and weaknesses and to enhance their effectiveness by suggesting how their weaknesses can be rectified. Professor Krishna K. Tummala takes on the specific case of India in Chapter 3, assessing the legal and administrative provisions to combat corruption, and the limited results to date due mainly to the lack of political will to curb corruption, and the cultural context of social tolerance and easy forgiveness which render this as a common and largely accepted experience. Despite some helpful developments such as the newly conferred freedom of information, active investigative media and engaged civic groups, reasons for optimism appear to be minimal. Tummala’s chapter deals with the ubiquitous problem of corruption in India among public officials – both elected and appointed. By analyzing legal and administrative provisions to combat corruption, he indicates how futile the attempts so far have been. Among the plethora of reasons for failure he concludes that the more

Corruption, Anti-corruption Policy and Management Reform

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important ones are the lack of political will to curb corruption, and more importantly the cultural context of social tolerance and easy forgiveness which render this as a common and largely accepted experience. Any outrage that is there is largely confined to rhetoric, not action. Despite some helpful developments such as newly conferred freedom of information, active investigative media and engaged civic groups, reasons for optimism appear to be minimal. Tummala concludes that what is needed is a more serious effort to develop sound norms by changing the societal culture, which places the premium for change on the shoulders of India’s political parties. In Chapter 4, Bidhya Bowornwathana explores what happens to combating corruption when big businessmen are at the helm. In this work, the author argues that the success in combating corruption of big businessmen in power correlates negatively with the following conditions: the ability of big businessmen to become the most powerful super patron in politics; the ability of the big businessmen to capture the state; the ability of big businessmen in power to handle conflict of interest accusations; the ability of big businessmen to take advantage of government power to expand their business empires; and the ability of big businessmen to stage a political recovery after suffering from exposure of corruption in which they have been involved. The author uses the experiences of two big businessmen, Thaksin Sinawatra in Thailand and Silvio Berlusconi in Italy, to illustrate his arguments. In Chapter 5, David S. Jones assesses government procurement of goods, services and civic works, which in most developing countries can comprise up to 50% of pubic expenditures. Jones demonstrates that government procurement is an important dimension of governance given its impact on the standards of government administration and public services. He notes that government procurement in many Southeast Asian states has been marked by significant failings, amongst which are the limitations imposed on both international and domestic competition and insufficient transparency of the procurement process. Both the curtailment of competition and the lack of transparency are reflected in the legal framework governing procurement and also in the everyday purchasing practices which government procurement entities follow. In the first part, the chapter examines the different ways governments of Southeast Asian states (with the exception of Singapore) have limited competition in procurement. In the second part, it analyzes how they have sought to restrict transparency in the procurement process. Also noted are initial steps which have been taken in some nations to promote competition and transparency.

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In conclusion, the chapter considers the underlying political, economic and cultural reasons that explain why restrictions on competition and transparency have been maintained and how they are related to corrupt practices. Chapter 6 by Roby Arya Brata indicates that Indonesia has a very poor international reputation in the areas of corruption and anti-corruption policy. Corrupt and dysfunctional political institutions and leadership ultimately led to the dramatic collapse of the country’s authoritarian New Order Regime in 1998. The central research question of this chapter is to what extent and for what reasons did the implementation of an assertive anti-corruption policy under the authoritarian New Order Regime from 1971 through 1998 fail to be effective in achieving its legally mandated objective of combating corruption? This study synthesizes the theoretical strengths of the competing mainstream theories on implementation – the top-down and the bottom-up prescriptive approaches – to analyze and explain the anti-corruption policy implementation and law enforcement failures of both. The author argues that the defects in the top and bottom operational levels of the implementation structures and processes are the primary explanatory factors that explain the implementation failure of the Anticorruption Law 1971 of the authoritarian New Order Regime. He concludes that combating corruption in a country where corruption became chronic and systemic was problematic and difficult. When corruption had systematically infected the institutional structure and process – both at the top and bottom levels – of the government, in particular the law enforcement mechanisms, implementing and enforcing anti-corruption law was sub-optimal and failed. To overcome the problem of corruption in Indonesia, the factors associated with policy implementation failure must be eliminated.

PUBLIC FINANCIAL MANAGEMENT REFORMS PFM reforms have been embraced by governments to reduce corruption, improve programme effectiveness, and ensure accountability to elected officials and citizens. In Chapter 7, Clay G. Wescott explains that in recent years the World Bank has channeled up to one-sixth of its lending and advisory support towards the reform of central governments. A recent evaluation tried to understand what was working, what needs to be improved and what needs to be added or discontinued. The evaluation looked at four key central government tasks: financial management and


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procurement reform (PFMP), administration and civil service reform (ACS), tax administration reform and combating corruption. This chapter concentrates on the first of these tasks. Wescott notes that the advice provided by the World Bank on improving PFM and procurement is influenced by debates on theory and practice in developed and developing countries. This chapter touches on some of the highlights of these debates, drawing from indicative literature mainly since 1990 from scholars and practitioners. The second part of the chapter discusses examples of World Bank support for reform of budget planning and execution, financial management and procurement, reviewing the Bank’s diagnostic work, design and implementation of project support. The author also assesses evidence of outcomes and attribution, and ends with questions for further research. In Chapter 8, Robert Taliercio argues that recent PFM reforms in Cambodia have succeeded due to public management processes and techniques that include: a joint government-donor analytical process to define the problem and build consensus, an agreed reform vision and action plan, a pilot civil service reform in the Ministry of Finance to address capacity constraints, and formal coordination mechanisms for government and donors. He disputes the dominant hypothesis that the change was related to ‘political will’, instead focusing on how public management solved the problem. Taliercio explains that over the last three years, the Royal Government of Cambodia has successfully and consistently been implementing its Public Financial Management Reform Program (PFMRP), which has focused on improving the credibility of the budget while reducing fiduciary risk. This outcome is surprising not only because of the well-known difficulties of implementing ambitious PFM reforms in low income, postconflict countries, but also because most other reform programmes in Cambodia have either failed or stalled, including an earlier effort at PFM reform (2001–2004). The chapter presents a case study of the PFMRP and argues that the success of the PFMRP is due to the way in which it was developed. The central hypothesis probed is that the public management processes and techniques that led to the development of the PFMRP are the same ones that explain its successful implementation. The conclusion offers lessons on designing reform programmes (in terms of public management processes and strategies) that may be applicable to other countries. Chapter 9 by Geoff Dixon and Danya Hakim explains that while many countries have decentralized budgeting in the last decade, few have tried to

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do so as quickly and ambitiously as Indonesia. Dixon and Hakim analyze the extent to which Indonesian decentralization is likely to achieve its goal of making Indonesian public spending more responsive to local preferences. They conclude that strengthening policy contestability and flexibility in local budgeting are central to a successful outcome. The 2001 ‘sink-or-swim’ decentralization largely abolished the hierarchical relationship between the center, province and the district, and transferred around one-third of central government expenditure to the regions. This largely replaced the deconcentrated agencies of central government (i.e. central government units operating in the regions) with a presumption that (despite Indonesia being a unitary state) local governments undertake all spending responsibilities other than those specifically assigned to the national government. Provinces and districts are responsible for an increasing share of national personnel and material expenditures, and they report that some 60% of the routine budget and just under 40% of the development budget is managed at the sub-national level. Local budgets are approved by autonomous (parliament like) local councils, replacing the previous deliberative councils, with resource allocation decisions being made by an elected local mayor, the local planning agency and local finance office. Chapter 10 authored by Arwiphawee Srithongrung investigates the immediate and permanent effects of Thailand’s results-oriented performance-based budgeting reform implemented by the Thai government and budgetary effects on the government’s spending levels across functions. The empirical results indicate that the budget reform has enhanced government planning capacity by shifting resources permanently between functions and cutting spending immediately on functions of lesser priority to the country’s master plans. The author employs a distributed lag model to capture dynamic effects of the reformed budget type over a six-year period immediately and after the budget is adopted. The testing model in this study was specified to control unit roots in time-series data and to incorporate omitted-political variables. Using time series data on Thai government spending from 1965 to 2005, the empirical results indicate that when data flaws are corrected, a performance-based budget also enhances government planning capacity by increasing education spending immediately to align with the Thai master plan while cutting economic development spending, which tends to be allocated inefficiently. However, the author finds that there is no clear pattern for the dynamic effects of PBB over the five-year period on all spending functions, except for education and economic development.


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PUBLIC MANAGEMENT REFORMS WITH EMPHASIS ON PERFORMANCE AND RESULTS Chapter 11 by Suchitra Punyaratabandhu and Daniel H. Unger presents an account of administrative reform in Thailand for the period 1997–2007, based on principles of good governance. Instruments of reform included the creation of new organizations, adoption of Results-Based Management concepts, development of critical success factors and key performance indicators, and an evaluation framework loosely based on the balanced scorecard. Administrative reform in the context of political clientelism, however, begs the question of paradigm fit. Thailand has been described as a clientelist system. In clientelist political systems, citizens sell their votes or trade them for particular goods and services. Political clientelism links citizens to the state and to politicians on a contingent basis, subject to a quid pro quo. Where clientelist arrangements pervade political and administrative systems, the motivation of officials responsible for implementing policy reforms may well be compromised. In the case of Thailand, the administrative system has remained vulnerable as ever to patronage appointments and corrupt practices. Politicians’ capacity to discipline officials, or to violate the principles of bureaucratic neutrality, is now probably greater than at any time in the past. Performance indicators fail to detect and measure clientelist practices, for example procurement and tender specifications favouring cronies; provision of insider information; and entering into purchase or employment contracts on a special basis. The last decade of management reform has achieved lackluster results. In terms of government effectiveness as measured by the World Bank’s Worldwide Governance Indicators, Thailand was placed in the 65th percentile in 2006; a decade earlier Thailand was placed seven percentiles higher in the ranking. In Chapter 12, Soonhee Kim explores the influence of selected factors on employees’ perceptions of electronic-government performance in a local district in the Seoul Metropolitan Government in South Korea. The key findings from this study are that executive e-government leadership, management for results, IT capacity and employee commitment are all important factors affecting employee perceptions of local e-government performance. The mayor’s e-government leadership in terms of communicating a clear vision for e-government innovation and IT capacity are positively associated with employees’ perceptions of e-government service quality, transparency and cost-efficiency. The study also found that employees’ identification commitment with the organization is positively

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associated with their perceptions of e-government service quality and transparency. Furthermore, the results of this research indicate that management for results is the most significant factor affecting the perceived performance of e-government. Lessons and implications of this study for future research on e-government performance also are indicated. Chapter 13 by Eng Netra and David Craig investigates how decentralization and deconcentration reforms in Cambodia face a number of core challenges, especially in relation to systemic difficulties across existing public management practice and capacity. The authors find that the area of human resource management is where the greatest challenges lie, but this area is also where some of the most important potential gains are to be had. Using data developed in a three-year-research programme on the topic this chapter explains that the Cambodian public sector human resource management suffers from a range of problems related to high centralization of core functions, related issues of patronage and informal accountability, loss of core staff and reduced accountability to donor programmes. The authors recommend that future reforms be based on a clearer understanding and realistic assessment of how existing managerial arrangements work. This is necessary so that the least desirable aspects of the HRM system are not simply reproduced or reinforced at the sub-national level by the decentralization and deconcentration reforms currently in progress in Cambodia. Chapter 14 by Gene A. Brewer, Yujin Choi and Richard M. Walker explains that governments and other organizations are confronted with more frequent and devastating crises and disasters as the environment within which they operate becomes more complex and tumultuous. Recent catastrophic events, such as the Tsunami in Southeastern Asia, Hurricane Katrina in the US and the swine flu epidemic have heightened interest in efforts to plan for and resolve such crises. However, despite the farreaching disruptions caused by these crises, the literature on the topic of crisis impacts has hitherto been relatively scant, and most studies are not empirical. In this chapter, the authors examine the impact of crises and disasters across the Asian region. Asia has experienced a range of regional crises over the last decade. For example the financial crisis in 1997 that swept over East Asian countries caused tremendous damage to national economies, and the 2004 Tsunami produced a death toll of over 225,000, leading it to be regarded as one of the worst natural disasters in history. A considerable number of studies have examined the causes and effects of these crises in Asia, but the authors assert these studies have not paid sufficient attention


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to the impact of crises on governance and performance in cross-country settings. They noted specifically that the existing literature consists primarily of case studies of crisis issues and the relationships between crises and individuals and organizations, such as firms or banks in the private sector, rather than considering the seminal role of national governance. The key issue addressed by this chapter is how performance and results in managing crises can be improved.

CONCLUDING OBSERVATIONS When the chapters included in this symposium were written, global financial stress had not yet begun to make an impact on the Asia-Pacific region. However, now this effect is highly evident as markets have collapsed and much trade within the region and with the rest of the world has frozen. Troubled banking systems are struggling with the consequences of the subprime mortgage market failure in the US which has affected many non-US banks and treasuries that invested in US mortgage financing and associated (risky) derivatives. Part of the debate over instrumentation needed to cope with the vast amount of residual debt centers on the question of how deeply governments should intervene financially to save private institutions. Few, if any, nations can avoid having to decide how to manage their monetary, fiscal and economic stress as similar challenges now confront the leaders of governments and national and private banking institutions around the world. What can be observed at this point is that both financial stress and solutions to it are global in nature, and that the countries damaged most by financial stress generally are developing nations including those studied by the researchers contributing to this symposium, for example Thailand, Cambodia and Indonesia. However, it must be noted that the effects of financial stress in 2008–2009 are also having a serious impact on wealthier nations in the region, for example Taiwan, Singapore and South Korea. Until markets stabilize the financial condition of governments in the AsiaPacific region will be less stable and their future condition will continue to be threatened. Another point needs to be made about whether we are presently in an economic and fiscal ‘crisis’ or a fiscal ‘stress’ condition. For political reasons, it is understandable why elected officials, including US President Obama, use the word ‘crisis’ to characterize the world financial situation, that is to persuade others, such as members of the US Congress, to act in

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response. However, scholars studying financial stress and crisis in governments from the period of the 1930s to the present point out that a crisis occurs when an entity cannot get loans to finance its current operations and proposed investments. Such is not the case for the US and most other developed nations presently. However, for many developing nations the word crisis is an apt description of their economic and fiscal condition. Finally, it may be helpful during a period of global economic stress to recall the words of a then newly elected US President Franklin D. Roosevelt in his first inaugural address in 1932, ‘The only thing we have to fear is fear itself’. While Roosevelt was right, it took a long time for financial markets and economic conditions to improve after he made this pronouncement and the consequences of the global economic depression of the 1930s changed the world in ways that few at the time anticipated. The works presented in this book are highly relevant to better understand how the region should respond to the current situation. For example as governments increase their efforts to stabilize markets, controlling corruption is crucial. We understand that corruption is endemic in the Asia-Pacific region but in response a number of governments are attempting to develop and implement policies to reduce corruption. Implementation of these initiatives often runs against the values of the dominant political and social culture of many nations. One of the areas in which anti-corruption efforts have been prominent is in the development and refinement of PFM systems. As the works in this book indicate, these reforms range from investment in improving the human resource capital knowledge and skill base, increased public participation in budget and financial decision making, increased transparency of government financial arrangements to citizens and decentralization and delegation of financial management authority and responsibility. However, delegation of financial authority and increased participation alone do not seem to be sufficient to solve the problems faced by many nations in the region. Improved public management processes and techniques to overcome the poor practices of the past is crucial. Likewise, the problems of corruption cannot be resolved by PFM reforms alone. Other reforms are necessary including greater emphasis on performance and results by governments at all levels. Reforms explored by authors contributing to this volume emphasize the importance of leadership in using information technology for decision making, noting that (a) citizens and government employees need to develop trust in e-government to make it effective, (b) changes in human resource management practice also requires trust and integration with social and cultural values and behavior patterns


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and (c) that improvements in crisis management are very evidently needed across the region. This last admonition is highly appropriate given the economic stress that has to be managed effectively in the Asia-Pacific region and around the globe. Finally, part of what coping with economic and financial stress has taught is that there is a critical linkage between government financial regulatory practices and the health of the global economy. In this regard, the need is highly evident for greater financial market vigilance by government in the form of increased oversight of financial institutions, and, in some cases, better enforcement of existing rules. While the importance of the role of government in the economy has been derided for decades, the causes of recent economic stress indicate that what is needed to prevent such stress and crisis is more effective regulation, that is not necessarily more government intervention, but better targeted and effective oversight and enforcement – regulating better and regulating in a more focused manner than was the case during the period 1992 through 2009. It is now better understood that the role of government in regulating financial markets is not only appropriate but necessary to guard against the natural tendencies of excess resulting from consumer consumption preferences and behavior and excessive risk taking in financial markets where there may not exist enough fear of the negative consequences of investment decisions and where absence of long-range forecasting of the consequences of highly risky financial instruments and methods of investment occurs. Quite evidently, markets will not function to regulate themselves; the role and responsibility of government oversight and intervention is clear. It is needed to protect markets and individual investors from themselves. Put bluntly, greed is not good and there is more than enough of in the world to go around.

PART I CORRUPTION AND ANTI-CORRUPTION POLICY REFORM

CHAPTER 2 COMBATING CORRUPTION IN THE ASIA-PACIFIC COUNTRIES: WHAT DO WE KNOW AND WHAT NEEDS TO BE DONE? Jon S. T. Quah INTRODUCTION Four decades ago, the Swedish economist, Gunnar Myrdal (1970, p. 230) attributed the paucity of research on corruption in South Asia to the research taboo on this topic. Fortunately, this taboo has been gradually eroded since the 1990s as reflected in the tremendous amount of research that has been done on corruption in the Asia-Pacific countries. Corruption has emerged in the 1990s as ‘‘a truly global political issue eliciting a global political response’’ (Glynn, Kobrin, & Naim, 1997, p. 7). Indeed, the globalization of corruption has given rise to an overriding concern with how to combat corruption in many countries among their governments and many international agencies. Consequently, many international organizations like the Asian Development Bank, Commonwealth Association for Public Administration and Management, Eastern Regional Organization for Public Administration, International Institute for Administrative Sciences, Organization of American States, Organization for Economic Co-operation and Development, Transparency International, United The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 15–43 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018004

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Nations Development Programme, World Bank, and World Economic Forum have organized numerous conferences, symposia and workshops on various aspects of corruption. What have we learned from the vast research output and many international conferences on how to combat corruption in the Asia-Pacific countries during the last two decades? This article addresses this concern by first reviewing the literature to identify the three major strategies employed by the Asia-Pacific countries to curb corruption. More specifically, these three patterns of anticorruption strategies will be illustrated by analyzing how they are implemented in nine Asia-Pacific countries. Table 1 below identifies the nine countries that will be discussed in this article. Following this, the strengths and weaknesses of the three patterns of corruption control will be evaluated. Corruption is a serious problem in the Asia-Pacific countries as reflected in their rankings and scores on Transparency International’s 2008 Corruption Perceptions Index (CPI), as shown in Table 2 below. Consequently, it is important to assess how the nine selected countries have attempted to curb corruption.

FROM RESEARCH TABOO TO GROWTH INDUSTRY In view of the various meanings of corruption, this paper adopts the UNDP’s public-office-centred definition1 of corruption as ‘‘the misuse of public power, office or authority for private benefit – through bribery, extortion, influence peddling, nepotism, fraud, speed money or embezzlement’’ (UNDP, 1999, p. 7) for two reasons: it applies to both the public and private sectors, and identifies the seven major forms of corruption. As mentioned earlier, Myrdal blamed the research taboo for the paucity of research on corruption in South Asia in the 1960s. He attributed this Table 1. Pattern 1 2 3

Anti-Corruption Strategies of Selected Asia-Pacific Countries. Features

Anticorruption laws without an anticorruption agency Multiple anticorruption agencies Single anticorruption agency

Selected Countries Mongolia and Papua New Guinea China, India, Philippines Singapore, Hong Kong, Thailand, South Korea

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Table 2.

Transparency International’s 2008 Corruption Perceptions Index for 32 Asia-Pacific Countries.

Country New Zealand Singapore Australia Hong Kong Japan Taiwan South Korea Macao Bhutan Malaysia Samoa China Thailand India Sri Lanka Kiribati Mongolia Solomon Islands Vanuatu Maldives Nepal Vietnam Indonesia Pakistan Philippines Timor-Leste Bangladesh Laos Papua New Guinea Cambodia Afghanistan Myanmar

CPI Rank

CPI Scorea

No. of Surveysb

1 4 9 12 18 39 40 43 45 47 62 72 80 85 92 96 102 109 109 115 121 121 126 134 141 145 147 151 151 166 176 178

9.3 9.2 8.7 8.1 7.3 5.7 5.6 5.4 5.2 5.1 4.4 3.6 3.5 3.4 3.2 3.1 3.0 2.9 2.9 2.8 2.7 2.7 2.6 2.5 2.3 2.2 2.1 2.0 2.0 1.8 1.5 1.3

6 9 8 8 8 9 9 4 5 9 3 9 9 10 7 3 7 3 3 4 6 9 10 7 9 4 7 6 6 7 4 4

Source: http://www.transparency.org/news_room/in_focus/2008/cpi2008/cpi_2008_table a The CPI score ranges from 0 (most corrupt) to 10 (least corrupt). b To be included in the CPI, a country must have at least three independent surveys.

taboo to ‘‘diplomacy in research,’’ which avoided such embarrassing questions as corruption by ‘‘ignoring the problems of attitudes and institutions.’’ He further illustrated how this taboo could be broken by analyzing the ‘‘folklore of corruption’’ (people’s beliefs about corruption), the causes of corruption, and anticorruption campaigns in South Asian

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countries. In his view, ‘‘the first task of research on corruption is thus to establish the ingredients of the folklore of corruption and the anticorruption campaigns’’ (Myrdal, 1970, pp. 230–232). Fortunately, this research taboo on corruption in Asian countries has been eroded as reflected in the proliferation of case studies in recent years. In contrast to the dearth of research in the 1960s, research on Asian corruption has mushroomed into a growth industry since the 1990s. Moreover, since the end of the Cold War, the number of news stories on corruption in the Economist, the Financial Times, and the New York Times ‘‘quadrupled between 1984 and 1995’’ (Leiken, 1996/1997, p. 58). This ‘‘global corruption epidemic’’ is the result of two trends: the emergence of civil societies and the disclosure of corruption scandals in many countries, and the trend toward democracy and markets, which has paradoxically ‘‘increased both the opportunities for graft and the likelihood of exposure’’ (Leiken, 1996/1997, p. 58). Hence, it is not surprising that by 2001, Caiden (2001, p. 435) has contended that ‘‘as far as the public sector is concerned, the taboo [on corruption] seems to be breaking down.’’ The proliferation of corruption studies in Asia is reflected in Table 3, which shows that country studies dominate the literature as only 93 (7.15%) of the 1,312 studies are comparative in nature. Of the 23 Asian countries listed in Table 3, the greatest amount of research has been done on China (14.23%), followed by Japan (11.38%), the Philippines (10.92%), India (10.53%), and Indonesia (9.23%). On the other hand, very little research has been conducted on Brunei Darussalam (0.15%), Bhutan (0.38%), Macao (0.46%), Laos (0.61%), and Nepal and Sri Lanka (0.69% each). Surprisingly, only 56 studies (4.30%) have been published on Hong Kong and 60 studies (4.46%) on Singapore, even though they have been the two most effective countries in Asia in curbing corruption.

PATTERN 1: ANTICORRUPTION LAWS WITHOUT AN INDEPENDENT ANTICORRUPTION AGENCY (MONGOLIA AND PAPUA NEW GUINEA) Mongolia The Law on Anti-Corruption (LAC) was enacted in Mongolia in April 1996. However, before the establishment of the Independent Authority

19


Table 3. Country Bangladesh Bhutan Brunei Darussalam Cambodia China Hong Kong India Indonesia Japan Laos Macao Malaysia Mongolia Myanmar Nepal Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Comparative studies Total

Corruption Studies in Asia by Country. Number

Percentage (%)

27 5 2 17 185 57 141 120 148 8 6 41 53 11 9 14 142 60 59 9 15 72 18 93

2.07 0.38 0.15 1.30 14.23 4.30 10.53 9.23 11.38 0.61 0.46 3.15 4.07 0.84 0.69 1.00 10.92 4.46 4.15 0.69 1.15 5.53 1.38 7.15

1,312

100.00

Against Corruption (IAAC) in December 2006, there was no independent anticorruption agency as the task of curbing corruption in Mongolia was shared between the police, the General Prosecutor’s Office (GPO) and the courts. The LAC requires all Mongolian public officials to declare their incomes and assets and those of their families within a month of assuming their positions, and thereafter to submit their annual declarations during the first 2 weeks of February of each year. Failure to submit such declarations will result in fines of between 5,000 and 25,000 togrogs (US$ 6–29) for the errant officials. The penalty for officials who do not monitor the declarations is a fine of between 20,000 and 30,000 togrogs (US$ 24–35). Those officials who fail to declare gifts or foreign bank accounts are required to pay higher fines between 30,000 and 40,000 togrogs (US$ 35–47). Finally, corrupt officials

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JON S. T. QUAH

will be discharged or displaced according to the procedure provided in the law (Quah, 2003, pp. 45–46). The LAC is ineffective as very few public officials have been convicted of corruption. More specifically, the LAC has two weaknesses. First, the responsibility for implementing the LAC has not been assigned to a specific agency as Article 5 has indicated that all state organizations are required to perform four common duties to prevent corruption. However, in practice, none of them performs these duties as they are concerned with the performance of their primary functions. Second, the financial penalties imposed by the LAC on officials for their failure to submit or monitor their annual income and assets declarations are ineffective deterrents as the fines range between 5,000 and 40,000 togrogs (US$ 6–47) and there is no imprisonment (Quah, 2003, p. 48). Before the formation of the IAAC in December 2006, corruption offenses were investigated by the Criminal Police Department, which referred these cases to the Investigation Department. Both departments investigated complaints of corruption against public officials and if there was evidence to substantiate these complaints, the cases would be handed over to the GPO. From the GPO, the cases are processed by the aimag courts, the Capital City Court, and the Supreme Court. The procedure for dealing with corruption offences is ineffective as it provided opportunities for corruption among the officials involved as they could interpret the law differently. For example, a bribery case by the police could be viewed as a smuggling offence by the GPO, and as illegal crossing of borders by the courts (Quah, 2003, p. 49). As judicial salaries are low (ranging between US$ 33–51 per month) and ‘‘one out of three judges [in the countryside] does not have an apartment’’ (McPhail, 1995, p. 45), the courts are perceived by the public to be corrupt as individuals can pay the poorly paid judges to make decisions in their favor.

Papua New Guinea In May 1998, the Transparency International Chapter in Papua New Guinea (PNG) together with other watchdog and related agencies submitted a proposal to establish an independent anticorruption agency (Mellam & Aloi, 2003, p. 33). However, 11 years later, this proposal has not been passed by Parliament. Consequently, PNG does not have an independent anticorruption agency and relies instead on the Ombudsman Commission and the police to combat corruption.


21

The Ombudsman Commission consists of the Office of the Ombudsman and the Office that enforces the Leadership Code. According to Section 219 of the Constitution, the functions of the Ombudsman Commission are ‘‘to investigate conduct relating to administration, which may be ‘wrong’, and enforce [the] leadership code.’’ Furthermore, to deal with maladministration, the Ombudsman Commission is empowered to investigate official bodies, initiate investigations and respond to complaints or referrals, question decisions and the decision-making process, and consider defects in law (Mellam & Aloi, 2003, p. 30). In short, the Ombudsman Commission’s role is ‘‘to expose government actions and those of public officials that are detrimental to the public and its trust’’ (Mellam & Aloi, 2003, p. 30). The Ombudsman Commission consists of three members; it received a budget of K8 million for 2001 and 2002, which was increased to K8.9 million for 2003. However, it has been criticized for reacting slowly to complaints because of its limited resources. Another constraint faced by the Ombudsman Commission is its inability to use the evidence used by the police to prosecute leaders. Thus, while the Ombudsman Commission ‘‘has been very vocal against corruption’’ the various constraints faced by it render it powerless ‘‘like a dog without teeth to bite’’ (Mellam & Aloi, 2003, pp. 30–31). The Leadership Code applies to more than 600 leaders and their offices in PNG. These leaders include ministers, members of national and provincial legislatures, members of local level governments, constitutional office holders, heads of national and provincial departments, heads and board members of state-owned enterprises, ambassadors, commanders of disciplinary forces, and defined executives. According to the Leadership Code, leaders must avoid situations that involve conflicts of interest, and they are required to disclose their assets and incomes, and are prohibited from accepting gifts and benefits. Those leaders found guilty of breaching the Leadership Code are dismissed from office and not eligible for reelection or appointment to public office for 3 years. However, the Ombudsman Commission’s main weakness is that the leaders avoid prosecution and dismissal by immediately resigning before and after the commencement of the leadership tribunal (Mellam & Aloi, 2003, pp. 31–32). As PNG does not have an independent anticorruption agency, the Ombudsman Commission performs the function of investigating corruption cases by default. As the problem of corruption in PNG has ‘‘intensified in number, volume and scope’’ in recent years, Mellam and Aloi (2003, p. 33) have argued that the formation of an anticorruption agency to curb corruption will relieve the Ombudsman Commission and the police, which lack the capacity to do so.

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JON S. T. QUAH

PATTERN 2: ANTICORRUPTION LAWS WITH MULTIPLE AGENCIES (CHINA, INDIA, AND THE PHILIPPINES) China In 1952, the People’s Republic of China (PRC) adopted the Act of the PRC for the Punishment of Corruption, which defined corruption and its punishment. As corruption became endemic in China during the post-1978 reform period, Deng Xiaoping’s regime relied on the Criminal Law of 1979 as the major legal measure in fighting corruption. This law was amended twice: first in 1982 to impose stiffer punishment for corruption, and in 1997 to include a chapter on corruption, which specified the penalty for corruption according to the amount involved. For example, a person found guilty of corruption involving more than 100,000 yuan (US$ 12,000) will be punished by 10 years’ imprisonment or the death penalty (Chan, 1999, pp. 300–301). China relies on multiple anticorruption agencies that are organized in three sectors. For the judicial sector, the Supreme People’s Procuratorate (SPP) was reestablished in 1978 to combat corruption. The SPP formed the Procuratorial Division of Graft and Bribery in 1989 after the Tiananmen anticorruption and democracy movement (Chan, 1999, p. 301). Below the SPP, the Bureau for Embezzlement and Bribery of the People’s Procuratorate is responsible for handling and preventing cases of embezzlement and bribery. As China is a large country, it is not surprising that there are 3,563 agencies for embezzlement and bribery (Luo et al., n.d., p. 3). For the administrative sector, the Ministry of Supervision (MOS) was reestablished in December 1986 ‘‘in part to curb corruption and maladministration within the civil service.’’ For the Chinese Communist Party, the Central Commission for Disciplinary Inspection (CCDI) was formed in 1978 to check corruption among its members (Chan, 1999, p. 301). Even though the MOS had received more than 700,000 reports in 1993, both the CCDI and MOS failed to reduce corruption because the ‘‘authorities appear[ed] to lack the political will to handle corruption cases among more senior party members’’ (Burns, 1994, pp. 57–58). On September 6, 2007, Ma Wen, the newly appointed Minister of Supervision, was appointed as the head of the new National Corruption Prevention Bureau (Chinadaily.com.cn, 2007). Until recently, few senior party officials have been convicted of corruption because they can ‘‘short-circuit corruption investigations by appealing to their protectors in the party hierarchy’’ (Root, 1996, p. 752). In 1994, Li Yiaoshi, former Vice-Minister of the State Science and Technology


23

Commission, was sentenced to 20 years’ imprisonment for corruption (Burns, 1994, p. 58). In July 1998, the former Beijing party chief, Chen Xitong, was the highest ranking party member to be jailed for corruption, when he was sentenced to 16 years (instead of the death penalty) for corruption of 555,000 yuan and dereliction of duty (Straits Times, 1998, p. 14). In 1999, Premier Zhu Rongji launched a crusade against corrupt officials (Leggett, 1999, p. 1). On March 5, 2000, he informed party delegates at the National People’s Congress that: ‘‘All major cases, no matter which department or who is involved, must be thoroughly investigated, and corrupt officials must be brought to justice’’ (Straits Times, 2000a, p. 23). To reinforce Zhu’s message, Hu Changqing, Deputy Governor of Jiangxi province, was the highest ranking public official to be executed 3 days later on March 8 for corruption involving 5.44 million yuan between May 1995 and August 1999 (Straits Times, 2000b, p. 30). Similarly, Li Chenglong, Deputy Mayor of Guigang City, was executed on April 23, 2000 for taking US$ 478,500 worth of bribes (Straits Times, 2000c, p. 2). More recently, Chen Liangyu, the chief of the Communist Party in Shanghai, was dismissed and removed from the Politburo on September 25, 2006 for his alleged involvement in a multimillion dollar pension fund scandal (International Herald Tribune, 2006).

India In India, the Prevention of Corruption Act is implemented by the Central Bureau of Investigation (CBI), the Central Vigilance Commission (CVC), the state anticorruption bureaus, and the state vigilance commissions. The CBI was established in April 1963 to investigate cases of bribery and corruption but it could only do so in a state with the consent of the government. This requirement became a problem after the decline of the Congress Party as some state governments withdrew the consent given by their predecessors ‘‘whenever they felt that an investigation taken up by the CBI was politically embarrassing or uncomfortable for them’’ (Narasimhan, 1997, pp. 255–256). The CVC was formed in February 1964 to perform four functions. First, the CVC investigates any transaction in which a civil servant is alleged to act for an improper purpose. Second, the CVC examines complaints against civil servants for using their powers for improper or corrupt purposes. Third, the CVC requests reports from ministries, departments and public enterprises to enable it to check and supervise their vigilance and

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JON S. T. QUAH

anticorruption work. Fourth, the CVC requests the CBI to investigate a case, or to entrust the complaint, information or case for inquiry to the CBI or the ministry, department or public enterprise concerned (Narasimhan, 1997, pp. 264–265). In his book, The Pathology of Corruption, Gill (1998, p. 237) wrote: ‘‘Looking to the number of agencies created to tackle corruption, it would appear that the government was in dead earnest to eradicate this malady.’’ However, he lamented that ‘‘this elaborate and multi-layered apparatus to control administrative corruption has hardly made a dent on the situation.’’ Indeed, the CBI has been negatively perceived by the public to be ‘‘a pliable tool of the ruling party, and its investigations tend to become cover-up operations for the misdeeds of the ministers’’ (Gill, 1998, p. 238). The CBI’s ineffectiveness is also manifested in its low conviction rate as only 300 of the 1,349 cases (22.2%) in 1972 and 164 of the 1,231 cases (13.3%) in 1992 resulted in conviction (Gill, 1998, p. 238). However, the CBI’s conviction rate has improved in recent years as its conviction rate in 2005 was 65.6% (CBI, 2006, pp. 8 and 29). The CBI has also been accused by Gill (1998, p. 238) of going ‘‘only after the small fry’’ as only one gazetted officer was dismissed in 1972 and two officers in 1992. A final indicator of the CBI’s effectiveness is its poor record in investigating the many mega scams as there has been no conviction (Gill, 1998, p. 238).

The Philippines The Philippines is the Asian country with the most number of anticorruption measures as it has relied on 7 major laws and 18 antigraft agencies since its fight against corruption began in the 1950s (Alfiler, 1979, p. 347; Oyamada, 2005, pp. 100–101). The first anticorruption law was the Forfeiture Law of 1955, which authorized ‘‘y the state to forfeit in its favor any property found to have been unlawfully acquired by any public officer or employer.’’ However, this law was ineffective as there were no convictions even after 4 years of its passage. The Anti-Graft and Corrupt Practices Act or the Republic Act (RA) No. 3019, which was passed in April 1960, identified 11 types of corrupt acts among public officials and required them to file every 2 years a detailed and sworn statement of their assets and liabilities. The third anticorruption law, RA No. 6028, which provided for the creation of the Office of the Citizens’ Counselor, was passed in August 1969, but was not implemented (Quah, 1999, p. 80).


25

The remaining four laws were the Presidential Decrees (PD) issued by President Marcos after the establishment of martial law in September 1972. PD No. 6 identified 29 administrative offences and empowered heads of departments to dismiss guilty officials immediately. This resulted in the sacking of nearly 8,000 public officials. In November 1972, PD No. 46 prevented public officials from receiving and private individuals from giving gifts on any occasion, including Christmas. Finally, PD Nos. 677 and 749 are amendments to RA No. 3019, requiring all government employees to submit statements of their assets and liabilities every year, instead of every other year; and providing immunity from prosecution for those willing to testify against public officials or citizens accused of corruption (Alfiler, 1979, pp. 326–327). The large number of anticorruption agencies in the Philippines can be attributed to the frequent changes in political leadership as such agencies were either created or abolished by the President. During May 1950 and January 1966, five anticorruption agencies were formed and dissolved as there were five changes in political leadership during that period. President Marcos created another five anticorruption agencies during his two decades in power because the first three agencies were ineffective and short-lived as they lasted between 8 months and 2 years (Quah, 1982, pp. 168–169). In July 1979, President Marcos created the Sandiganbayan (Special Anti-Graft Court) and the Tanodbayan (Ombudsman) by issuing PD Nos. 1606 and 1630, respectively. After assuming office in February 1986, President Corazon Aquino formed the Presidential Commission on Good Government (PCGG) to identify and retrieve the money stolen by the Marcos family and their cronies. Unfortunately, Aquino’s anticorruption stance was viewed cynically by the public as two of her cabinet members and her relatives (referred to derisively as ‘‘rela-thieves’’) were accused of corruption. The PCGG was also a target for charges of corruption, favoritism and incompetence, and by June 1988, 5 of its agents faced graft charges and 13 more were under investigation. In May 1987, Aquino established the Presidential Committee on Public Ethics and Accountability (PCPEA) to respond to increasing public criticism. However, the PCPEA was ineffective as it lacked staff and funds. In short, Aquino’s ‘‘honesty has not been matched by the political will to punish the corrupt’’ (Timberman, 1991, pp. 233–235). The Tanodbayan or Office of the Ombudsman was ‘‘reborn’’ in 1988 during President Aquino’s term of office. However, it was inefficient as it took a long time to process the complaints received. Consequently, the Ombudsman had accumulated a huge backlog of 14,652 cases, or 65% of its

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JON S. T. QUAH

total workload by December 1994. The Sandiganbayan had a higher profile than the Tanodbayan but the former was less efficient as it completed only 13% of its total caseload in 1996 (Balgos, 1998, pp. 247–248, 250–251). President Ramos appointed Eufemio Domingo to head the Presidential Commission against Graft and Corruption in 1994, 2 years after assuming office. Joseph Estrada succeeded Ramos in 1998 and he established three anticorruption agencies: the Inter-Agency Anti-Graft Coordinating Council in August 1999; the Presidential Committee on Effective Governance in October 1999; and the National Anti-Corruption Commission in July 2000. Similarly, after assuming office in January 2001, President Gloria Macapagal-Arroyo formed the Presidential Anti-Graft Commission in April 2001, and the Governance Advisory Council in July 2001 (Oyamada, 2005, pp. 100–101).

PATTERN 3: ANTICORRUPTION LAWS WITH AN INDEPENDENT AGENCY (SINGAPORE, HONG KONG, THAILAND, SOUTH KOREA) Singapore The first anticorruption law was introduced in Singapore when the Prevention of Corruption Ordinance (POCO) was enacted in December 1937. The POCO was implemented by the Anti-Corruption Branch (ACB) of the Criminal Investigation Department (CID) of the Singapore Police Force. However, the ACB was ineffective for three reasons: it was understaffed with only 17 personnel; fighting corruption was not the CID’s top priority; and there was widespread police corruption (Quah, 2007a, pp. 14–15). The last straw was the discovery by the British colonial government that some police detectives were involved in the theft of S$ 400,000 (US$ 133,330) of opium in October 1951. This opium hijacking scandal exposed the ACB’s ineffectiveness in curbing corruption and made the British authorities realized its mistake of relying on the police to fight corruption when there was extensive police corruption. Consequently, the ACB was replaced by the Corrupt Practices Investigation Bureau (CPIB), which was established as an independent agency in October 1952 (Quah, 1995, pp. 393–394). When the People’s Action Party (PAP) government assumed office in June 1959, corruption was a way of life in Singapore and perceived by many


27

to be a low-risk, high-reward activity. To minimize corruption and change the public perception of corruption to a high-risk, low-reward activity, the PAP leaders initiated a comprehensive anticorruption strategy in 1960 by enacting the Prevention of Corruption Act (POCA) and strengthening the CPIB. As Singapore’s gross national product per capita in 1960 was S$ 1,330 (US$ 443), the PAP government could not afford to raise the salaries of civil servants. Accordingly, it was left with the alternative of strengthening the existing anticorruption laws to reduce the opportunities for corruption and to increase the penalty for corrupt behavior. The POCA of 1960 removed the POCO’s weaknesses, enhanced the penalty for corruption to 5 years’ imprisonment and/or a fine of S$ 10,000 (which was increased to S$ 100,000 in 1989), and gave the CPIB more powers to perform its duties. The CPIB is the anticorruption agency responsible for enforcing the POCA’s provisions. It has grown by 16 times from a small staff of 5 officers in 1952 to its current strength of 82 members (Quah, 2007a, p. 22). The CPIB performs three functions. First, it receives and investigates complaints on corruption in the public and private sectors. Second, the CPIB investigates malpractice and misconduct by public officials. The third function of the CPIB is to examine the practices and procedures in the public service to minimize the opportunities for corrupt practices (CPIB, 1990, p. 2). Unlike Hong Kong’s Independent Commission Against Corruption (ICAC), which has 1,194 members, the CPIB can perform its duties without a large staff as its location within the Prime Minister’s Office and its legal powers enable it to obtain the required cooperation from both public and private organizations.

Hong Kong In Hong Kong, the POCO was introduced in 1948 and was implemented by the ACB, which was formed in the same year as a special unit within the CID of the Royal Hong Kong Police Force (RHKPF) to handle the investigation and prosecution of corruption cases (Kuan, 1981, p. 24). The ACB was separated from the CID in 1952 but it kept its title and remained within the RHKPF (Lethbridge, 1985, p. 87). In 1968, the ACB reviewed the POCO and recommended a scrutiny of the anticorruption laws of Singapore and Ceylon (now known as Sri Lanka). A study team visited both countries during 1968 to examine how their anticorruption laws worked in practice. The study team was impressed with the independence of the anticorruption agencies in these countries and attributed Singapore’s success in minimizing

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corruption to the CPIB’s independence from the police (Wong, 1981, p. 47). The knowledge gained from the study tour contributed to the enactment of the Prevention of Bribery Ordinance (POBO) on May 15, 1971. The introduction of the POBO in May 1971 led to the upgrading of the ACB into an Anti-Corruption Office (ACO). The escape of a corruption suspect, Chief Superintendent Peter F. Godber, on June 8, 1973 to England angered the public and undermined the ACO’s credibility. Sir Alastair BlairKerr, Chairman of the Commission of Inquiry, indicated that the arguments for keeping the ACO within the RHKPF were ‘‘largely organizational’’ and the arguments for removing it were ‘‘largely political and psychological’’. The Governor, Sir Murray MacLehose, accepted Sir Alastair’s advice of considering public opinion and decided to form a new anticorruption agency that was independent of the RHKPF (Quah, 1995, p. 402). The Independent Commission Against Corruption (ICAC) was established on February 15, 1974 with the enactment of the ICAC Ordinance and was entrusted with two tasks: ‘‘to root out corruption and to restore public confidence in the Government’’ (Wong, 1981, p. 45). The ICAC is independent in terms of structure, personnel, finance and power. Before the handover of Hong Kong to China in July 1997, the ICAC was directly responsible to the Governor, and its Commissioner reported directly to him and had easy access. After July 1997, the ICAC reports directly to the Chief Executive of the Hong Kong Special Administrative Region and is directly responsible to him.

Thailand The National Counter Corruption Commission (NCCC) was established in November 1999 as part of the anticorruption measures introduced by the 1997 People’s Constitution. The ineffectiveness of its predecessor, the Counter Corruption Commission (CCC) during its 24-year existence (1975–1999) led to the CCC’s dissolution and replacement by the NCCC. Learning from the CCC’s unimpressive performance, the members of the Constitution Drafting Assembly enhanced the NCCC’s effectiveness in combating corruption by removing those features that handicapped the CCC’s performance. Thus, instead of being a toothless paper tiger like its predecessor, the NCCC has been empowered to investigate corruption complaints against both civil servants and politicians. A second important difference is that the NCCC is more independent than the CCC as it is responsible to the Senate and not to the Prime


29

Minister. This difference is significant as ‘‘y removing it [the NCCC] from the supervision of the prime minister’’ and ‘‘making its involvement automatic when the Senate speaker receives a corruption complaint, should make it much more effective in pursuing corrupt cabinet ministers’’ (Laird, 2000, pp. 165–166). Another manifestation of the NCCC’s independence is its control over its staffing, budgeting, and other aspects of management. Finally, the nine NCCC members are nominated by the Senate and appointed by the King for a single, nonrenewable term of 9 years. The NCCC performs three functions, which are specified in Section 19 of the Organic Act on Counter Corruption B.E. 2542 (1999) (ONCCC, 2006a, pp. 10–11). First, it is responsible for inspecting and verifying the declaration of the assets and liabilities submitted by the politicians and civil servants. Those officials who do not declare their assets or make false declarations are reported by the NCCC to the Constitutional Court. Those found guilty are removed from their positions and barred from holding political office for 5 years. Second, the NCCC prevents corruption in three ways: (1) to make recommendations on preventing corruption to the Cabinet and other government agencies; (2) to enhance the integrity of the officials and the public by organizing contests, meetings and seminars on fighting corruption among the people and civil servants; and (3) to foster cooperation among the public by conducting seminars on countering corruption in Bangkok and the various provinces. The NCCC’s third function is to suppress corruption by taking disciplinary action against corrupt politicians and civil servants. More specifically, it investigates complaints of corruption against politicians and civil servants and the Senate has the power to impeach them for having ‘‘unusual wealth,’’ or for committing corruption, malfeasance, or abuse of power. Section 58 empowers the Senate to initiate the removal from office of political leaders and senior bureaucrats for such offences. Furthermore, Section 59 specifies that the Senate can also initiate the impeachment of corrupt politicians and civil servants if it receives a request that is supported by one-quarter of the House of Representatives, or if the complaint is signed by 50,000 members of the public (ONCCC, 2006a, p. 23).

South Korea The origins of the Korea Independent Commission Against Corruption (KICAC) can be traced to the comprehensive anticorruption strategy introduced by President Kim Dae Jung after he assumed office in

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February 1998. The most important component of President Kim’s strategy was the formation of an Anti-Corruption Committee in August 1999 to coordinate the anticorruption programs and activities, and the formulation of the Anti-Corruption Law to provide protection for whistle blowers, to strengthen citizen watch and participation in anticorruption movements, and to reinforce detection and punishment for corrupt practices (Office of the Prime Minister, 1999, pp. 10–11). However, as President Kim’s strategy met with stiff resistance in the National Assembly, it took more than 2 years before the Anti-Corruption Act was passed on July 24, 2001. The Public Prosecutor’s Office and the National Police Agency were also opposed to the formation of the KICAC during the policy development process for establishing an independent anticorruption agency (Kim, 2007, p. 144, footnote 21). Six months later, the KICAC was formed on January 25, 2002. According to its Annual Report 2005, the KICAC performs these six functions: 1. Policy maker: to formulate and coordinate anticorruption policies by organizing on a regular basis the Inter-Agency Meeting on Corruption. 2. Evaluator: to evaluate the levels of integrity and anticorruption practices of public-sector organizations. 3. Observer: to monitor corruption and protect whistle blowers by handling reports on alleged corrupt conduct and protecting and offering rewards for whistle blowers. 4. Partner: to promote cooperation for the fight against corruption by encouraging civil society involvement and public–private partnership against corruption, and engaging in the global fight against corruption. 5. Legal reformer: to improve the legal and institutional frameworks to remove laws and practices that encourage corruption. 6. Ethics leader: to inculcate ethical values in society by promoting public awareness on the risks of corruption, and by enforcing the code of conduct for public sector employees (KICAC, 2006, pp. 4 and 7). An analysis of the above functions shows that the KICAC is not a fullfledged anticorruption agency like the CPIB, ICAC, or NCCC, because it cannot investigate corruption cases itself as it has to rely on the Board of Audit and Inspection (BAI) and the Public Prosecutor’s Office to do so. Articles 29–30 of the Anti-Corruption Act of 2001 describe the procedure for dealing with whistle-blowing cases involving public officials. According to Article 29, Section 3, the KICAC refers the investigation of a whistleblowing case involving a public official to the BAI, an investigative agency,

31


or an agency in charge of supervising the relevant public agency. The investigative agency has to inform the KICAC of the results of its investigation within 60 days. The KICAC will then notify the whistle blower of the result of the investigation. However, the KICAC may request for a reinvestigation if the results of the earlier investigation are incomplete (Anti-Corruption Act, 2001, pp. 18–21). On February 29, 2008, the KICAC was merged with the Ombudsman and the Administrative Appeals Commission to form the Anti-Corruption and Civil Rights Commission (ACRC). However, the functions of the ACRC in terms of fighting corruption remain the same as those of the KICAC as the ACRC cannot investigate corruption cases.2

EFFECTIVENESS OF THE THREE PATTERNS OF CORRUPTION CONTROL Which of the three patterns of corruption control is the most effective and why? Table 4 provides details of the ranking and scores of the nine countries discussed in this paper on Transparency International’s 2008 CPI and the World Bank’s 2007 Governance Indicator on the Control of Corruption. It appears from Table 4 that Pattern 3 is the most effective as Singapore and Hong Kong have the highest CPI scores of 9.2 and 8.1, respectively, in Table 4.

2008 CPI and 2007 Control of Corruption for Nine Asia-Pacific Countries.

Country

2008 CPI Rank

Mongolia Papua New Guinea China India Philippines Hong Kong Singapore South Korea Thailand No. of countries

102nd 151st 72nd 85th 141st 12th 4th 40th 80th 180

2008 CPI Scorea

Control of Corruption Percentile Rank

3.0 2.0 3.6 3.4 2.3 8.1 9.2 5.6 3.5 –

33.8 9.2 30.9 47.3 22.2 92.3 96.1 68.1 44.0 212

Source: Compiled from http://www.transparency.org and http://info.worldbank.org/governance/wgi/sc_chart.asp a The CPI score ranges from 0 (most corrupt) to 10 (least corrupt).

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2008, and the highest percentile rank of 96.1 and 92.3, respectively, on the World Bank’s 2007 Governance Indicator on the Control of Corruption. However, South Korea and Thailand, which have also adopted Pattern 3, are less effective as reflected in their lower CPI scores of 5.6 and 3.5, respectively, and their lower percentile ranks of 68.1 and 44, respectively, on the Control of Corruption indicator. Patterns 1 and 2 are less effective than Pattern 3 for different reasons. In the absence of an anticorruption agency in Mongolia, the task of fighting corruption was shared between the police, the GPO, and the courts. However, because of the extremely low salaries of civil servants and judges, there is widespread corruption among the police and judges. Indeed, the Mongolian public has perceived the poorly paid police officers and judges to be corrupt (Quah, 2003, p. 49). The experiences of Singapore and Hong Kong have clearly shown the importance of not relying on the police to curb corruption as ‘‘this would be like giving candy to a child [and] expecting that it would not be eaten’’ (Quah, 2004, p. 2). PNG has the lowest CPI score of 2.0 and lowest percentile rank of 9.2 for the Control of Corruption indicator. This is not surprising as corruption is a serious problem in PNG, where Mana (1999, p. 7) notes that ‘‘ordinary civil servants at the provincial centers and district stations look for every opportunity to supplement their low wages’’ as they use their positions to extract bribes and other favors from the public. Indeed, the rampant petty corruption at the provincial and district administration level has been reinforced by the wantok system that ‘‘involves doing favors for friends and mates who belong to the same family, tribe or region’’ (Mana, 1999, p. 6). Needless to say, the wantok system has undermined the efficiency of the civil service in PNG. A more recent analysis by Chin (2007, p. 202) has confirmed that ‘‘corruption remains unchecked, with the civil service and politicians seemingly immune from any systems designed to prevent corruption and fraud.’’ The continued reliance on the ineffective Ombudsman Commission and the 10-year delay in approving the proposal to establish an anticorruption agency clearly reflect a lack of political will to curb corruption among the political leaders in PNG. Indeed, Mellam & Aloi (2003, p. 33) have recommended the formation of an anticorruption agency to replace the ineffective Ombudsman Commission and the police. Pattern 2 is also ineffective as the proliferation of anticorruption agencies in the Philippines has led to ‘‘resource and effort-dilution in anticorruption efforts due to duplication, layering and turf wars’’ (Quimson, 2006, p. 30). Similarly, in China the multiple agencies involved in anticorruption work


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lack a proper coordination mechanism. Accordingly, since 1993, the CCDI, the SPP and the MOS have enhanced cooperation among themselves and all the anticorruption agencies (Quah, 2007b, p. 6). In the case of India, Palmier (1985) has attributed the ineffective anticorruption strategy to the lack of political will that is reflected in the government’s unwillingness to provide adequate resources for the CBI and the CVC. Palmier wrote: The notion is simply ludicrous that one Central Vigilance Commissioner can effectively consider the files of all gazetted officers charged with corruption, or that their cases can be properly investigated by a handful of Commissioners for Departmental Inquiries. True priorities are shown by the allocation of resources more than by rhetoric; on that score the control of corruption cannot be said to be very high on the list of preferences of the Government of India. The Central Vigilance Commission and the Central Bureau of Investigation appear to have been given just enough powers and resources to permit some activity, but not enough to make them effective. (Palmier, 1985, p. 113, emphasis added)

Unlike Singapore’s CPIB and Hong Kong’s ICAC, India’s CBI is a police agency and is not concerned with fighting corruption only as it has three major areas of operation: anticorruption, economic crimes, and special crimes (including organized crime and terrorism). As there is extensive police corruption in India, it is surprising that the government has continued to rely for the past 46 years on the CBI to curb corruption even though this traditional British method of relying on the police for corruption control has been shown to be ineffective in Singapore and Hong Kong. In the Philippines, the major reason for the failure of the multiple anticorruption agencies was provided by Eufemio Domingo, the head of the Presidential Commission against Graft and Corruption, who concluded in 1997 that ‘‘the system is not working. We are not making it work’’ because: We have all the laws, rules and regulations and especially institutions not only to curb, but to eliminate, corruption. The problem is that these laws, rules and regulations are not being faithfully implemented. y I am afraid that many people are accepting [corruption] as another part of our way of life. Big-time grafters are lionized in society. They are invited to all sorts of social events, elected and re-elected to government offices. It is considered an honor – in fact a social distinction – to have them as guests in family and community affairs. (Balgos, 1998, pp. 267–268)

Thus, it is not surprising that corruption remains a serious problem in the Philippines in spite of the efforts of both the government and civil society to curb it. According to Quimson (2006, p. 9), all the integrity pillars in the Philippines are ‘‘tainted by internal corruption and are therefore heavily compromised’’ and ‘‘unable to perform their functions and operate effectively.’’

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The Importance of Political Will If Pattern 3 is more effective than Patterns 1 and 2, why are the CPIB and ICAC more effective than the KICAC and NCCC? The most important reason for the difference in effectiveness of the four anticorruption agencies is the political will or commitment of their governments in curbing corruption. When there is political will, the incumbent government will enact legislation to empower the anticorruption agency to implement the anticorruption laws impartially without fear or favor. Furthermore, it will also provide the anticorruption agency with the required personnel and budget to perform its functions. At the same time, however, the anticorruption agency must be independent from political control to enable it to investigate allegations of corruption involving political leaders and senior civil servants. As the anticorruption agency has extensive powers, it should not abuse these nor should the political leaders use it as a weapon against their political rivals. In the final analysis, the anticorruption agency must be perceived by the population in the country as a credible public agency, which performs its task of corruption control professionally and impartially. As the incumbent governments in Hong Kong and Singapore are committed to curbing corruption, it is not surprising that Table 5 shows that they have provided the ICAC and CPIB, respectively, with the required personnel and budget as reflected in their favorable staff–population ratios and per capita expenditure. On the other hand, the lower level of political will of the incumbent governments in South Korea and Thailand is also manifested in the unfavorable staff–population ratios and per capita

Table 5.

Comparative Data on Six Anti-Corruption Agencies in 2005a.

Anti-Corruption Agency ICAC CPIB KICAC NCCC CBI Ombudsman

Personnel

Budget

1,194 82 205 924 4,711 957

US$85 million US$7.7 million US$17.8 million US$22.8 million US$30.3 million US$12 million

Population Staff–Population Per Capita Ratio Expenditure 7 million 4.3 million 47.8 million 64.2 million 1,081.2 m 81.4 million

1:5,863 1:53,086 1:233,171 1:69,481 1:229,505 1:85,057

US$12.14 US$1.79 US$0.37 US$0.36 US$0.28 US$0.15

Source: Compiled from data provided in ICAC, 2006; Republic of Singapore, 2007; KICAC, 2006; ONCCC, 2006b; CBI, 2006; Office of the Ombudsman, 2006, and the Economist (2007). a Data on the personnel and budget of the anti-corruption agencies in China, Mongolia, and Papua New Guinea are not available.


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expenditure of the KICAC and NCCC. Not surprisingly, Table 5 also shows that the CBI in India and the Ombudsman in the Philippines are even more poorly staffed and funded as their governments are not seriously committed to fighting corruption. The KICAC is the weakest of the four anticorruption agencies as it is not, strictly speaking, an anticorruption agency because it does not have the power to investigate corruption cases. This structural weakness is the KICAC’s Achilles’ heel and is a clear indication of the South Korean government’s lack of political will. The Anti-Corruption Act, which was passed in July 2001, was proposed for legislation in 1996 by the People’s Solidarity for Participatory Democracy, which is the leading civil society organization in South Korea, and supported by other civil society groups like Transparency International Korea, the Citizens’ Coalition for Economic Justice and the Citizens’ Association for Anti-Corruption. From 2000 to 2002, these civil society organizations participated in public hearings, legislation requests, national assembly person signature drives, campaigning, rallies, and television broadcast discussions to advocate the passage of the bill in June 2002. However, the Anti-Corruption Act of 2001 did not include all the provisions they had proposed (Kim, 2006, p. 53). In his evaluation of South Korea’s national integrity system, Kim (2006, p. 10) has revealed that the ‘‘introduction of an investigative authority’’ for the Anti-Corruption Act was a major item requested by civil society organizations in the original proposal. However, the Anti-Corruption Act did not include such a provision when it was passed in July 2001 because of opposition in the National Assembly. Accordingly, to rectify the KICAC’s inherent defect, he has recommended that the KICAC ‘‘should be equipped with more authoritative and/or investigative powers.’’ However, as mentioned earlier, the new government of President Lee Myung Bak has merged the KICAC with the Ombudsman and the Administrative Appeals Commission to form the ACRC on February 29, 2008 without empowering it to investigate corruption cases. In short, the ACRC, like the KICAC, is a weak anticorruption agency without the power to investigate corruption cases. Unlike the KICAC, Thailand’s NCCC has the power to investigate corruption cases as its predecessor, the CCC, was perceived as a toothless paper tiger because of its inability to do so. However, unlike Hong Kong’s ICAC and Singapore’s CPIB, the NCCC has not received adequate staffing and funding since its inception in November 1999. A NCCC official who declined to be identified had informed a Straits Times correspondent based in Bangkok in May 2000 that the NCCC needed an additional 200 personnel as its staff was overworked. Furthermore, budget constraints had forced the

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NCCC to limit its expenditure in 2000 to 100 million baht, which was ‘‘hardly enough to cover operational costs’’ (Tang, 2000, p. 27). Borwornsak Uwanno has emphasized the critical importance of providing the NCCC with adequate staff and funding for improving Thailand’s integrity system: Staff and funding are critical factors in agency performance because control agencies cannot operate effectively without qualified personnel and adequate resources. y Adequate numbers of qualified personnel are also a success factor. Inadequacy results in delays in the work process. Unqualified personnel can damage cases under investigation. This problem is linked to inadequate funding and remuneration. y As an example of the staffing situation, the NCCC, with its wide mandate for combating corruption, has only 346 officials, [which] y is not in proportion to the number of cases the NCCC has to investigate. (Borwornsak, 2001, pp. 198–199)

Thus, if the NCCC is not provided with adequate funding for new staff and a competitive pay scale, it would not be able to function effectively. Similarly, Nualnoi (2004, p. 195) has observed that the NCCC could ‘‘barely keep up with the increasing number of cases’’ as the number of corruption cases filed increased from 1,646 cases in 2000 to 2,179 cases in 2001. In her assessment of the NCCC’s effectiveness, she found that the NCCC’s performance was ‘‘slower than expected’’ because of its ‘‘limited resources and weak governance environment.’’ Accordingly, Nualnoi (2004, p. 202) recommended that: (1) the resources of the NCCC should be increased; (2) training programs should be provided for NCCC staff; and (3) skilled staff should be recruited by the NCCC. In their evaluation of Thailand’s national integrity system in 2006, Ora-orn and Ake (2006, p. 47) identified the NCCC as one of the four public institutions that were ‘‘overloaded with cases awaiting review.’’ Table 5 shows that the NCCC has the fourth largest number of staff and the third largest budget among the six ACAs. However, as Thailand’s population of 64.2 million is the third largest among the six countries, the NCCC’s staff–population ratio of 1:69,481 is third, while its per capita expenditure of US$ 0.36 is fourth. Indeed, Borwornsak (2001, p. 199) has warned that the NCCC ‘‘risks being labeled a ‘paper tiger’’’ if its staffing and funding situation does not improve.

CONCLUSIONS Of the three patterns of corruption control, Pattern 3 is more effective than Patterns 1 and 2. However, the key factor responsible for combating


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corruption effectively in a country is the political will or commitment of its political leadership. According to Ian Senior: The principal people who can change a culture of corruption if they wish to do so are politicians. This is because they make the laws and allocate the funds that enable the laws to be enforced. (Senior, 2006, p. 84)

This indicates that if an incumbent government is committed to curbing corruption in the country, it should demonstrate its political will by supporting the selected pattern of corruption control with the required staff and funding. In other words, the incumbent government must be sincerely committed to the anticorruption strategy and not just pay lip service to it. Indeed, political will is ‘‘the most important prerequisite as a comprehensive anticorruption strategy will fail if it is not supported by the political leadership in a country’’ (Quah, 2003, p. 181). Thus, the commitment of the political leaders in fighting corruption ensures the allocation of adequate personnel and resources to the anticorruption strategy, and the impartial enforcement of the anticorruption laws by the anticorruption agency. Faced with the choice between the three patterns of corruption control, the political leadership in a newly independent country should not adopt Pattern 1 as the experiences of Mongolia and PNG have shown that the existing agencies of the police, GPO and the courts in Mongolia, and the Ombudsman Commission and the police in PNG are ineffective in curbing corruption. Pattern 2 is also not a good option as the reliance on multiple anticorruption agencies in China, India, and the Philippines has not been effective in curbing corruption because of the lack of coordination, interagency competition, and the dilution of the anticorruption effort by spreading the limited resources among these agencies. The rising trend of corruption in China is an indication that its anticorruption strategy of relying on multiple anticorruption agencies has not worked. According to Zou (2003, p. 82), 881,175 cases of corruption were reported in China during 1991–1999, but only 391,677 cases (44.4%) were investigated. Accordingly, he concluded on this pessimistic note: Realistically, it is impossible for China to completely eliminate corruption; what it can do is only to curb its increase. One reason lies in the fact that China is a one-party-ruled country. As long as the power of the CCP [Chinese Communist Party] is not effectively checked and supervised, such power can still give rise to corruption. y However, after 20 years of reform, corruption has become even more severe. The reason is simple. Corruption is closely linked to power. When power is unrestricted, corruption breeds quickly. (Zou, 2003, p. 84)

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In India, the reliance on the CBI and CVC has also not been effective in curbing corruption. To improve the CBI’s effectiveness, these reforms, which require political will, must be introduced: (1) the CBI must be removed from police control and be transformed into an independent anticorruption agency and (2) the CBI’s powers must be increased by amending the Constitution so that it does not have to obtain permission from the state governments to investigate corruption cases in these states (Quah, 2008, p. 254). Lall, a former CBI joint director, stressed that it was possible to curb corruption by strict and equitable laws and their firm enforcement without fear or regard for any one’s status or position. It is strong unwavering action against corruption and the corrupt which really will make the difference and change the mindset. y A strong and determined Prime Minister can make all the difference y. All we require is a straightforward, effective, honest, firm, bold and a well-meaning Prime Minister for a few years at least. (Lall, 2007, pp. 284–285, 287)

The Philippines has not been effective in curbing corruption even though it has the most anticorruption laws and agencies in the Asia-Pacific region. The lack of political will is the most important reason for the rampant corruption in the Philippines. Carino (1994, pp. 115–118) has attributed the lack of political will in curbing corruption in the Philippines to these six factors: (1) the decentralization of power was not accompanied by regular monitoring and evaluation of the subordinates’ performance; (2) the inability of the political elite and senior civil servants to distinguish between public needs and private interests has resulted in many conflicts of interest; (3) officials were not punished for their failure to perform their duties; (4) unequal and selective enforcement of the laws; (5) pronouncements were not followed by action; and (6) adequate manpower and funds were not provided for the implementation of the anticorruption measures. Hence, it is not surprising that ‘‘y corruption in the Philippines is perceived to be the worst among East Asia’s leading economies’’ according to the World Bank’s 2007 Control of Corruption governance indicator (Dumlao, 2008). The experiences of Singapore, Hong Kong, Thailand, and South Korea show that only Pattern 3 should be adopted if there is political will. The political will of the governments in Hong Kong and Singapore in curbing corruption is clearly reflected in the higher per capita expenditure and more favorable staff–population ratios of the ICAC and CPIB. Conversely, the lack of political will of the governments in South Korea and Thailand is also reflected in the lower per capita expenditure and less favorable staff–population ratios of the KICAC and NCCC, respectively.


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Pattern 3 is more effective than Patterns 1 and 2 because the independent anticorruption agency is a specialized agency concerned solely with minimizing corruption. The agency’s single-minded focus on combating corruption is a tremendous advantage as it is not distracted by other priorities. Thus, the CPIB in Singapore and the ICAC in Hong Kong focus their energies and resources on curbing corruption unlike India’s CBI, which is concerned also with tackling terrorism and organized crime in addition to fighting corruption. The most important strength of an independent anticorruption agency is that its raison d’etre is the investigation of corruption cases without political interference. In this connection, the experience of South Korea’s KICAC is instructive and should be avoided by those countries contemplating the introduction of an anticorruption agency as part of their anticorruption strategy. The KICAC is unique and anomalous as it cannot investigate corruption cases. In his evaluation of South Korea’s anticorruption measures, Kim, the Chief Deputy Director of the Korean Civil Service Commission, has observed that: The Government [of South Korea] adopted a check-and-balance system with the creation of the KICAC. But considering that [the] KICAC is not given investigative power, the check-and-balance system would not work as effectively as the Government originally intended. (Kim, 2005, pp. 130–131)

Thus, the KICAC’s experience demonstrates clearly that an anticorruption agency will not be able to perform its functions effectively if it lacks investigative powers, which is its hallmark. Indeed, the KICAC’s Achilles’ heel is that it has to rely on other agencies to investigate corruption cases instead of doing so itself. More importantly, as indicated earlier, the establishment of the KICAC as a toothless anticorruption agency without the ability to investigate corruption cases is a manifestation of the lack of political will of the South Korean government. In other words, it is futile to establish an anticorruption agency without investigative powers if the government’s sincere intention is to minimize corruption. Hence, it is not surprising that since 2000, in South Korea the ‘‘continuous stream of scandals involving high-ranking officials,’’ which ended ‘‘without clear investigations and judgments’’ led to the proposal to establish a special bureau of investigation of corruption by high-ranking public officials (Kim, 2006, p. 10). However, the plan to introduce legislation for the formation of this special bureau was ‘‘stymied’’ in the National Assembly and resulted instead in an alternative proposal of setting up ‘‘a standing special investigation system under an anti-corruption-related public institution’’ (Kim, 2006, p. 11).

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Finally, it should be noted that an independent anticorruption agency is not a magic bullet and the adoption of Pattern 3 will not automatically result in the eradication of corruption in a country if the political leaders are not committed to this task. However, if a government decides to adopt Pattern 3 and establishes an independent anticorruption agency to spearhead its anticorruption strategy, it can enhance the prospects for the anticorruption agency’s success by providing the agency with adequate staff and budget, by not interfering in the agency’s daily operations, and, most important of all, by resisting the temptation to use the agency as a political weapon against its critics or opponents. In short, if there is political will, the anticorruption agency can be an asset and a powerful weapon against corrupt politicians, civil servants, and business persons. On the other hand, if political will is absent, the extensive powers of an anticorruption agency can be abused by a corrupt government to victimize its political foes instead.

NOTES 1. Heidenheimer (1970, pp. 4–6) has identified three ways of defining corruption in terms of the duties of the public office, the market, or the concept of the public interest. 2. For details of the ACRC, see its website http://www.acrc.go.kr/eng_index.jsp

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Chan, K. M. (1999). Corruption in China: A principal-agent perspective. In: H.-K. Wong & H. S. Chan (Eds), Handbook of public administration in the Asia-Pacific Basin (pp. 299–324). New York: Marcel Dekker. Chin, J. (2007). Papua New Guinea in 2006. Asian Survey, 47(1), 200–205. Chinadaily.com.cn. (2007). China appoints head of corruption prevention bureau. September 7. Corrupt Practices Investigation Bureau (CPIB). (1990). The Corrupt Practices Investigation Bureau. Singapore: CPIB. Dumlao, D. (2008). WB: Corruption in RP worst in East Asia. Philippine Daily Inquirer, June 25. Economist. (2007). Pocket World in Figures 2008. London: Profile Books and the Economist. Gill, S. S. (1998). The pathology of corruption. New Delhi: Harper Collins Publishers India. Glynn, P., Kobrin, S. J., & Naim, M. (1997). The globalization of corruption. In: K. A. Elliott (Ed.), Corruption and the global economy (pp. 7–27). Washington, DC: Institute for International Economics. Heidenheimer, A. J. (Ed.) (1970). Political corruption: Readings in comparative analysis. New Brunswick, NJ: Transaction Books. Independent Commission Against Corruption (ICAC). (2006). 2005 Annual report by the Commissioner of the Independent Commission against corruption. Hong Kong Special Administrative Region, ICAC: Hong Kong. International Herald Tribune. (2006, September 29). China says it widens inquiries into graft.3. Korea Independent Commission Against Corruption (KICAC). (2006). Annual report 2005. KICAC, Seoul. Kim, J. (2006). National Integrity Systems Transparency International Country Study Report Republic of Korea 2006. Berlin: Transparency International, http://www.transparency. org/policy_research/nis/regional/asia_pacific Kim, P. S. (2007). Building national integrity through corruption eradication in South Korea. International Public Management Review, 8(2), 138–162. Kim, S. Y. (2005). Review on assessing effectiveness of integrity and anti-corruption measures in the Korean Public Service. In: J. Bertok & E. Beth (Eds), Public sector integrity: A framework for assessment (pp. 125–160). Paris: Organization for Economic Co-operation and Development, Part III. Kuan, H.-C. (1981). Anti-corruption legislation in Hong Kong – A history. In: R. P. L. Lee (Ed.), Corruption and its control in Hong Kong: Situations up to the late seventies (pp. 15–43). Hong Kong: The Chinese University Press. Laird, J. (2000). Money politics, globalisation, and crisis. Singapore: Graham Brash. Lall, B. R. (2007). Who owns CBI? The naked truth. New Delhi: Manas Publications. Leggett, K. (1999, December 9) China intensifies campaign to stamp out corruption. Asian Wall Street Journal, 9. Leiken, R. S. (1996/97). Controlling the global corruption epidemic. Foreign Policy, 105(Winter), 55–73. Lethbridge, H. J. (1985). Hard graft in Hong Kong: Scandal, corruption, the ICAC. Hong Kong: Oxford University Press. Luo, J., Miao, C., & Guo, H. (n.d.). The work against embezzlement and bribery in the people’s procuratorate of the People’s Republic of China. Beijing: Procuratorial Department for Embezzlement and Bribery. Mana, B. (1999). An anti-corruption strategy for provincial government in Papua New Guinea. Working Paper Gov99-5: Asia Pacific School of Economics and Management, Australian National University, Canberra.

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Quimson, G. (2006). National integrity systems transparency international country study report Philippines 2006 (http://www.transparency.org/policy_research/nis/regional/asia_pacific). Berlin: Transparency International. Republic of Singapore. (2007). The Budget for the Financial Year 2007/2008. Singapore: Budget Division, Ministry of Finance. Root, H. (1996). Corruption in China: Has it become systemic? Asian Survey, 36(8), 741–757. Senior, I. (2006). Corruption – The world’s big C: Cases, causes, consequences, cures. London: The Institute of Economic Affairs. Straits Times. (1998, August 1). 14. Straits Times. (2000a, March 6). 23. Straits Times. (2000b, March 9). 30. Straits Times. (2000c, April 24). 2. Tang, E. (2000, May 24). Thai graft busters mean business. Straits Times, 27. Timberman, D. G. (1991). A changeless land: Continuity and change in Philippine politics. Singapore: Institute of Southeast Asian Studies. United Nations Development Programme (UNDP). (1999). Fighting corruption to improve governance. New York: Management Development and Governance Division, UNDP. Wong, J. K. H. (1981). The ICAC and its anti-corruption measures. In: R. P. L. Lee (Ed.), Corruption and its control in Hong Kong: Situations up to the late seventies (pp. 45–72). Hong Kong: The Chinese University Press. Zou, K. (2003). Why China’s rampant corruption cannot be checked by laws alone. In: W. Gungwu & Z. Yongnian (Eds), Damage control: The Chinese communist party in the Jiang Zemin Era (pp. 81–97). Singapore: Eastern Universities Press.

CHAPTER 3 CORRUPTION IN INDIA: CAN IT BE CONTROLLED? Krishna K. Tummala INTRODUCTION One cannot mandate honesty. – Veerappa Moily, Chair, Second Administrative Reforms Commission, 2007

India did not invent corruption, but it seems to excel in it. Transparency International, (TI) in its September 2007 Corruption Perception Index, placed India 72nd (tying with China and Brazil) with its neighbors Sri Lanka at 94th, Pakistan 138th, and Bangladesh 162nd as among the most corrupt of the 180 nations it surveyed. Denmark, Finland, and New Zealand stood at the top as the least corrupt, while Mynamar and Somalia are ranked at the bottom as the most corrupt. In 2008, India was ranked at 74th (Transparency International, 2007, 2008). In its 2005 study, TI found that as many as 62% of Indians believe corruption is real and in fact had first hand experience of paying bribes (Transparency International, 2005). Threefourths in the survey also believe that the level of corruption in public services has only increased during 2004–2005. It is estimated that a total of about $5 billion are paid annually as bribes. The police are ranked as the most corrupt, followed by lower judiciary and Land Administration. Yet Suresh Pachauri, the Minister of State for Parliamentary Affairs, Government of India, declared: ‘‘Government is fully committed to implement its policy of zero tolerance against corruption. It is moving progressively to The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 45–72 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018005

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eradicate corruption by improving transparency and accountability’’ (Pachauri, 2008). This is a rather sorry state for a country known as the largest working democracy. Corruption conventionally is viewed as a transactional evil where money changes hands either in anticipation of favors, or favors already conferred. However, the more serious and pernicious ‘‘regime corruption,’’ where personal and partisan interests are confused with, and/or substituted for, national interests and the general welfare of the populace have been studied elsewhere (Tummala, 2006, pp. 1–22; 2007, pp. 139–160). The following pages are thus devoted to the study of the reasons for, and consequences of, corruption in its conventional sense, and the efficacy of measures to combat it (Tummala, 2002). Studying the subject within the ecological perspective in the tradition of Gaus (1947) and Riggs (1961), this chapter is divided into the following sections. The first provides a brief introduction. The second explains the context of corruption. The third examines administrative corruption. The fourth deals with political corruption. The fifth discusses the legal premises and institutional arrangements available to combat explicates. The sixth explicates the application of anticorruption measures. The final section draws some conclusions and makes some suggestions. ‘‘The folklore of corruption’’ (Myrdal, 1968, p. 408) must be approached with great caution as the very concept of corruption is fraught with many a pitfall. A simple and useful definition is given by Carl J. Friedrich. For him, corruption, ‘‘y is a kind of behavior which deviates from the norm actually prevalent or believed to prevail in a given context y. It is deviant behavior associated with a particular motivation, namely that of private gain at public expense y. Such private gain may be monetary one, and in the minds of the general public it usually is, but it may take other forms’’ (Friedrich, 1989, p. 15; 1972, 127–141). Several caveats, however, must be noted. First, lacking a precise and universally accepted definition, often all and sundry actions, including inefficiency in performance, are considered as being corrupt, in addition to its transactional facets. Second, the debate needs to be tempered by certain culture-specific imperatives. For example, in the Hindu culture, while visiting an elder, or a superior, one is expected to carry a gift, however small or inconsequential it is, as a mark of respect and not as an instrument of corruption although it might serve that purpose. Third, there is a certain duality in less developed countries (LDCs) where personal life is judged by indigenous cultural standards while the official conduct is largely assessed under western norms. Fourth, a distinction must also be made between the magnitude (size of bribe) and frequency (its pervasiveness). Fifth, there is the issue of cause and effect in that who

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is to be blamed for the initiative – the client who offers the bribe or the official who takes it? Sixth, there is often also the confusion stemming from the failure to analytically distinguish between the conduct of elected public officials and that of the civil servants. The behavior of each group, after all, follows different imperatives. Seventh, it should be noted that in all societies, more so in transitional and less developed societies, norms themselves are in a state of flux with behavior trying to catch up. In fact, corruption is thought to be the grease that facilitates at least some things get done which otherwise would not (Huntington, 1968, pp. 59–71). There, however, is a shared belief that corruption is dysfunctional as it deviates from established norms. Hence, it is illegal. It is inequitable as only those with resources can get things done, and those in crucial seats of power become rich due to unearned, or unduly earned, income. It is wasteful in an economic sense because resources are spent on an activity that did not deserve any further expenditure, to start with. It also leads to a lot of misery for the client who is often taken hostage. And, of course, it is contrary to the tenets of good governance.

THE CONTEXT OF CORRUPTION Before dwelling on pervasive corruption and the efficacy of several efforts to combat it, one must put the Indian scene in perspective. It is argued here that (i) the very diversity and the prevailing contradictions result in a certain absence of norms, and (ii) the politico-economic system provides various power points and opportunities that allow corruption to flourish. The above are studied under three headings: demographic, economic, and cultural.

Demographics India has an estimated population of 1.07 billion in 2004 living on a total landmass of 3,287,590 km2 (including Indian administered Kashmir), speaking 18 languages (besides English), and as many as 1,652 dialects. There are several religions with a predominant Hindu majority (81.3%) and the largest Muslim minority (12%). The average life span of 27 years at the time of independence in 1947 is now at 63.9 years. With an estimated GDP (purchasing power parity – PPP) of US$ 3.2 trillion and a 7.6% average annual growth rate, its per capita income was estimated by the World Bank at $780 in 2006. Nearly a fourth of India’s population lives below poverty

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line. With 66% of its population living in rural areas, India has only 54% of its land arable, and agriculture still contributes 24% of its GDP (India Today, 2004a, 2004b). In June 2008, inflation rate stood at 11.05% – a 13-year high, as against the Reserve Bank target of 5.5%. It is also a land of stark contradictions. It is the largest working democracy, with 29 states (including Delhi, which has semistatehood) and 6 union territories. Yet, no constitutional status was provided for local selfgovernment until the passage of the 73rd and 74th Amendments in 1992. To accommodate the great diversity, it opted for a federal form of government, but fearing fissiparous tendencies called it as the ‘‘Union of India.’’ As the 5th largest (by some counts fourth, certainly third in Asia – after Japan and China) economy in the world, and rated as the 11th largest industrial nation, it still has nearly two-thirds of its population living off agriculture, forestry, and fisheries. With only 52% of its population literate (the State of Kerala in south boasts 90% while Rajasthan in north languishes at about 40%), the nation with 219 institutions of higher learning at the University level produces the second largest number of scientists and engineers in the world. It had a woman Prime Minister, Indira Gandhi, who was considered to be one of the most powerful democratic leaders in the world, and was voted as the ‘‘Woman of the Century’’ in a poll conducted by BBC (BBC, 1999). But successive governments, as of today, have had trouble in getting a law passed to reserve 33% of all legislative seats for women (while local bodies already have this quota). Although the nation has been struggling with the inequities of the caste system, it, however, decided in 1990 to extend minority preference in public service on the basis of caste, further to the Mandal Commission recommendation in 1980 (Tummala, 1994). Ever since its 1974 nuclear device explosion and the 1998 tests of five nuclear bombs and several missiles capable of carrying nuclear warheads, India entered the select nuclear club. It, however, is not a signatory to the Comprehensive Test Ban Treaty. It fought three bloody wars with Pakistan, and was beaten by China in 1962. Yet, according to Washington-based World Watch, as far back as 20 years ago, it led the Third World among arms producers (followed by Israel). But it still professes to be the leader of nonaligned and peaceful nations. While the country leap-frogged into the electronic age beginning in 1990, used electronic voting machines in its 2004 and 2009 general lections and is now an Information Technology (IT) powerhouse, large part of India, rural as it is, still languishes in the age of the bullock cart with little amenities. Despite the fact it is well modernized and westernized, India clings to a lot of


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its tradition, and more so to occult. As far back as in 1989, an all-female crew flew a Boeing jet on a domestic flight. But, even today reports are frequently heard of cases of suttee (which is outlawed) where a wife immolates herself on the funeral pyre of her deceased husband (whether under force or on her own volition). The country has the largest railway network in the world and ever since its green revolution, it has been able to feed its teeming millions. What with the low water tables, climate change, and the spurt in the growth of population, the last 2 years, India had to import wheat. Millions go hungry on a daily basis due to poor food distribution, or where available cannot afford to buy food due to lack of income. Bharatiya Janata Party (BJP), which led the National Democratic Alliance (NDA) coalition government (till its defeat in 2004 general elections), came into prominence after some of its followers destroyed, in 1992, the Babri mosque that was allegedly built upon a razed Hindu temple (Tummala, 2004, pp. 207–234). But once in power, it showed a good measure of secularism in a way when its appointments to the position of State Governors included a lower caste Christian, a Syrian Christian, a Protestant, a Muslim, and people of other religions (India Today, 1999a, p. 7). Contrarily, it not only exonerated, but also supported another of its party leaders – the Chief Minister of Gujarat, Narendra Modi – who has been much criticized for his inability to prevent, and even accused by some of fomenting, large-scale religious killings of Muslims. It must be noted, however, that while all parties talk of secularism as enshrined in the Constitution of India, mostly every party used religion for electoral advantage.

Economics On the political economy front, under the helmsmanship of its first Prime Minister Jawaharlal Nehru, the country started with the credo of ‘‘democratic socialism.’’ Unleashing massive social engineering, it resulted in one of the most administered states by capturing the ‘‘commanding heights’’ of the national economy. By 1990, however, it turned toward economic liberalization. A traditionally hoarding culture has since changed into a fully consumer-oriented one, worshiping wealth, no matter how it is accumulated. While under the previous economic regime, it was the administrator who was considered to be corrupt, now the politicians have not only taken over the lead, but also been coopting the administrators.

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Culture It is important to take note here of the cultural dimension of the behavior of the Indian majority population – the Hindus. Hinduism is not a proselytizing religion but largely a way of life. Not only other religions such as Buddhism and Sikhism emanated from it, it is also tolerant and absorbing. Yet, when the country was partitioned on the eve of its independence in 1947, religious fanaticism rose to such a level that it resulted in the largest migration of over 17 million people across borders in both directions between a predominantly Hindu India and an Islamic theocracy, Pakistan. And in 1971, as Pakistan was being dismembered with the creation of a new nation, Bangladesh (out of former East Pakistan), as many as 10 million Bengali refugees poured into India, and to this day the eastern Indian states continue to agitate against these ‘‘foreigners.’’ Hinduism, in general, is also personally forgiving in nature. An errant individual can always go to a superior (a religious leader, or simply one who is senior in age) and fall on his/her feet, literally and unashamedly, and the chances are that leniency will be shown almost immediately regardless of the fact the culprit may or may not have repented at all. Nirad C. Chaudhuri captured its essence thus, ‘‘The unlimited capacity to be a villain of the worst kind with an unlimited capacity for self-abasement before virtue and nobility is one of the most disarming traits of the Indian character y’’ (Chaudhuri, 1978, p. 787). Life at two different, and often contradictory, levels of existence for an Indian is not abnormal. Even the most debased material living can coexist with a high abstraction of life. Deviance in personal and material life is accepted and forgiven when the search is for a purportedly higher truth. The present and the observed, for the Hindu, is only maya – illusion. Thus, two apparently contradictory, but not necessarily conflicting behavior patterns are manifest, and are tolerated. Given all the contradictions and opportunities, corruption in India is ubiquitous. Neither is this a modern day development; nor is it far different from the experience of other nations. That the subject was of interest even historically is seen from the ancient writings of Kautilya1 who stated, Just as it is impossible not to taste the honey or the poison that finds itself at the tip of the tongue, so it is impossible for a government servant not to eat up, at least, a bit of the king’s revenue. Just as fish moving under water cannot possibly be found out either as drinking or not drinking water, so government servants employed in the government work cannot be found out (while) taking money (for themselves) y. Government servants shall not only be confiscated of their ill-earned hoards, but also be transferred from one work to another, so that they cannot either misappropriate government money


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or vomit what they have eaten up. Those who increase the king’s revenue instead of eating it up, and are loyally devoted to him, shall be made permanent in service. (Sastry, 1967, p. 71; also, Thakur, 1979)

The British colonial administration contributed generously to this scourge. To quote Cornwall Lewis, a member of the British House of Commons: ‘‘y no civilized Government existed on this earth which was more corrupt, more perfidious and more rapacious than the Government of the East India Company from 1765–1784’’ (Pylee, 1980, p. 4). At least one Governor-General of India, Warren Hastings, was impeached (but exonerated) in Britain for all his misdeeds in India. Modern-day India is no exception. For instance, the Central Vigilance Commission (CVC) recognized as many as 33 different modes of corruption (Central Vigilance Commission, 1966, pp. 15–16 and 32–33).

ADMINISTRATIVE CORRUPTION India’s ranking among the corrupt is already shown at the beginning of this chapter. For analytical purposes, it should be noted that there are two groups of public officials involved in corruption – appointed (civil servants), and the elected (politicians). To deal with the first category first, it is theorized by several that corruption is endemic in LDCs for various reasons: unequal access to, and disproportionate distribution of, wealth among the rich and the poor; public employment as the only, or major, source of income; fast changing norms and the inability to correspond personal life patterns with public obligations and expectations; access to power points accorded by state controls on many aspects of private lives; poor, or absent, mechanisms to enforce anticorruption laws; general degradation of morality, or amoral life styles; lack of community sense, and so on (Braibanti, 1962, pp. 357–372; Leys, 1965, pp. 467–497). The earlier commitment to democratic socialism led to state intervention in terms of licensing in many aspects of private life and private entrepreneurship culminating in the great expansion of the public sector and its undertakings, and thus generating the label that it was a ‘‘permit Raj,’’ which in turn led to the stranglehold that the bureaucracies exercise over people. Planned development, observed Kuldeep Mathur, ‘‘considerably helped the bureaucrats to acquire administrative and political power, which expanded their role in the economy, permitting them greater opportunity to satisfy their self-interest.’’ (Mathur, 1991, pp. 639). The Santhanam

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Committee as far back as in 1964 confirmed that, ‘‘The sudden extension of the economic activities of the Government with a large armory of regulations, controls, licenses and permits provided new and large opportunities (for corruption)’’ (Santhanam, 1964, p. 7). Contrarily, the New Economic Policy (NEP) since 1990, with its liberalization, inaugurated a neocapitalist culture and whipped up a voracious appetite for accumulation of wealth. It has also transformed a largely traditional and hoarding society into a consumer nation with great abandon and amorality. In other words, the opportunity for corruption, starting with a highly administered society to the current neoliberal economy, has become abundant. Robert Wade summed up the situation the best, ‘‘Several structural features of Indian society predispose the administrative and political system to a high level of corruption: acute scarcities; a large regulatory and allocative role of the state; a preeminent bureaucracy, faced with declining real salaries; a rapidly expanding middle class demanding access to the state.’’ (1985, p. 486) Summing up the observations made in its report of 2000 by the Centre for Media Studies, New Delhi, N. Vittal, former CVC, reflected on the current situation thus: Nearly half of those who avail services of most often visited public departments of Government in the country had the first hand experience of giving bribe at one time or the other. In fact, as high as two thirds of people think that corruption in these offices is real. However, one third think corruption is more exaggerated. And yet, 80 per cent of people are passive and hardly 20 per cent had ever complained about such corruption to any. It is interesting that while 50 per cent of the people reported that they had bribed, only 20 per cent took the trouble of complaining. This also highlights the need for sensitizing the public about the dangers of corruption. (Vittal, 2003, p. 181)

POLITICAL CORRUPTION While a great deal is said of administrative corruption, little attention has been paid till recently toward the behavior of elected public officials and those aspiring for elected offices. Political parties have successfully helped criminalize politics and politicize crime. For example, in the 2002 elections in the State of Uttar Pradesh (UP) for the 403 seats in the Legislative Assembly, there were 910 candidates from all parties, 430 of whom were accused of assorted crimes ranging from murder, rape, kidnaping for ransom, and dacoity. A Dhanajay Singh won the election despite the fact he


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was a ‘‘contract killer’’ with 43 different criminal cases pending against him including being the prime suspect in the murder of the State’s Medical Health Director, Dr. Bacchiter Singh. Of those elected, 190 have had criminal records, which led to a caustic comment that they might as well form the government by themselves, as they had a near majority (Rastogi, 2002). In the case of Bihar, during 1991–1999, there had been 58,565 murders, 18,485 kidnapings, 8,377 rapes, 495 political murders, and 390 massacres (Hindu Online, 1999, p. 7). In recent memory, former Prime Ministers Rajiv Gandhi and P. V. Narasimha Rao, besides other cabinet ministers, were accused of large scale corruption (both exonerated later). Even the former Speaker of Lok Sabha (the lower House of Parliament), Balram Jhakar, faced major corruption charges. There were at one time as many as 46 different corruption cases pending before three special courts against the then Chief Minister of the State of Tamil Nadu, Jayalalithaa Jayaraman. Bihar Chief Minister, Laloo Prasad Yadav, was forced to resign his office pending major corruption inquiries into what is known as the fodder scam was not resolved even in 2008–09. Paradoxically, he was later elevated to the national stage having been elected to the Lok Sabha, and rewarded with the Railway Ministry in the Central Cabinet. Rumor was that he demanded, rather unsuccessfully, the Home Ministry that would have given him some control over the investigations. The list goes on and on resulting in the general cynical belief that all politicians by nature are corrupt, and that they seek public office to enrich themselves. Ironically, almost all the accused continue to be active political participants with impunity. Newspapers are replete with all sorts of stories of raids of houses of politicians, civil servants, and businessmen. But very few spend time in jails, and if and when they do go to jail on rare occasions, there is no stigma attached and soon they are rehabilitated as they come out of jail. Such state of affairs provoked the Election Commission (EC) to remark that lawbreakers have become lawmakers. It is argued that the electorate cannot make an informed judgment on the candidates running for office unless all the antecedents of each candidate are made public. To this end, the Association for Democratic Reform, comprising of several civic groups, went to court demanding the disclosure of the background of all candidates, as was recommended by the Law Commission in its 170th report. The Vohra Committee in 1993 also thought the same. On November 2, 2000, the Delhi High Court obliged and directed the EC to issue directives accordingly. But the NDA government, led by BJP, appealed to the Supreme Court claiming that under Article 84 of the Constitution, the

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power to decide on the qualifications of candidates belonged to the Parliament, and the EC cannot step into this arena, even when there is no adequate legislation. The Supreme Court in its May 2, 2002, judgment upheld the right of the voters to know the details of the candidates, and ruled that where legislation is silent, the EC can indeed step in with directions. Consequently, asserting the importance of transparency in a democracy, the EC gave the necessary directions to the effect that all candidates running for a legislature (be at the states level or to the Parliament) should file an affidavit before the EC with full details of their past record on five counts: any conviction, acquittal, or discharge of any criminal offense in the last 6 months prior to filing their nomination papers; any accusations in pending cases punishable with imprisonment of 2 or more years; assets (both movable and immovable) of self and those of spouses and dependents as well; any liabilities, particularly any overdues of public financial institutions or Government; and the educational qualifications of one self. However, the Government of India joined by 21 other political parties, thought otherwise and came up with a watered-down Ordinance (as the Parliament was not in session) on August 24, 2002, amending the Representation of the People Act of 1951, and sent it for the signature of the President. After a lot of politicking and posturing by the government and other parties, the Ordinance was signed by the President into law. However, given the variance between the EC’s directives and the new law, the Supreme Court was again moved by the National Campaign for Electoral Reforms (NCER) and others. The Court gave its decision on March 13, 2003, basically reiterating their previous 2002 decision, which required full disclosure by candidates. Not only that, if a rival candidate were to file an affidavit with information contrary to what a candidate disclosed, such information must also be disseminated under this ruling of the Court. In the new general elections in March–April 2004, it is said that 25–30 members of Parliament and 250–300 members of State Assemblies have had criminal histories. ‘‘The line between criminality and politics,’’ observed a staunch advocate of political and electoral reforms, ‘‘y is being erased in many parts of India y. With coalition politics, the numbers speak. You are no longer able to make clean choices’’ (Jayaprakashnarain, 2004, p. A13). Mention must be made of at least two ministers in the Cabinet of the Congress Party led by Prime Minister Manmohan Singh (2004–2009) who headed the UPA coalition of 19 different parties. Against one, there are criminal charge sheets in a fodder scam that deprived him of the


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Chief Ministership of the State of Bihar (Laloo Prasad Yadav, who held the Railway Portfolio, as already seen). Another (Taslimuddin, Minister for Agriculture, Food and Civil Supplies), also from Bihar, has a criminal background. The opposition, led by BJP made an issue of these ‘‘tainted Ministers’’ and had successfully stalled the parliamentary proceedings for a while. They even prevented the customary, polite ‘‘motion of thanks’’ following the President’s inaugural speech to the new Parliament, forgetting that they had after all accommodated their own Defense Minister, George Fernandes, who initially resigned consequent to the Tehelka revelations (see below), but returned to his office in no time (before the case was judged). In general, public office is considered to be a great source of private gain. The second Administrative Reforms Commission (henceforward ARC-2) observed in 2007 thus, ‘‘In our case, at times public office is perceived to be an extension of one’s property. That is why, sometimes, public offices are a source of huge corruption and a means of extending patronage’’ (ARC-2, 2007). Such patronage has been, in a way, institutionalized with the inauguration of the Members of Parliament Local Area Development Schemes (MPLADs), whereby each of member of Parliament is entitled to spend about Rs 20 million each year to purportedly develop individual constituencies (Ramachanadran, 2005, pp. 1965–1967). Government agency demands for kickbacks for the party (parties) in power from even foreign firms are also known. And the general populace has taken all this as a matter of course; it became second nature. Any client can attest to the fact that petty bribery is pretty common. The current highstakes corruption is in the form of land-grab in the name of establishing Special Economic Zones (SEZs) or other purported economic development schemes. All this leads to the single fundamental question: Why cannot corruption be controlled, if not eliminated altogether?

LEGAL AND INSTITUTIONAL MEASURES The short answer to the above question is not that there is any dearth of legal and administrative measures to deal with errant public servants; there indeed are several. Section 161 of the Indian Penal Code (IPC) of 1860 established the initial legal source meant to deal with bribe-taking and favoritism. While no precise definition of the word ‘‘corruption’’ was provided, this Section gave the most comprehensive explanation of a corrupt person as one,

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KRISHNA K. TUMMALA y being or expecting to be a public servant, accepts, or obtains, or agrees to accept, or attempts to obtain from any person, for himself or for any other person, any gratification whatever, other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to show, in the exercise of his official functions, favour or disfavour to any person or for rendering or attempting to render any service or disservice to any person, with the Central or any State or with any public servant as such. (Venktatappiah, 1968, p. 272)

This was followed by the Prevention of Corruption Act, 1947. Without further improving the already existing Penal Code, this Act defined a new offense—‘‘Criminal Misconduct in discharge of official duty’’ punishable by 1–7 years imprisonment. To protect the innocent from harassment, it is also stipulated that no authority less than the one that appointed an officer could remove or punish otherwise. The sanctioning authority may be called in at the time of prosecution to adduce evidence on the sanction (which continues to cause problems in that the case might come in for a hearing many years after the sanction was given, and the current incumbent who may or may not know of the sanction shall bear witness. ARC-2 wants this to be amended.) Also, the complainant/bribe-giver is protected from prosecution as without such immunity no one might come forward to complain. Criminal Law (Amendment) Act, 1952, made some changes such as making abetting of offenses an offence. All corruption related cases shall be tried only by special judges. The First Five Year Plan in 1952 emphasized integrity in public life, and thought that corruption ‘‘not only inflicts wrongs which are difficult to redress, but (it) undermines the structure of administration and the confidence of the public in administration. There must, therefore, be a continuous war against every species of corruption within the administration as well as in public life y’’ (p. 115). In 1955, an Administrative Vigilance Commission was created within the Ministry of Home Affairs (now within the Department of Personnel & Training) with the responsibility to provide direction and coordinate the various efforts of the Ministries to deal with corruption. Perhaps the most important development in this context was the 1964 ‘‘Report of the Committee on Prevention of Corruption,’’ otherwise known as the Santhanam Committee. This Committee, following the logic that an executive body impartially inquiring into its own conduct is more or less an anomaly, recommended the creation of a Commission, headed by a Commissioner independent of the executive part of government, that is, all ministries. The government accepted it, and set up the CVC in the


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same year. Each Ministry also came to have a Vigilance Officer, whose appointment will be subject to the veto of the Commissioner. The Prevention of Corruption Act of 1947 was also amended to make it a criminal offense to possess wealth disproportionate to the income of a public servant that cannot be satisfactorily explained. A Prevention of Corruption Act, 1988 consolidated the IPC along with all the amendments; a new concept of ‘‘public duty’’ was added and penalties were enhanced. It also sought expeditious trials, and stipulated that no court shall stay the proceedings on the grounds of any error or irregularity in the sanction granted unless in the opinion of the court it has led to failure of justice. The Act listed (a) offences of bribery and other related offences and penalties; (b) abuse of authority by favoring or harming someone, without any pecuniary consideration or gratification; (c) obstruction or perversion of justice by unduly influencing law enforcement; and (d) squandering public money. In addition to these, there are several Service Conduct Rules specifying the ‘‘dos’’ and ‘‘don’ts’’ for the civil servants. Article 102 of the Indian Constitution provides for the disqualification of any Member of Parliament (MP) for holding an office of profit; (b) declared of unsound mind by a competent court; (c) being an undischarged insolvent; and (d) voluntarily acquiring a foreign citizenship and acknowledging foreign allegiance. (Article 191 deals similarly with state legislators.) There indeed have been occasions when an MP was expelled for holding a position of profit as was the recent case of Jaya Bachchan, who claimed that she was barred for political reasons. In fact, an Act of 1959 made several positions exempt from this definition without any rule or rhyme – rather arbitrarily. Article 311 of independent India’s Constitution reiterated the former Prevention of Corruption Act provision that no civil servant can be prosecuted and punished by an authority that is subordinate to the one that made the original appointment. Further guarantees are provided for the civil servant who is charged to be heard during the investigation (but not necessarily while imposing the penalties). Noteworthy is the provision that makes the appointing authority to make the final determination whether an inquiry itself is possible (by giving its reasons in writing). Further, the President of India or the Governor of a State may prevent an inquiry in the name of national security. While this provision was originally intended to protect the civil servants from harassment, it, in fact, turned out to be a hindrance in that sometimes no consent was given by the appointing authority, or if given, it came too late and/or only grudgingly. Veerappa

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Moily, Chair, ARC-2, quoting the 2004 report of the CVC showed that ‘‘out of the 153 cases for sanction, 21 cases were pending for more than 3 years, 26 cases between 2 and 3 years, 25 between 1 and 2 years. The departmental enquiries are soft-pedaled (sic) either out of patronage or misplaced compassion’’ (Moily, 2007). Besides the Administrative Vigilance Division, there are three other institutions at the Union (federal) level: (i) the CVC; (ii) individual vigilance units in each of the Ministries and Departments of the Government of India, central public enterprises and other autonomous organizations; and (iii) the Central Bureau of Investigation (CBI). The CVC advises the Government of India in all matters pertaining to all matters with regards the maintenance of integrity in administration and supervises over the CBI and other vigilance administration agencies. The CBI is the principal investigative agency of the central government in all anticorruption matters. The arrangements vary from state to state, which have either Vigilance Commissions (e.g., Tamil Nadu, West Bengal) or the Lokayktas (or both, such as the case in Andhra Pradesh). ARC-2 concluded that their working leaves much to be desired relative to the central apparatus. It also noted that while the number of cases of corruption keeps increasing, the number of cases disposed off remains relatively low. For example, in 2005, at the centre of the 4,130 cases pending for trial, only 265 were disposed off. At states level, a total of 12,285 cases were pending in the same year, and only 2005 were disposed off. It is estimated that it would take about 6 years to clear the backlog in the states alone (ARC-2, 2007, paras 4.2.1 and 4.2.2). The first Administrative Reforms Commission (ARC) in 1969 recommended the establishment of a Lok Pal (an Ombudsman) to oversee the conduct of Ministers and MPs. But so far nothing happened, although whether the Prime Minister’s conduct should be subjected to the authority of a Lok Pal continues to be a matter of hot debate. As many as 17 states have such an office, but the experience with this office has been rather spotty. When a public servant is accused of corruption, the CVC may undertake an investigation on its own, or entrust it to the CBI or the concerned Ministry or Department itself. The resulting investigatory reports must be submitted to the CVC, which would recommend to the Ministry proper action such as criminal prosecution. In case such a recommendation was not accepted by the Ministry, it should be noted in the report to be placed before the Parliament. Besides the above governmental institutions, it is important to discuss the nascent investigative role of (a) the media and (b) other civic groups.


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The Media India has always taken pride in a free press. Of late, the electronic medium has joined, what with the proliferation of private television channels and the dot.com entrepreneurs, to make up a new tool to curb corruption, or at least expose it. To illustrate the power of investigative journalism, three egregious cases may be cited: (i) the Tehelka expose; (ii) the Petrol Pump scam; and (iii) the Aaj Tak expose. (i)

The Tehelka expose: Tarun Jit Tejpal launched a web site – Tehelka.com. Investing a mere Rs 210,000 (about US$ 5,000 at current rate of exchange), he started a sting operation with a bogus company called West End International to sell an equally preposterous thermal camera to the Ministry of Defense. Trying to negotiate a deal, he ran 270 min of videotape that caught no less than the then President of BJP, Bangaru Laxman, taking a bribe of a paltry sum of Rs 100,000 (about US$ 2,300). It also showed the President of Samata Party, Jaya Jaitly, inviting the peddlers to the home of the then Defense Minister and the NDA Convener, George Fernandez, and receiving money supposedly for the party. (Jaitly’s name was later struck out of the list of bribetakers.) Several high-ranking military brass were also caught with their pants down, so to speak, asking for whiskey and women. The scandal reached to the Prime Minister’s Office (PMO) as well with at least two, Brajesh Mishra and N. K. Singh, both close to Prime Minister A. B. Vajapayee, turning up in the taped discussions. As some juicy segments of the tape were shown on a private television channel in March 2001, the BJP led government rocked. Laxman resigned in disgrace (but continues to be a leader of the party even today). Fernandez also resigned saying that he would keep out of the government till the investigations into the allegation are completed. However, not too long after, he returned to head the Defense Ministry as talk turned to a war – a possible nuclear one – between India and Pakistan. ‘‘Government Shamed & Crippled,’’ called one prominent front-page (India Today, 2001, p. 1). Leaving aside the substance of the accusation, the messenger himself came to be investigated being charged that he was financed by unsavory characters, in foreign countries to boot, to undermine BJP and its NDA government. The government also claimed that the tapes were a fake. Three years later, however, in June–July 2004, British experts concluded that the tapes in fact were authentic, but the dispute continues and investigations continue into the corruption charges themselves and

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the allegations against Tejpal even with the new United Progressive Alliance (UPA) government led by the Congress Party which came to power after the new general elections in March–April 2004. (ii) The Petrol Pump Scam: On July 21, 2002, the widely read English daily, The Indian Express, broke a story that Ram Naik, Petroleum Minister in the NDA government, changed the procedures to license dealers to sell petrol, kerosene, and cooking gas. The Chairpersons of the 59 three-member individual Dealer Selection Committees across the country were given virtual control over this process. It was also required that all applications be submitted through the state BJP chief’s office. The net result, as reported, was that nearly one half of the 3,850 licenses went to NDA partners and relatives of BJP colleagues. Thus, this turned out to be a large exercise in political patronage. Not surprisingly, the opposition parties in Parliament jumped on BJP that had claimed all along a higher moral ground, and asked for nothing less than the dismissal of the Petroleum Minister. Prime Minister Vajpayee, stung as he was, canceled 3,565 licenses despite the fact that as many as 2,131 of them have already been in operation. He also announced that an inquiry into all licenses issued between 1983 and 2000 will be conducted. But the government did not stop there. It went on an offensive and pointed out that the previous Congress government behaved no better in that their own Minister, Satish Sharma, was forced to resign for a similar patronage exercise in 1995 following the severe strictures passed by the Supreme Court. It also claimed that in the present allotment process, some of the leaders of the Congress have, in fact, made recommendations in favor of their own candidates or clients, thus proving no one is above board. (iii) Perhaps a more telling and successful episode occurred on December 12, 2005, as a TV channel in its ‘‘Aaj Tak’’ program revealed that 11 MPs belonging to various parties accepted money to raise questions in Parliament regarding a fictitious company (North Indian Small Manufacturers Association – NISMA). Based on the recommendation of a Parliamentary Committee, all were expelled on the 23rd, posthaste.

The Rise of Civic Groups The degradation of politics due to extensive corruption also led to the rise of many civil society groups with participation by several high-profile


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concerned and committed individuals. These include former Judges, higher civil servants, and top brass of the army. For example, the Foundation for Democratic Reform, with its sotto voce, Lok Satta, is ‘‘a non-partisan people’s movement for reforms in the governance structure’’ in the country with the lofty goal that it is not interested in a ‘‘mere change of players, but change in the rules of the game’’ as such. (This organization now is a political party hoping to work from inside.) Several of these organizations have been on a literal crusade, some quite successfully, to empower the EC to make it mandatory that all candidates for elections must disclose their past life, so to speak (see below). Several individuals also have taken recourse to what is known as Public Interest Litigation (PIL) to serve as watchdogs and move the courts on any suspected corrupt practice. While some well-meaning persons have rendered yeoman service using the PIL, it must also be noted that on and off this tool tended to be misused on trivial grounds, or because of simple vendetta, thus downgrading its importance and contributing to its nuisance value. Some in the media also face similar charges, including ‘‘manufacturing’’ news.

EFFICACY OF ANTICORRUPTION MEASURES While the opportunities for corruption abound, the application of anticorruption measures apparently leave much to be desired, as evidenced above. As is the case with any criminal offense, there are two phases in dealing with corruption of public officials: investigation of the crime and the subsequent prosecution. The institutions that are established to do the first in India came under severe criticism in that they had not done a proper job, or did not do the job at all in certain cases depending upon who the accused was. When indeed someone of substance is charged, (s)he almost always instantaneously and invariably claims some medical emergency or disability, real or feigned, just to stall the proceedings. While the court system itself has proved to be agonizingly slow, even not to present a case before a court as investigations are not completed is a near travesty of justice. The total failure of enforcement of the anticorruption process can be illustrated by the Vineet Narayan case in 1997 (otherwise known as the ‘‘hawala’’ case, involving violation of foreign exchange rules (Vineet Narayan et al. v. Union of India et al., 1998).2 To provide a gist of the case, consequent to an arrest on March 25, 1991, several raids were made on various premises of one S. K. Jain and his family. Large amounts of Indian and foreign currency, some notebooks, and

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a diary were seized in the process. The latter contained the initials of several high-ranking politicians to whom vast amounts were said to have been illegally paid. But nothing was done to further investigate the matter that led to a PIL suit filed on October 10, 1993, before the Supreme Court of India. The petition was to ‘‘command performance of the duty under law to properly investigate into the accusation of commission of crime and to file a charge sheet in the competent court, if a prima facie case is made out.’’ The primary issue here was ‘‘(w)hether it is within the domain of judicial review and it could be an effective instrument for activating the investigative process which is under the control of the executive?’’ On December 8, 1997, the Court answered in the affirmative by invoking Articles 32 (right to move the Supreme Court for the enforcement of Fundamental Rights) and 142 (right of the Supreme Court to issue orders enforceable throughout the country for ‘‘doing complete justice’’) as provided in the Constitution, and in defense of Rule of Law. It also observed: ‘‘Inertia was the common rule whenever the alleged offender was a powerful person.’’ It found that the CBI and other investigative agencies had not performed their primary duties, and directed them to do just that by stating that ‘‘none stands above the law so that an alleged offence by him is not required to be investigated.’’ It is important to note that the Court here was not attempting to deal with the merits of the case as such. Its interest was limited only to see that investigations are conducted, and the process of justice moved on, without undue delay and political interference.’’ It is reiterated,’’ the Court said, ‘‘that any proceeding pending here has no bearing on the merits of the accusation, and is not to influence the trial in any manner.’’ There were two other issues that came to the fore. One, under what came to be known as the ‘‘Single Directive,’’ which the Government of India previously laid down to investigate a higher policy making public servant, prior permission shall be obtained from the head of the office concerned. The Court thought such a requirement was inhibiting the investigatory process, and quashed it. The second, to whom should the investigating agencies be accountable? After all, in a parliamentary form of government, the Cabinet Minister who is heading the Ministry/Department (working under the principles of collective responsibility and accountability to Parliament) must be the final referral point. But experience has been such that several Ministers either soft-pedaled cases when they or their own ilk are involved, and worse, even tried to hush it up for either personal or partisan benefit. The Court did not hide its annoyance in this context, and consequently assumed for itself the supervisory responsibility. It admonished thus: ‘‘y (t)he CBI would not


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take any instructions from, report to, or furnish any particulars thereof to any authority personally interested in or likely to be affected by the outcome of the investigations into any accusation. This direction applies to any authority that exercises administrative control over the CBI by virtue of the office he holds, without any exception.’’ The CBI, thus, was instead asked to report to the Court from time to time as to the progress of the investigation till the charge sheets are filed in the appropriate courts. The Court did not stop there. It further observed: The constitution and working of the investigating agencies revealed the lacuna of its (sic) inability to perform whenever powerful persons were involved. For this reason, a close examination of the constitution of these agencies and their control assumes significance. No doubt, the overall control of the agencies and responsibility of their functioning has to be in the executive, but then a scheme giving the needed insulation from extraneous influences even of the controlling executive is imperative.

As these proceedings were going on in the Court, the Government of India on July 1, 1993, constituted a Committee headed by the Home Secretary N. N. Vohra, who reported in a scathing tone how dismal the efforts to curb corruption were, and recommended the establishment of a nodal agency within the Home Ministry (which deals with law and order in the country) to compile all the information that comes out of the various investigative agencies. The need for improving the procedures for the constitution, and monitoring the functioning, of the intelligence agencies was also recognized by this report. Yet another Committee was later established (which included Vohra) headed by the Cabinet Secretary, which came to be known as the Independent Review Committee (IRC). Noting that they see a general impression that the investigating agencies are subject to extraneous pressures leading to dilatory tactics, they made several recommendations such as the appointment of Special Courts to deal exclusively with foreign exchange rules violations, empowering the Enforcement Directorate (ED) to appoint special counsel for conducting trials, establish within the Ministry of Health medical boards to examine those accused who claim medical disability or emergency to stall the proceedings, and so on. Also recommended was that members of CVC be selected by a Committee, and the appointment be made by the President of India conferring statutory status on the Commission. The selection of the CBI Director itself tended to be controversial in that the government of the day could pick its own minion to subvert any investigation, or transfer the incumbent to suit the needs of the day.

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Thus, the IRC also recommended that a Selection Committee should identify a panel of names suitable to be the CBI Director, with the final selection to be made by the Appointments Committee of the Cabinet (ACC). While the Director must have a minimum of a 2-year tenure, any transfer shall be subject to the endorsement of the Selection Committee. Similarly, a Selection Committee headed by the Central Vigilance Commissioner should recommend to the ACC a panel out of which the appointment of the Director of Enforcement would be made with a minimum 2-year tenure, and with the status of an Additional or Special Secretary to the Government. Two events in 1999 are instructive in this regard: the transfer of the Director of ED, and the appointment of the Vigilance Commissioner.

Director of the Enforcement Directorate M. K. Bezbaruah, a civil servant heading the ED, was pursuing a number of very sensitive cases regarding violations of the 1973 Foreign Exchange Regulations Act (FERA). The accused included very highly visible politicians and their associates, such as Sasikala Natarajan, a close friend of Jayalalithaa Jayaraman, then Chief Minister and leader of AIADMK in Tamil Nadu, and a coalition partner of the NDA government at the Centre. Jayalalitha, who herself was being tried by three special judges in a slew of corruption charges, was alleged to have demanded the transfer of Bezbaruah failing which she would withdraw her support, which was essential for the survival of the BJP government. In fact, she did withdraw her support in late April 1999, and the BJP government fell. As if to confirm the suspicions of political manipulations, the Special Prosecutor, K. Kumar, who was leading the investigations, was sacked in 1998. And the Director himself was abruptly transferred, despite the above cited Supreme Court directive that insisted that officials dealing with sensitive cases should not be transferred. The government argued that the Delhi Administration (to whose cadre Bezbaruah belonged) wanted him back as the Transport Secretary. It should, however, be noted here that the Delhi government belonged to BJP, and that in 1995, it was the same Chief Minister of Delhi who successfully had Bezbaruah moved out of the Delhi Administration. Adding insult to injury, before removing Bezbaruah as Director, the BJP government upgraded the position (of Vigilance Commissioner) to that of Special Secretary – two ranks higher than that of Bezbaruah – which made him ineligible for the position he was already holding. It may also


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be noted that the Government later claimed before the Court that they were not aware of the stipulation of the Supreme Court against transfers as that relevant sentence was in fact altogether missing from the in-house draft. Needless to say, the Supreme Court charged that the government was misleading them, and incensed as they were, ordered reinstatement of Bezbaruah as Director. The government saw no alternative but to oblige, and in a facesaving effort said that the reappointment was ‘‘temporary.’’ Ironically, Bezbaruah himself was accused of corruption by a former Deputy Director (Delhi zone), Ashok Agarwal, who himself was divested of his sensitive position, and his house raided previously (India Today, 1999b, pp. 22–23). It also should be noted that the ED itself had not done a great job in the past, as the Director himself admitted. Of the 5,511 corruption inquiries registered in 1977, only 159 – less than 3% – led to arrests, and criminal prosecution launched against 92 – a mere 1.6% of the total, or a little more than half of those arrested (Frontline Online, 1998). In tune with this dismal outcome, not a single politician involved in the ‘‘hawala’’ case was convicted. The fact that the CBI had been located in the Prime Minister’s office in essence facilitates political pressures brought to bear upon it. But with the current Supreme Court’s directive, the CBI passed under the control of the CVC. The latter would have a say who should be appointed as the Director of CBI.

Appointment of the Vigilance Commissioner This appointment is crucial in that (s)he would in turn help identify candidates to head the other investigative agencies such as the CBI and ED. Pursuant to the Supreme Court directive, the BJP government asked the Law Commission to draft a Bill to that effect which it did in August 1998. And by September 1998, the government passed an Ordinance, but it was not necessarily in compliance with the Supreme Court directive. For example, the Supreme Court did not envisage a multi-member CVC; the ordinance does. The court did not specify that Vigilance Commissioner will be selected only from among civil servants; the ordinance does so. The Supreme Court did not include the Personnel Secretary as ex-officio member; the ordinance does. Having the Personnel Secretary as ex-officio member leaves the door open for influence-peddling by bureaucrats who may come under the scrutiny of the investigative agencies, since the former will have a major say in their posting to the top slots in government (Mahalingam, 1998, p. 4).

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Moreover, the Single Directive that the Supreme Court thought was inhibiting the prosecution of higher administrators on corruption charges (and hence was quashed), was brought back in the Ordinance when it required the permission of CVC to prosecute any officials of Joint Secretary and above level and other officials of government Corporations and Companies appointed by the government. No wonder, Justice Jeevan Reddy, who chaired the Law Commission, was peeved enough at the Ordinance to say that once the government ‘‘chose to ask the Law Commission to draft the CVC bill, they should have studied it fully and then taken a decision’’ (Indian Express, 1998, p. 1). The Ordinance also stated that the Central Vigilance Commissioner and other Commissioners will be appointed by the President following the recommendation of a Committee consisting of the Prime Minister, Minister for Home Affairs, and the Leader of the Opposition in the Lok Sabha. In September 1998, N. Vittal, a retired civil servant, was appointed to head the CVC. It is of interest to note that the above cited 1977 Supreme Court directive stipulated that the CVC should be ‘‘y from a panel of outstanding civil servants and others with impeccable integrity’’ (emphasis added). Not only did the Law Commission’s recommendation confine the appointment of a person only from the civil service, but also the Section 3 (3) of the 1998 Ordinance issued by the Government confined the choice ‘‘y from amongst persons who are or have been in an All-India Service or in any civil service of the Union or in a civil post under the Union having knowledge and experience in the matters relating to vigilance, policy making and administration including police administration.’’ Thus, the appointment of a civil servant was criticized as being the result of the government succumbing to the pressures exerted by higher civil servants (otherwise known as the ‘‘IAS lobby’’). As it so happened, Vittal retired in August, and P. Shankar, who resigned as Chief Secretary of the government of Tamil Nadu, was appointed to succeed him on September 3, 2002. The new Ordinance conferred statutory status on CVC which would have a Central Vigilance Commissioner with a 4-year tenure, and three other Commissioners with 3 year terms each. They can only be impeached, but otherwise cannot be removed from office. Procedurally, Ordinances issued by a government when Parliament is not in session would be in effect for 6 months. Beyond that, Parliamentary approval is necessary. Thus the government introduced the CVC Bill on December 7, 1998 in Lok Sabha that approved it. But, lacking a majority in Rajya Sabha (the upper House of Parliament), and to avoid defeat and the consequent embarrassment, the BJP government did not even bring this on to the floor of Rajya Sabha,


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which means the Ordinance would have died by April 4, 1999. Instead, the government announced that it would issue an Executive Order on April 5, 1999 to keep it going, but could not do so as Parliament was in session. As noted above, the BJP coalition government was voted out of power in late April 1999, but restored to office with a little more comfortable majority in November 1999, and announced that it would introduce legislation in Parliament. Yet, as of the time of this writing, no legislation was passed, and the CVC continues to derive power from the above-mentioned Supreme Court order. On top of all this, one need to think of the time it takes to clear corruption cases, assuming that the proper clearance is given by the appointing authority. ARC-2 states that the average time taken by trial courts under the Prevention of Corruption Act is enormous. In 1996, there were 8,225 cases pending, but in 2005 the number grew to 12,703. And thus, it recommended that there must be some time limits to dispose off these cases (ARC, 2007, Para 3.2.5.1). It should be noted here that the Prevention of Corruption act does not apply to the private sector. The only recourse to bring them to book is by invoking the ‘‘abetment’’ provision, mentioned above. Similarly, at this time there is no protection accorded to a whistleblower from retaliation, just as Article 311 has come to be an impediment to prosecute the corrupt. Thus, ARC-2 recommended whistleblower protection legislation, as well as the repeal of Article 311.

CONCLUSIONS The above discussion shows that despite numerous institutional arrangements backed by legislation, corruption abounds. Thus, the explanation must be found elsewhere. The easy and obvious response is that corruption flourishes certainly because of the knowledge of lax enforcement of anticorruption laws. After analyzing case law pertaining to corruption, H. L. Mansukhani concluded that the Prevention of Corruption Act turned out to be a ‘‘puerile piece of legislation.’’ Existing laws only more meticulously recognized several forms of bribes and corruption, but did not prevent them. According to him, it created a new branch of evidentiary law whose objectives are neither moderate, nor practical (Mansukhani, 1979). Similarly, both constitutional and legal provisions are being continuously flouted and/or tampered with for personal, political, and partisan reasons

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raising further legal and constitutional issues. Not only is the sanctity of the Constitution undermined but Rule of Law is also negated. ARC-2, no wonder, concluded thus: ‘‘It is generally believed that all these y types of willful abuse of office are on the increase in our country at all levels and need to be firmly curbed if we were to protect public interest and our democratic system. Otherwise, public servants – elected or appointed – will be seen not as custodians of public interest and sentinels of democracy but as opportunists working for personal aggrandizement and pursuing private agenda while occupying public office.’’ (ARC, 2007, para 3.2.1.8) Such a failure can be attributed to the following reasons. First, the emphasis so far has been mostly not so much on correcting the reasons for corruption as is the effort to deal with the practices and outcomes of corruption. There are only two basic reasons for corruption: need and greed. While the need for corruption could be ameliorated to an extent by better pays at least for civil servants, greed is another matter. Indeed, in March 2008, the Sixth Pay Commission recommended hefty pay raises all over, and one would hope that this might alleviate need, at least at the bottom end. But then there is ample evidence that even in the higher paying nations corruption is prevalent leading to the conclusion that it is simply a matter of size (of the bribe), not that of kind. But greed is something of prevailing cultural norms, and it almost became habit with no stigma attached. The capacity for tolerance attributed to Indians as part of their culture has profound impact here. Except for rhetoric and the occasional nodding of heads, no outrage has been, seen much less serious implementation of anticorruption measures. The Santhanam Committee aptly observed thus: ‘‘In the long run, the fight against corruption will succeed only to the extent to which a favorable social climate is created’’ (Santhanam,1964, p. 101). Second, the duality in Hindu life leads the same person proclaiming a ‘‘holier than thou’’ attitude often indulging in the most debased life. And the liberal, almost amoral, attitude that appears to have taken hold since economic liberalization in 1990 only encourages this life style further. While deriding the all-pervasive corruption intellectually and certainly rhetorically, people are all out on an acquisition binge. Thus, nothing positive and constructive emerges to stem the general rot. Third, the very laws, rules and regulations to curb corruption are themselves corrupted insofar as they are not often followed strictly in their spirit, or in fact followed only in the letter on occasion. If at all, they are applied selectively and in some places as a matter of show, and in other cases as a means of vendetta.


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Fourth, paradoxically, sometimes the very Rule of Law and the various rights guaranteed to the civil servants in the name of assuring their neutrality, have been found to come in the way of bringing the errant to book. As noted, Article 311 of the Constitution of India proved to be a major hurdle. Fifth, there is not only the absence of sound role models, but also an apparent lack of political will to reform. Instead, one hears a great deal of rhetoric and little in practice. The same recommendations are made ad infinitum. For example, appointment of a Lokaykta (Ombudsman) was recommended by the first ARC in 1969 and is repeated nearly 40 years later by ARC-2in 2007, as nothing happened since the first recommendation. Only a shallow debate goes on whether the office of the Prime Minister be subjected to the authority of such an Ombudsman. Sixth, this attitude is further buttressed by transient governments. Pressured as they are to survive in office, unscrupulous leaders resort to all sorts of illegal, amoral, and even unconstitutional means. In an effort just to remain in office, coalition governments have been succumbing to the pressures of their partners who have learnt that they can get a lot of political mileage by simple threats of withdrawal of their support, and by using, or attempting to use, legal and Constitutional provisions as partisan tools. In a way, the coalition governments are turning out to be hostages of pure partisan and personal interests. The all-consuming effort of these governments appears to be no more than keeping in office, and it does not augur well for constructive measures. Seventh, even when the corrupt are brought to book, there is the lack of expeditious disposal of cases due to the slow judicial investigative processes. Prime Minister, Manmohan Singh, admitting that corruption is a challenge for his government, went so far as to suggest that there is the need for more special courts (All India Radio News, 2008). In the absence of effective institutions and the poor application of laws, perhaps the most crucial element in combating corruption is the social attitude toward corruption. As noted above, honesty cannot legislated. No amount of legal restrictions would help as long as the society itself is lenient and tolerant. It is, thus, hard to decide which is the cause and which is the effect: Is the society permissive, or is a corrupt regime corrupting the society? The traditional Sanskritic usage, yatha raja, tatha praja (as is the king, so is the populace) is often cited to blame the regime. Contrarily, there is the cynical theory that people get a government that they deserve. Indeed, the top public leaders have to set an example with the political parties taking the lead, and the nation as a collective entity ought to show its intolerance,

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and give the corrupt the boot. A clear and clean sweep of the polity, it appears, is the task at hand of all reformers. One cannot but wonder how much more developed India could have been, if only the rot has been stemmed. The ARC-2 identified three aggravating factors. The first is the blame placed on the colonial legacy. The second is the enormous asymmetry of power where the masses are at the mercy of the powers that be. The third is the result of past policies of ‘‘permit Raj’’ that had placed a great deal of licensing power in the hands of officials enabling them to take the citizen hostage. While there is an element of truth in these assertions, the fact remains that sadly three generations have passed since independence with not much positive to show. The inauguration of decentralization of power scheme, particularly since the passage of the 73rd and 74th Amendments to the Constitution, is thought to empower the large masses. Instead, decentralization of power seems to have come to be decentralization of corruption. Similarly, the change in economic policies had not diminished opportunities for corruption; instead it accorded new venues, and even a flux in social norms. With the passage of Freedom of Information Act, one expects transparency strengthened by the several active media outlets and civic groups. Thus, it may not have been a lost cause altogether. The ARC-2 concluded as follows: Indians have always valued a world beyond the material and have embraced spiritualism as a way of life. Instances abound in our epics of good behaviour, of the triumph of good over evil, of the wisdom of sages. Stories of the honesty, generosity and piety of legendry kings such as Vikramaditya, are told to our children even today. There is no reason why Ram Rajya cannot be attempted. In modern India, poverty, insufficiency and class conflicts are slowly giving way to a confident, inclusive, empowered India. On the Transparency International’s Corruption Index, India’s position has improved significantly, and hopefully will continue to do so. The vigilance of our enlightened people will ensure this’’ (ARC-2, 2007, para, 1.3 and Conclusion).

One can only hope that they are correct, and their optimism is not altogether misplaced.

NOTES 1. Kautilya’s Arthsastra (loosely translated as ‘‘statecraft’’) was written in Sanskrit and dated between 321 and 296 BC. 2. The quotes that follow in the text, unless otherwise specified, are from this decision.


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REFERENCES All India Radio news. (2008). April 29. http://www.newsonair.com ARC-2. (2007). The Second Administrative Reforms Commission, appointed by the President of India in 2005, Fourth Report: Ethics in Governance January. BBC poll. (1999). on-line, 1 December. Braibanti, B. (1962). Reflections on bureaucratic corruption. Public Administration, 40(4), 357–372. Central Vigilance Commission. (1966). Report of the Central Vigilance Commission, New Delhi: Government of India, 15–16 and 32–33. Chaudhuri, N. C. (1987). Thy hand, great anarch! India: 1921–1952 (787). London: Chatto & Windus. First Five Year Plan. (1952). Government of India, 115. Friedrich, C. J. (1972). The pathology of politics: Violence, betrayal, corruption, secrecy and propaganda (pp. 127–141). New York: Harper & Row. Friedrich, C. J. (1989). Corruption concepts in historical perspective. In: A. J. Heidenheimer, M. Johnston & V. T. LeVine (Eds), Political corruption: A handbook (p. 15). New Brunswick, Canada: Transaction Publishers. Frontline Online. (1998). Interview with Bezbaruah, Cover Story, No. 20, September 26 – October 6, p. 15. Gaus, J. M. (1947). Reflections on public administration (p. 7). Alabana: Alabama University Press. Huntington, S. P. (1968). Political order in changing societies (pp. 59–71). New Haven CT: Yale University Press. Indian Express. (1998). September 5, p. 1. India Today. (1999a). November 29, p. 7. India Today. (1999b). April 19, pp. 22–23. India Today. (2001). March 21 , p. 1. India Today. (2004a). June 7, pp. 10–23. India Today. (2004b). July 5, p. 17. Jayaprakashnarain. (2004). Coordinator, Federation for Democratic Reform. New York Times, 26 May, p. A13. Leys, C. (1965). What is the problem about corruption? Journal of Modern African Studies, III(2), 467–497. Mahalingam, S. (1998). Vigilance commission: Issues for vigilance. Frontline Online, 15(19), 12–25, September, 4. Mansukhani, H. L. (1979). Corruption and public servants. New Delhi: Vikas Publishing House. Mathur, K. (1991). Bureaucracy in India: Development and pursuit of self-interest. Indian Journal of Public Administration, XXXVII(4), 639. Moily, V. (2007). Preface, ARC-2. Myrdal, G. (1968). Asian drama: An inquiry into the poverty of nations (Vol. I & II). New York: Twentieth Century Fund. Pachauri, S. (2008, March 19). Minister of State for Parliamentary Affairs, Government of India, http://www.ndtv.com Pylee, M. V. (1980). Constitutional history of India, 1600–1950 (2nd ed). Bombay: Asia Publishing House (P) Ltd. Ramachnadran, V. (2005, 7–13 May). A chronic aberration. Economic and Political Weekly, XL(19), 1965–1967. Rastogi, V. K. (2002). ‘‘In UP ‘criminals’ could even form govt! 9 July. www.headlines.sify.com

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Riggs, F. W. (1961). The ecology of public administration. Bombay: Asia Publishing House. Santhanam, K. (1964). Report of the committee on prevention of corruption (p. 7). New Delhi: Government of India Press. Sastry, R. S. (1967). Kautilya’s arthasastra (8th ed.). Mysore, India: Mysore Printing and Publishing House. Thakur, U. (1979). Corruption in ancient India. New Delhi: Abhinav Publications. Transparency International. (2005, 2007, 2008). Transparency International Corruption Perception Index, http://www.transparency.org/layout/set/print/policy_research/surveys_indices/cpi/2007 Tummala, K. K. (1994). Public administration in India (Chapter IX). Singapore: Times Academic Press. Tummala, K. K. (2002). Corruption in India: Control measures and consequences. Asian Journal of Political Science, 10(2), 43–69. Tummala, K. K. (2004). Democracy vs. fundamentalism: Religious politics of the Bharatiya Janata Party in India. In: S. C. Saha (Ed.), Religious fundamentalism in the contemporary world: Critical social and political issues (pp. 207–234). Lanham, MD: Lexington Books. Tummala, K. K. (2006). Regime corruption in India. Asian Journal of Political Science, 14(1), 1–22. Tummala, K. K. (2007). Developments in Indian federalism. Asian Journal of Political Science, 15(2), 139–160. Venktatappiah, B. (1968). Misuse of office. In: D. L. Sills (Ed.), International encyclopedia of social sciences (Vol. II, p. 272). New York: Macmillan. Vineet Narayan et al. v. Union of India et al. (1998). 1SC 226. Vittal, N. (2003). Corruption in India (p. 181). New Delhi: Academic Foundation. Wade, R. (1985). The market for public office: Why the Indian state is no better at development. World Development, 13(4), 486.

CHAPTER 4 THE POLITICS OF COMBATING CORRUPTION WHEN BIG BUSINESSMEN ARE AT THE HELM: LESSONS FROM THAKSIN AND BERLUSCONI Bidhya Bowornwathana INTRODUCTION In this chapter, the words ‘‘big businessmen at the helm’’ refers to the situation when wealthy and prominent businessmen become prime ministers, ministers, and hold other key political positions in government. Many high political positions in governments around the world are held by big businessmen-turned-politicians. For them the distinction between business and government is blurred and maybe useless. The typical business lobbyists have conquered government. We can no longer expect government to act in the public interests when dealing with powerful companies belonging to government politicians. When big businessmen are at the helm of government, combating corruption becomes an elephantine task. The reasons explaining the difficulties involved in fighting corruption when big businessmen are in power are: the enormous strength of the top businessman who becomes the super patron in politics; the extraordinary The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 73–96 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018006

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political skills of the big businessman to capture the state; the unusual ability of big businessman at the helm to handle conflict of interest accusations; the cunningness of big businessman in power to use government power to facilitate his businesses; and the die-hard nature of big businessman who used to be at the helm of government to stage a comeback. Five major hypotheses on combating corruption, when big businessmen are in power, are postulated from the five reasons why the fight against corruption of big businessmen at the helm usually failed. For each reason, experiences of Thaksin and Berlusconi are used as empirical examples to substantiate the author’s arguments. Hypothesis 1. Becoming the most powerful super patron in politics Combating corruption of big businessmen in power becomes more difficult when the big businessman can turn himself into the most powerful super patron in politics. That is, the more the top big businessman is able to become the most powerful super patron in politics, the more difficult it is to combat corruption (Hypothesis 1). What is the meaning of a super patron? A polity that manifests characteristics of a super patron model is one that has a single extremely powerful leader on top of the state machine who acts as the super patron for several ‘‘patrons’’ surrounding him in an exchange relationship. The opposite of the super patron model is the multiple-patron model that portrays political and governmental power as being dispersed among various political patrons of equal clout and influence. Allocations of ministerial positions are evenly distributed among the various cliques and factions in power. There is no one who is strong enough to become a super patron. Therefore, a government consisting of a coalition of factions and cliques is fragmented and unstable. How does one become a super patron? There are many factors at work. First, one has to be superior over other patrons in terms of economic wealth and strength of one’s patron–client networks. The second factor is the super patron’s personal ability to coordinate and bring in other patrons into one’s alliance without providing them the opportunity to join forces against him. The patrons are kept separated from each other by the super patron. Third, the Machiavellian super patron must also have the political skills to destroy any potential super patron candidate, and increase the dependency of other patrons on the super patron. Fourth, the ability to assure political victory and provide economic and political returns to joining coalitions is another factor. Fifth, another crucial factor is the ability of the super patron to become even stronger and remain in power forever. Eternal superiority or

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absolute power occurs when the super patron has expanded his dominance in all areas: political, government, business, and social. For example, in the business world, the super patron may end up monopolizing all sectors of the economy. All products and services being sold in the market are monopolized by the businesses of the prime minister. In government and politics, government politicians and bureaucrats are under the direct command of the prime minister. They listen to the prime minister, neither to the ministers, nor the senior bureaucrats. In the social world, the wife and family members of the prime minister dominate all social activities, for example, presiding in all important social events.

LESSONS FROM THAKSIN AND BERLUSCONI Scholars have pointed out that Italian and Thai politics are very-well illustrated through a patron–client or political clientelism model (Scott, 1971; Nye, 1967; Sotiropoulos, 2004; Zuckerman, 1979; Hine, 1993; Putnam, 1993; LaPalombara, 1987; Neher & Bowornwathana, 1988; Riggs, 1966; Siffin, 1966). I would like to start by asking the question: Who became the more powerful super patron while in power during 2001–2006, Thaksin or Berlusconi? I argue that during 2001–2006, Thaksin became a more powerful super patron than Berlusconi. Of course, both of them are super patrons who sat on top of the state machine. But Berlusconi represented the case where the power of other patrons was also more substantial than that of patrons under the super patron Thaksin. That is, Berlusconi case came closer to the multipatron model than Thaksin case. On the other hand, the Thaksin case is closer to the single super patron model than Berlusconi case. The reasons are as follows. First, though coalition governments have traditionally dominated both Thai and Italian politics (Bowornwathana, 2001b; Verzichelli & Cotta, 2000), the elected Thaksin Government in 2005 became a one-party government, meanwhile the Berlusconi Government remains a coalition government. During his first 4-year term (2001–2005), Thaksin Government consisted of several coalition parties, such as the New Aspiration Party, the Chat Thai Party, and the Chat Pattana Party. Later on, the New Aspiration Party and the Chat Pattana Party were dissolved under the political pressure of Thaksin to join his Thai Rak Thai (TRT) Party. Several factions, such as the Chonburi faction and the Buriram faction, both from the Chat Thai Party were also compelled to join Thaksin’s TRT Party. As a result,

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TRT Party won an overwhelming majority in the February 2005 elections, and was able to form a one-party government. Thaksin became a very strong prime minister who was successful in bringing in many political factions into his TRT Party. Though the nature of factions still permeates Thai politics, the case of TRT shows that factions within the TRT can be managed by rotation of cabinet positions among the leaders of factions. Thus, under Thaksin leadership, there were many cabinet reshuffles. Government became unstable, but Prime Minister Thaksin was as stable as ever. Thaksin’s choice of his new ministers clearly indicated his increasing power because he had appointed many members from his own faction as ministers. At the same time, Thaksin had also introduced a new decree empowering Thaksin to make decisions ‘‘important to the national interest’’ with the backing of just one other member of the cabinet, instead of summoning his full cabinet. Many scholars and intellectuals, especially Thais, have noted the increasing tendency for Thaksin to consolidate and monopolize state power (see, e.g., collections of articles in Pinthong, 2004a, 2004b, 2004c, 2004d; Wongviapnon, 2004; Traisuriyadamma, 2004; Nitivititat Foundation, 2004; Sonesupap & Namprasarnthai, 2003; McCargo & Pathmanand, 2004; Phongpaichit & Baker, 2004). Thai and foreign correspondents have also alerted us to the authoritarian tendencies of Thaksin (for foreign correspondents, see Crispin & Rodney, 2001; Crispin, 2002; Cochrane, 2005). However, if we consider the case of Italian Prime Minister Berlusconi, we find that he headed a center-right coalition government, called La Casa delle Liberta, consisting of Forza Italia, National Alliance (AN), the Lombard League, and other small parties such as the Catholic allies. Berlusconi had to please these fragile coalition partners to remain in power. Berlusconi did not have the luxury of a one-party government that enabled the super patron like Thaksin to favor his own faction in terms of cabinet appointments. Thus, Berlusconi gave some key positions to leaders of coalition parties. For example, AN leader Gianfranco Fini was made vice premier and Unberto Bossi, leader of the Lombard League, was made minister for institutional reform and devolution. There were also tensions among coalition partners, such as between Fini and Bossi. For example, the National Alliance opposed Lombard League’s plan for devolution of power from the central government to the regions. Second, the coalition government of Berlusconi consisted of political parties with different policies and ideologies. Thaksin’s TRT Party was, in my opinion, clearly a ‘‘club’’ of big businessmen-turned-politicians whose objectives were clear, that is, to facilitate one’s business for more profit


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making. Thai cabinet members were drawn from large business conglomerates. They were from families that owned big businesses such as the Thai Summit Automotive Group (of Suriya Jungrungreangkit), Jasmine Telecommunications Group (of Adisai Bodharamik), BEC broadcasting Group (of Pracha Maleenont), CP Agriculture Group (of Watana Muangsook, son-in-law of CP Dhanin Chearavanont). Many of Thaksin’s political friends in TRT Party were big businessmen who owned a large number of shares in the stock market. Hence, in the Thai cabinet, there were no ideological differences: the issue was always how all of them could make profit from government. Third, the old 1997 Constitution of Thailand was designed to strengthen the power of the executive. A strong prime minister was desired so that unstable coalition governments could be rid of. On the contrary, the Italian Constitution was designed to weaken the power of the executive and prevent the rise of another strongman such as facist leader Benito Mussolini. Contrary to Thaksin, Berlusconi could neither fire his ministers, nor dissolve parliament. Fourth, both Thaksin and Berlusconi have a media empire that enabled them to control the channels of information and dictate what citizen should hear. Their media empires put them in an enormous advantage to manipulate the news, conduct media censorship and political propaganda. Other competing politicians did not have these media instruments. The media empires help them become super patrons in politics. In Italy, Berlusconi controlled three biggest private television stations and as prime minister, had taken control of the state-run television station RAI that had three channels (Blatmann, 2003; European Federation of Journalists, 2003). In the same fashion, as prime minister, Thaksin controlled all government television channels (most of television channels in Thailand are owned by government). Through his Shin Corporation Public Company Ltd., Thaksin had acquired ITV channel almost at the same time that he was assuming his premiership in 2001.The other private television, Channel 3, is owned by a cabinet member, Pracha Maleenond. Both Thaksin and Berlusconi were accused by many of abuses of power by constraining the media from providing negative coverage of their governments or encouraging the media to attack the opposition. In Italy, the government-owned national television channels operated by RAI were obliged by law to give at least a minority voice to opposition parties (Smith, 1997, p. 487). In Thailand, however, there is no such law, so Thaksin could order the state channels to block positive news about the opposition. Fifth, administrative reform, clothed in new public management or managerialism fashion, (Bowornwathana, 2004a, 2007, 2008, forthcoming)

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conducted by the Thaksin Government was geared toward centralizing and monopolizing government power solely in Thaksin’s hands (Bowornwathana, 1997, 2000, 2002a, 2002b, 2002c; Bowornwathana & Poocharoen, 2005, 2006). The result is what I called ‘‘prime ministerialization’’ (Bowornwathana, 2005a, 2005b, 2004b, 2004c). Both Thaksin and Berlusconi see themselves as possessing the necessary leadership qualities such as innovative, creativity, and experienced (Samuels, 2003, p. 342). Thaksin’s TRT Party’s well-known campaign slogan was ‘‘New Thinking, New Acting.’’ Hypothesis 2. Capturing the state The extraordinary skills of big businessmen to capture the state also are another reason why effective combat against corruption becomes almost impossible. If state mechanisms designed to fight corruption can be infiltrated by the big businessman in power, the corrupted big businessman will never be nailed by the state. Thus, the more the big businessman is able to capture the state, the more difficult it is to combat corruption (Hypothesis 2). Ideally, one completely captures the state when one actually exercises absolute control of government. The top business politician who becomes the prime minister can directly command ministers and other heads of government agencies to follow his orders. The prime minister can at anytime remove any minister that he thought to be disloyal. Ministers become ‘‘company directors’’ and the prime minister the owner of the countrycompany (Bowornwathana, 2004b). Why does one want to capture the state? From a businessman point of view, government is a key factor in the success of his enterprise. As Graham Wilson noted, a government is important for business because government establishes the legal framework within which commercial activity is conducted; government imposes limits on market relationships; government is itself a major customer; business relies on government to protect and defend their interests overseas; business is dependent on government to maintain sound economic conditions; and business is an important supplier of resources to government (Wilson, 2003, pp. 1–8). The process of state capture consists of three stages. First, the top businessman has to win the national elections and obtain a majority to form government. He, then, becomes the prime minister. To capture the state, the prime minister must have sole power to choose his cabinet members and appoint other key political positions. Factors that enhance the prime minister’s strength are, for example, a one-party government and weakcoalition partners. A one-party government ensures that the top


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businessman is the leader of the winning party from the start. He does not have to bargain or bring in other political parties to form a majority. However, in his political party, there may be several factions and cliques demanding political positions after political victory. The prime minister must first weaken these factions, and strengthen his own faction; second, divide and rule the existing factions; third, find out the weaknesses or ‘‘Achilles’ heels’’ of other faction leaders; and fourth, use job rotation by introducing many cabinet reshuffles so that leaders of every faction will have the opportunity to become ministers. The second stage of the state capture process is the ability of the top businessman-turned prime minister to place his men in key positions that can facilitate the expansion and profit of his business empire. Key political positions that are crucial to business, besides the prime minister are, for example, the minister of finance, minister of foreign affairs, minister of commerce, minister of industry, and minister of communications. Specific ministries are also important. For example, if one business is telecommunications, one has to take over the positions of minister of information, communications, and telecommunications, head the Board of Investment, and exercise control of public agencies in charge of telecommunications. If a businessman is related to agricultural products, he would be wise enough to become minister of agriculture. The third stage involves the politicization of high civil servants and government employees. Once in power, the prime minister must make appointments and transfers of high civil servants, military generals, policemen, state enterprise CEOs, and board members, by putting his men in all key positions. Family members and close relatives, old friends from high school, university, military, and police cadets, are called upon by the prime minister to assume important administrative positions in the bureaucracy. Trust and loyalty to the prime minister are main personality traits required for the appointments. Sometimes, the prime minister’s wife may play a key role in suggesting names for political appointments and she may informally reconcile and appease unhappy coalition factions.

LESSONS FROM THAKSIN AND BERLUSCONI Who captured the state better, Thaksin or Berlusconi? Again, the answer is that during 2001–2006, Thaksin captured the state better than Berlusconi. Besides being a stronger super patron that would enable Thaksin to capture the state better, the Italian case was also a harder nut to crack. Unlike

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Thailand, in Italy, there were stronger forces that can challenge the efforts of the super patron to obtain absolute power in government. Who were these counter-balancing forces? First, there are the magistrates. They were the number-one enemy of Berlusconi because they were the ones who kept on questioning Berlusconi on charges of conflict of interest. Berlusconi had been accused of attempting to intimidate the judiciary (Lane, 2004, p. 286). In the space of 20 years, there have been 24 magistrates killed by the mafia (Lane, 2004, p. 253). In Thailand, the judiciary’s relationship with Thaksin during 2001–2006 was not as tense as in the case of Italy. However, there were many cases involving the killings and mistreatments of persons who are critical of Thaksin Government. Some NGO activists and southern protesters were missing. In March 2003, a former Shin employee was found dead from bullet wounds. He was the man who gave information on a deal in which Shin Satellite, a company owned by Thaksin’s family, was alleged to have evaded taxes on import satellite equipment. Second, the Italian President and the Constitutional Court judges did sometimes act against Berlusconi’s wishes. For example, on December 2003, Italian President Ciampi refused to sign a controversial media bill relaxing limits on media ownership (known as the Gasparri Media Bill). Critics said the bill would benefit Berlusconi who, for example, would be able to venture in radio businesses. On January 2004, the Constitutional Court threw out law-granting Berlusconi and other state-post holders immunity from prosecution. In Thailand, the King is above politics: he does not officially intervene in the work of the prime minister. Thaksin’s critiques question the neutrality of some judges of the Thai Constitution Court whom they claimed their selections by the Senate have been dictated by Thaksin. Third, the opposition party and labor unions are strong in Italy. For example, in March 2002, a mass demonstration consisting of 2–3 million people took place against Berlusconi in Rome and other cities. They were demonstrating against a man who thinks he owned Italy and operated accordingly. The labor unions also demonstrated against Berlusconi Government’s plans about pension reforms. In Thailand, labor unions and the opposition party are much weaker than in Italy. Indeed, they are becoming weaker and weaker (Phongpaichit & Baker, 2005, pp. 25–29). Fourth, politicization of civil servants also allowed Thaksin to capture the state (Bowornwathana, 2004c, 2009). Politician–bureaucrat relationship is based on patron–client ties (Bowornwathana, 1994, 1996, 1999, 2001a, 2001b, 2006). The super patron Thaksin intervened in the appointments and transfers of senior bureaucrats in all ministries and state enterprises.


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Thaksin’s friends and relatives were appointed to key positions in the army and police. In Italy, there is a tradition of politician–bureaucrat separation, but political clientelism in Italian politics and administration also encourages politicization of government officials (Lewansky, 2000, pp. 231–238). Hypothesis 3. Handling conflict of interest accusations When big businessman takes the helm in government, he is likely to be accused of conflict of interest. Therefore, the more the big businessman is able to handle conflict of interest accusations, the more difficult it is to combat corruption (Hypothesis 3). When big businessmen are directly in charge of government, conflict of interest becomes the prominent new form of corruption. Public institution mechanisms to check and balance the discretionary use of government authority by the big businessmen-turned-cabinet members become crucial factors in maintaining a good society. The integrity and ethical standards of business politicians in government are called into question. Can the businessman-turned-Mr. Prime Minister forget his companies and act in the interest of the public? Conflict of interest is a form of graft or political corruption described as the acquisition of money, gain, or advantage by dishonest, unfair, or illegal means through the abuse of one’s public office (Hejka-Ekins, 1998, p. 482; Anechiarico & Jacobs, 1996). When business politicians use their ministerial positions to facilitate their business goals, conflict of interest situations are likely to be displayed. The author had recently classified 10 conflict of interest situations: policy corruption, nepotism, bribery, thievery, inside information, privatization, government procurement, the sale of state property, competing against government, and preferential treatment and double standards (Bowornwathana, 2008, 2009). It is a common practice for business politicians to be under conflict of interest situations. The issue for business politicians is how to manipulate conflict of interest situations so that they can be overruled. The author had outlined six tactics used by business politicians: the legal argument, political supremacy, absolute control of the state machinery, takeover of accountability mechanisms, censorship of the press, and distract citizens from conflict of interest issue (Bowornwathana, 2009). To be able to overrule conflict of interest situations, the guardians or whistle blowers of conflict of interest must be eliminated or at least neutralized. Who are the guardians? They are: government bureaucrats in ministries and state enterprises; members of accountability institutions such the national counter corruption commission, ombudsmen, constitution

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court, administrative court, antimoney laundering agency, ministry inspectors, newsmen, senators, and members of the house of representatives, political critics, and outspoken intellectuals, members of civil society groups. To silence these guardians, politicization must be practiced so that the political executive could gain control of the guardians. Politicization of bureaucrats is done through appointments of bureaucrats loyal to the prime minister. Administrative reform measures are introduced so that the businessman-turned-prime minister will have absolute power to place favorite bureaucrats in key positions. Rewards are given to bureaucrats that have assisted the businessman prime minister and his gang to bypass or take advantage of legal and administrative loopholes, or to register business gains from decisions of bureaucrats. Severed punishments are handed to bureaucrats who were lenient to the opposition. On the other hand, members of accountability mechanisms are politicized through efforts of the businessman prime minister to influence senators’ choices of candidates, cultivating close patron–client ties with senators, discrediting accountability mechanisms, and behind-the-door lobbying and perhaps bribing of members of accountability institutions.

LESSONS FROM THAKSIN AND BERLUSCONI It is difficult to judge who is more skillful in terms of handling conflict of interest, Thaksin or Burlesconi. The fact that both businessmen-turnedpoliticians had survived corruption charges and remained in power during 2001–2006 was good proof of their political skills in handling conflict of interest allegations and accusations. For Prime Minister Berlusconi, conflict of interest is a long battle between him and the magistrates. Berlusconi sought to solve the conflict of interest problem by proposing new laws. Meanwhile, Thaksin chose to coopt authorities, such as constitutional court judges and national counter corruption commissioners, so that they can be lenient to Thaksin’s conflict of interest cases. Prime Minister Berlusconi had taken the following steps. First, he had promised that a law on conflict of interest would be issued in the first 100 days of his new tenure as prime minister to resolve the conflict arising from his dual roles as head of government and the country’s biggest media businessman. He owned private television networks, but he also ran state television stations. Second, the conflict of interest law approved by parliament in March 2002 did very little to solve the problem. The law prohibited public officials to hold executive positions in business companies.


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But it did not limit ownership of businesses by political officials, so Berlusconi can retain his business empire. The conflict of interest bill’s second article stated that ‘‘more ownership of a business was not sufficient to preclude taking up government office’’ (Jones, 2003, p. 235). So what Berlusconi did was to appoint his adult children and close friends as executives of the companies in his business empire (Passigli, 2002). Third, Berlusconi’s effort to have his bribery trial regarding his takeover of a major food company shifted from Milan was turned down by the Supreme Court. Fourth, a bill was passed by parliament in June 2003 that granted immunity to five highest constitutional officers, including the Prime Minister, from prosecution while they are in office. The proposed law was, however, overturned by the Constitutional Court in January 2004 (Beckman, 2004, p. 50). Fifth, another law proposed would have made it more difficult for magistrates to obtain financial documents from abroad required for their inquiries (http://www.pbs.org/wnet/wideangle/printable/berlusconi/ briefing/print.html). Sixth, the Parliament had passed a law (Gasparri Law) that modified the domestic media market and antitrust restrictions that would allow greater competition to enter the media sector. However, the law also allowed Berlusconi’s family to expand into radio and newspapers businesses. Recently, Fininvest’s move to reduce its holding in the Mediaset TV network to just over 34% was seen by critics as Berlusconi’s effort to quell criticism of conflict of interest after his government coalition lost the recent regional elections. However, this represents only a minor change and does not loosen his firm control of the television (TV) empire. In fact, the rumor was that his business partner, Rupert Murdoch would buy the relinquished holding of Fininvest in the Mediaset (Hooper, 2005). Berlusconi’s Mediaset and Murdoch’s Sky Italia that owned several important channels of Italian pay TV, Stream and Telepiu, meant that Italian commercial television will be dominated by a Berlusconi–Murdoch duopoly (Ginsborg, 2004, p. 139). The fight against conflict of interest accusations took a different direction in the case of Thailand’s Thaksin. First, not so long after becoming prime minister, Thaksin was indicted by the National Counter Corruption Commission on charges of concealing his assets through transfers of his shares to his maids, driver, and bodyguard. The Thai Constitution of 1997 prohibited the prime minister and cabinet members from holding more than 5% of any listed company while in office. The Constitution Court, however, acquitted (by 8–7 votes) the prime minister on technical ground. If the sentence had been upheld, Thaksin would have been banned from politics for 5 years (Rohr, 2004).

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Second, Thaksin’s ownership of shares in the companies was transferred to his adult children. After reaching adulthood in September 2000, Panthongthae Shinawatra, Thaksin’s son, suddenly became a billionaire by owning 25% of Shin Corp. When his sister Pinthongthae became 20 years old, she also bought half of his brother share in Shin Corp. Other members of the family and relatives also owned Shin Corp. shares, including Thaksin’s wife Khunying Potjamarn and her brother Bannapot Damapong (chairman of Shin Corp.) (Beckman, 2004, pp. 52–53). Third, Thaksin’s ability to capture the state and consolidate his absolute power in government also helped him in his fight against conflict of interest accusations. In fact, Thaksin seemed to be on the offensive. Anyone who accused Thaksin of conflict of interest was dealt severely. Examples of deterrence methods used were: discrediting, closure of information channels to air one’s opposing view, verbal threats, and legal action such as filing defamatory charges in court. In some cases, the critic was murdered. The state machines, such as the police and the antimoney laundering office, an office directly under the prime minister, were used to subdue political criticisms. On the other hand, public officials in charge of accountability institutions were reluctant to pursue the case of conflict of interest against Thaksin. TV programs and radio stations that criticized the government and investigated conflict of interest cases of business politicians were banned or eliminated. Afraid of losing their jobs, self-censorship was widely practiced by the media people. NGO leaders, human rights activists, civil society organizations, and critical academicians were harshly treated by the government. Lawsuits were filed by the companies of business politicians against persons who had accused business politicians of conflict of interest. Several outspoken NGO leaders were suspiciously killed. An atmosphere of fear prevailed. Through government policies, ethical standards were blurred, and the new capitalist values of consumerism and materialism were praised. After 5 years in office, Thaksin had successfully weakened public agencies designed to check and balance the use of government authority by the prime minister. Government and private media were intensely used as propaganda tools to discredit critics and endorse Thaksin. The legal battle between Shin Corp. and Supinya Klangnarong, a young lady secretary-general of the Campaign for Popular Media Committee, is a good example of legal intimidation practiced by Shin Corp., a company belonging to Thaksin’s family. In 2003, Shin Corp. filed both civil and criminal lawsuits against Supinya and editors of the Thai Post newspaper demanding 400 million baht in compensation from the codefendants on grounds that Supinya’s interview published in the Thai Post had damaged


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its reputation by allegedly saying that Shin Corp. was a major beneficiary of government policies issued since Thaksin took first term of office in 2001. Shin Corp. claimed that the huge profit reaped was due to business acumen and not to political ties. Hypothesis 4. Expanding business empires The stronger and larger the business empire of the big businessman at the helm is, the better the chance for him to withstand corruption charges. That is, the more the big businessman is able to expand his business empires, the more difficult it is to combat big businessman’s corruption (Hypothesis 4). Big businessmen enter politics because they want to control government and use their government authority to facilitate their businesses. They are all self-interested individual merchants who pursue power and wealth. Big business politicians own and run big companies. Though formally they may have relinquished their legal ownership of those companies to meet the legal conditions of being a minister, in practice the companies are still owned by their families, friends, or close aides who assume temporal ownership of the business politicians’ companies. In reality, the business politicians still run their companies through these persons and can become legal owners of these companies immediately after they do not hold any political positions that prohibit them to be the legal owners. The question is why do these rich businessmen want to become cabinet members? From a businessman’s perspective, it is an advantage to control both the worlds of business and government. I refer to this as the ‘‘twosystems-one-family’’ approach. For example, the father may become the prime minister who commands all ministries and state enterprises. The mother, sons, and daughters run family business companies that enjoy preferential treatment and protection from the state machine governed by the father. Companies belonging to the prime minister’s family and relatives may win government concessions and bids. Or they may have the clout to influence government decisions, thus opening the door for corruption and bribery. Government regulatory agencies may give special privileges by putting prime minister’s companies in a very advantageous position vis-a`-vis their business competitors. The revenue department may be lenient to prime minister’s companies by finding ways for them to pay less tax. With the assistance of government, the prime minister’s companies may be able to expand and diversify their businesses. The prime minister may use his position as head of government to negotiate with foreign governments on deals involving his business companies. For example, some foreign governments may rent a telecommunication satellite owned by the prime

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minister, or allow the prime minister’s mobile phone company to open mobile phone businesses in those countries. In exchange, the prime minister may offer import tax privileges or promises to buy goods from them. At the end, the bottom line is that the business world of the prime minister will flourish through lucrative profit from being in government. This vicious cycle of business empire expansion meant that one has to remain in government power forever to enjoy the benefit of being in control of government. The more the large projects launched by government the better, because they open doors of opportunities for business politicians to make more profit. In short, the two-systems-one-family approach of big businessmen in politics inevitably brings back the old problem and debate on corruption, or the misuse of public office for private gains (Della Porta, 2001; Della Porta & Pizzorno, 1996). The political success of business politicians is measured by the wealth accumulated by their business empires before and after office. The richer they become, the greater the success. In practice, of course, it is difficult to find out how much wealth the prime minister has amassed. It is easy to find out the publicized number of stocks and shares each business politician and his family and relatives own before and after office. Even information about increased land ownership may be sought out. However, there are many other ways to hide the gained wealth from government office: for example, savings in oversea banks, having somebody else besides your family and relatives assume ownership (the nominee tactic), buying property and assets abroad, and owning foreign companies. Then of course, there are profits made legally under questionable political ethical standards from government concessions, bids, and sales of cheap government property, such as state enterprise shares, to be added to the profit sacks of business politicians.

LESSONS FROM THAKSIN AND BERLUSCONI It is impossible to answer the question who had expanded his business empire more, Thaksin or Berlusconi because information about wealth and assets of big businessmen are difficult to obtain. Business empires of both Thaksin and Berlusconi gained substantially from the two being prime ministers. Thaksin’s former flagship Shin Corp. was one of the largest holding company investing in telecommunication, information technology, multimedia, and advertising businesses classified into five categories: wireless telecommunication, satellite communication and international business, media and advertising, E-business, and other


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businesses. For example, Shin Corp. was a major shareholder of Shin Satellite Public Co. Ltd., Advanced Info Service Public Co. Ltd. (Shin owns only 43.06% as of 31/12/02), ITV Public Co. Ltd., and IT Applications and Services Co. Ltd. Thaksin’s fortune derived from monopoly concessions in mobile and telecommunications given by previous governments, especially with the help of his uncle who at one time was then deputy communications minister. For Berlusconi, the parent company in his business empire is Fininvest. As one of the richest man in Europe, Berlusconi made his first fortune in Milanese real estate during the unregulated building speculation of the 1970s (Smith, 1997, p. 486). He then extended his businesses into print media, advertising, retailing, telecommunications, insurance, supermarkets, newspapers, television, and football (Ginsborg, 2004, pp. 11–56). Interestingly, Berlusconi owns AC Milan, while Thaksin’s attempt to buy Liverpool FC failed. But Thaksin finally acquired Manchester City during his exile in England. Both Thaksin and Berlusconi took direct control of politics for business purposes. Thaksin had been conducting his business with the backing of government from the start. Increasingly he found out that he should enter politics to protect his business, and if possible be head of government. In the same fashion, Berlusconi jumped into politics because the clout of his political patron former prime minister Bettino Craxi whose socialist government was alleged to had helped Berlusconi turn his local commercial television companies into three national channels (Smith, 1997, p. 487), was fading away. Moreover, Berlussconi feared that unfriendly ministers in the departments of finance and justice might penalize financial irregularities of his Fininvest more rigorously than more friendly governments. At the same time, Berlusconi’s near-monopolized commercial television stations were criticized by the Constitution Court in Rome and by European politicians in Brussels (Smith, 1997, p. 487). The two-systems-one-family approach works well for both Thaksin and Berlusconi. While Thaksin was in charge of government, his family and relatives were in charge of running businesses with the backing from government. His wife, children, and relatives owned Shin Corp. and several big companies. In Italy, Berlusconi’s children sat on the boards of Fininvest and Mediaset, Italy’s largest television company. Thaksin’s business empire was expanding and flourishing. Shares of companies belonging to Prime Minister Thaksin had increased in value in the stock market. Companies belonging to Thaksin’s business empire had easily won government bids and contracts at the expense of other competitors. For example, M Link Asia, a company owned by Thaksin’s sisters,

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Yaowapa Wongsawat and Monthatip Kovitcharoenkul, had won contracts to supply government with handsets. Thaksin’s son advertisement company, HowCome, won a contract that enabled his company to monopolize all advertisements in the MRTA (Mass Rapid Transit Authority of Thailand). During 2001–2006, Thaksin Shinawatra’s business empire had diversified into other businesses such as advertisement, entertainment, internet, banking, hotels, airlines, hospitals, etc. For example, his son Panthongthae was then one of the biggest single shareholders of the Thai Military Bank: he bought the shares for a bargain price because the Thai Military Bank was in financial trouble at that time. Thaksin’s business expansion increases the possibility of conflict of interest. As the head of government, Thaksin was in charge of THAI International. However, while Thaksin was prime minister, his Shin Corp. had started a new Air Asia in direct competition with THAI. Again, as prime minister he looked after public hospitals, but his Shin Corp. had bought several middle size private hospitals during the last 4 years. Perhaps Thailand was then approaching the state of Italy’s new epithet ‘‘Berlusconism.’’ Most of the things you come into contact with in Italy are owned by Berlusconi. Some feared that in no time, perhaps, Thaksin might end up ‘‘owning’’ Thailand. It is difficult to determine how rich Berlusconi and Thaksin have become after being in office. One way to do this is to rely on Forbes Magazine’s ranking of the world’s richest people. In 2002, Forbes’s ranked Berlusconi as the 35 richest man in the world with an estimated 7.2 billion dollars (Lane, 2004, p. 121). Three years later, in March 28th, 2005 Special Issue of Forbes, Berlusconi is ranked the 25th richest man in the world with an estimated wealth of 12 billions US dollars. In this regard, Berlusconi had done quite well. Estimating Thaksin’s increased wealth during his term as prime minister is more difficult because his assets were mostly not in his name, but in the names of his wife, children, relatives, friends, maids, drivers, and who knows what else. Together, they form what one can call the ‘‘Shinawatra’’ business clan. In the stock market alone, the values of stocks owned by the Shinawatra business clan through Shin Corp. and subsidiary companies had doubled from around 91,799 million baht in February 2001 to 194,074 million baht in February 2004. That is, after 3 years as prime minister, Thaksin and his family network had made 102,275 million baht profit from Shin Corp. stocks. Hypothesis 5. The ability to stage a comeback Combating corruption committed by big businessman in power is almost impossible if the big businessman can stage a comeback. If the former big


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businessman-turned-prime minister can become prime minister again or, is able to exercise firm control of government from behind the scene, it is likely that he will be able to consolidate his super patron position, capture the state, ward off conflict of interest accusations, and expand his business empire. Because of his tremendous political and administrative power, those charging him with alleged corruption will have a difficult time indicting him. Thus, the greater the ability of big businessman formerly in power to stage a comeback to the helm of government again, the more difficult it is to combat corruption (Hypothesis 5). The process of indicting a corrupted big businessman at the helm of government is long and complicated. To accuse a big businessman in power of corruption, one needs to collect a great amount of evidence and witnesses. Many key informants and witnesses will refuse to cooperate for fear of retaliation. The corruption busters who carry out the investigations have to be courageous since they, their families, and relatives may face retribution from the big businessmen and their cronies in various ways, such as lawsuits, personal threats, and killings. The legal process in combating corruption also involves several government agencies such as the National Counter Corruption Commission, the Office of the Attorney-General (OAG), the Police, the Constitution Court, the Anti-Money Laundering Office, and the Supreme Court. When a big businessman under investigation for alleged corruption is back in power, he is likely to wield influence over some of these government agencies and individual officials.

LESSONS FROM THAKSIN AND BERLUSCONI Both Thaksin and Berlusconi came into power in 2001. They both lost power in 2006 and both tried to stage a comeback in 2008. Berlusconi was successfully reelected as prime minister in 2008. Thaksin went in exile after a military coup in September 2006. In 2008, Thaksin’s supporters were able to form two short-lived governments under the premierships of Samak and Somchai (Thaksin’s brothers-in-law). As of this writing, neither Thaksin nor his ‘‘nominees’’ are in power. In September 2006, a military coup overthrew the elected Thaksin II Government. One of the four reasons for the coup was Thaksin’s alleged grand corruption. Thaksin went into exile. The military-appointed government led by General Surayud appointed the Assets Examination Committee (ASC) consisting of 11 members to probe alleged corruption irregularities by Thaksin Government. In the December 2007 elections, the People’s

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Power Party (PPP) (a new name for the former TRT Party of Thaksin) won the elections and formed a coalition government. Most ministers are Thaksin’s cronies. Thaksin returned to Thailand immediately. Clearly, Thaksin’s had staged a comeback to power. The PPP MPs questioned the legitimacy of the AEC. There were attempts to revoke the AEC’s order to freeze the assets of Thaksin and his family. Pro-Thaksin bureaucrats were transferred to key senior positions. Key organizations in charge of fighting corruption, such as the Police and the OAG, became increasingly proThaksin. It was more and more difficult to obtain cooperation from government officials in various organizations to give evidence against Thaksin’s alleged corruption. For example, the OAG is under the supervision of the prime minister. In June 28th, 2008, after the PPP came into power, the OAG recently decided to defer the indictment of former Prime Minister Thaksin who was accused of being unusually rich as a result of the sale of his shares in Shin Corp. The OAG wanted to form a joint inquiry with the ASC to search for more information as that recommended by the ASC was incomplete. After 21 months in office, the ASC was dissolved in June 30th, 2008. The ASC was able to conclude 14 of its 24 cases. Four cases have been passed on to the Supreme Court’s Criminal Division for Holders of Political Positions: a 772-million-baht Ratchasaphisek land deal; two-and-three-digit lottery scheme; rubber saplings procurement; and export and import bank of Thailand’s soft loan to Burma. Seven cases are under consideration by the OAG: alleged tax evasion in Shin Corp share transfers; procurement of baggage-handling system for Suvanabhumi Airport; Krung Thai Bank loans to politicians; procurement of pipelines for electricity cable laying at Suvarnabhumi Airport; imposition of excise tax on telecom businesses; bribery regarding the Ua-Arthorn housing project; and Mr. Thaksin being unusually rich as a result of abnormalities in the sale of shares in Shin Corp. Four cases in which investigations are completed and are waiting decisions: alleged abuse of power by former social development minister Watana Muangsuk over the Ua-Arthorn housing project; three alleged corruption cases against executives of the National Housing Authority regarding the Ua-Arthorn housing project; Airport Link project; and Bangkok Metropolitan Authority’s fire truck and boat procurement. Two cases in which investigations are still going on are: central lab project and takeover of Manchester City Football Club by Mr. Thaksin. After the ASC was dissolved, the National Counter Corruption Commission took over the functions of the ASC. Thaksin’s attempts to stage a comeback were strongly opposed by antiThaksin demonstrators, especially the ‘‘Yellow-Shirts.’’ Thaksin wielded


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considerably power behind the short-lived governments of Samak (July 29 – September 9, 2008) and Somchai (September 18–December 2, 2008) that consisted mostly of Thaksin’s cronies. The Constitutional Court ruled that Samak’s TV program on cooking violated the 2007 Constitution (Article 267) that stated that the prime minister is not allowed to be employed by a profit-making company. Somchai premiership also ended with the Constitutional Court’s ruling that a member of the executive board of the PPP was found guilty of vote-buying, which according to Article 237 of the 2007 Constitution meant that the PPP must be dissolved. On December 17, 2008, the leader of the Democrat Party, Abhisit Vejjajiva was elected prime minister by the House of Representatives. Pro-Thaksin supporters, especially the ‘‘Red-Shirts,’’ resorted to violence. On April 2009, there were assassination attempts on Prime Minister Abhisit and Sondhi Limthongkul, the founder of the yellow-shirt movement. Unlike Berlusconi, Thaksin’s attempts to stage a comeback are less successful and more violent. Berlusconi and his political party won the 2008 April elections to form a new government. In the Italian national elections of 2006, Berlusconi lost the elections to Romano Prodi by a small margin (Shin & Agnew, 2008; Stille, 2007). Later on, Italian voters were disappointed with the bickering centre-left government of Romano Prodi that had resorted to raising taxes instead of any serious public finance reforms to salvage the sluggish Italian economy. On April 14, 2008, Berlusconi who headed a centre-right coalition was elected to a third term as prime minister. Berlusconi has been involved in approximately 1,000 hearings in 17 different trials in Italy. He has been acquitted or benefited from the statute of limitations. The new Berlusconi cabinet has launched a bill giving Berlusconi immunity from prosecution while he remains in office. The bill is likely to be passed into law by both houses of parliament largely dominated by the government coalition. If passed, his trials in Milan for allegedly paying a bribe to British lawyer David Mills to return for favorable evidence in previous trials, and for allegedly committing tax fraud at his Mediaset S.p.A. television company will both be suspended. The bill is a rewording of a law passed by Berlusconi’s previous government in 2003, which was deemed unconstitutional by Italy’s constitutional court. The case of Berlusconi shows how difficult it is to combat corruption when the alleged corrupted big businessman successfully stages a comeback. He attacked his number-one enemy, the magistrates, by calling them ‘‘the cancer of democracy’’ who are ‘‘politically driven’’ to pursue him since he enter politics 14 years ago. Berlusconi claimed that he had spent

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174 million euros on legal fees in a series of cases linked to his business empire. For Thaksin, staging a comeback has become more difficult because of rulings by the Constitutional Court and the Supreme Court of Justice Division for Persons Holding Political Positions. Thai judges are becoming Thaksin’s number-one enemy.

CONCLUSIONS This work has identified and illustrated five conditions that make combating alleged corruption by big businessmen at the helm an extremely difficult task. The ability of the corrupted big businessmen in power to resist corruption charges depends on first, the ability of the big businessman to become a ‘‘permanent’’ super patron in politics. Second, the extraordinary skills of big businessmen in power to capture the state and thus, weakening state mechanisms in charge of busting corruption. Third, the ability of big businessmen to handle conflict of interest allegations is also an important factor that determines the ability of the state to combat grand corruption of big businessmen in power. Fourth, another factor that hinders effective corruption combat is the business skills and cunningness of big businessmen in power to use their political and administrative power to facilitate and expand his business empire. Fifth, the last factor that accounts for the failure in combating corruption is the ability of former big businessmen in power to stage a comeback.

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CHAPTER 5 COMPETITION AND TRANSPARENCY IN GOVERNMENT PROCUREMENT IN SOUTHEAST ASIA David S. Jones INTRODUCTION An important aspect of good governance is a well-managed government procurement system. This has a direct impact on the extent and quality of a country’s infrastructure and the effectiveness of its public services. Two key principles underpin a well-managed procurement system: value for money from the goods, services, and public works, which are procured, and fair access to procurement opportunities. Arguably, competition and transparency in the procurement process are necessary conditions for both. Yet despite this, most of the states of Southeast Asia have been reluctant to create an openly competitive and transparent government procurement system. This has been in part reflected in the fact that none them have become signatories to the WTO’s Government Procurement Agreement of 1994 with the notable exception of Singapore. This Agreement seeks to promote international access to the government procurement market in goods, services, and public works by mandating open competition and transparent procedures. The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 97–121 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018007

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The chapter will discuss the different degrees of competition and the nature of transparency in government procurement, and will examine the restrictions placed on both in the states of Southeast Asia. It will also consider the initial steps that have now been taken in some states to promote competition and transparency. In conclusion, consideration will be given to the underlying economic, political, and cultural reasons for the failure of Southeast Asian states (with the exception of Singapore) to fully embrace a competitive and transparent procurement system.

DEGREES OF COMPETITION IN PROCUREMENT In the states of Southeast Asia, the laws governing government procurement permit different degrees of competition. For high-value procurements, open tendering, which is the most competitive form of procurement, may be adopted, in which all companies registered as a government trading partner in the appropriate category and financial grade are invited to submit proposals. The categories in the register indicate the type of goods, services, and works that the company is eligible to supply, and the financial grades specify the maximum value of the contract the company can bid for. There are two types of open tender the international open tender, which allows foreign companies to submit bids, and the domestic open tender which restrict bids to firms owned by nationals. A variant of open tendering is selective tendering. This is often adopted in the case of large, complex, or specialist procurements, when it is advisable to ensure that only those businesses with the necessary capacity, expertise, and experience, participate in the tender. Under selective tendering, companies from the appropriate category and grade in the register of government trading partners that are interested in bidding, are invited first of all to submit to a qualifying test determining their suitability and capacity to undertake the contract (known as prequalification). Only those who qualify are then invited to submit a tender. An alternative to open tendering, which is less competitive, is limited or closed tendering (in the Philippines referred to as ‘‘limited source bidding’’). Only certain companies in the relevant registration category and financial grade are invited to tender either on the basis of their proven capability relative to the requirements of the contract, or, more dubiously, due to their personal, family, or political connections to government leaders. As an example, in Vietnam, alongside open tendering, limited tendering is allowed in certain situations under the 2006 Tender Law. In most cases, at least five

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‘‘experienced and capable’’ tenderers must be invited to tender (Government of the Socialist Republic of Vietnam [GSRV], 2006). By contrast, in the Government Procurement Reform Act in the Philippines, the minimum number of invitees in a limited tender is not specified (COP, 2003). For low-value procurements of off-the-shelf goods and regular equipment and supplies, limited sourcing is also practiced, in which three or more suppliers are directly solicited to submit price quotations. Quotation-based procurement is commonly called shopping (in Cambodia referred to as canvassing), and, although less competitive than open tendering, does allow price and quality comparisons to be made. In the purchase of low value goods available within a country, in most states of the region domestic shopping is mandatory in which only local suppliers will be solicited. Where there is no local availability, then international shopping is adopted, in which as a general rule the three or more suppliers solicited must come from at least two different countries. A third method of procurement widely practiced in the region is direct purchasing/contracting, in which there is little or no competition. In the Philippines, this is referred to as ‘‘negotiated procurement’’ and in Vietnam and Indonesia as procurement through ‘‘direct appointment.’’ Direct contracting involves earmarking one company for a procurement and then negotiating the price and the terms of the contract. This mode of procurement is often associated with corruption.

RESTRICTIONS ON COMPETITIVE PROCUREMENT IN SOUTHEAST ASIA In most of the states across the region, the procurement laws mandate competitive tendering, as the ‘‘main’’ or ‘‘preferred’’ mode of procurements of goods, services, and public works. However, this commitment to marketbased procurement is often compromised by formal and informal restrictions on competition. These restrictions are considered below. Preferential Access Types of Preferential Access One way to restrict competition is by allowing preferential access to procurement opportunities for certain types of business. These may be businesses within a country in which nationals own all or most of the equity,

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state-owned enterprises (SOEs), small and medium enterprises (SMEs), and businesses drawn from a section of the population with special economic needs (McCrudden, 1998, pp. 219–223; Trepte, 2004, pp. 48, 137–139, 152–168, 180–182). The most frequently favored category is businesses owned exclusively or in part by nationals. To facilitate preferential access, one or more of several options may be adopted (a) tenders (and quotations) for certain types of product or for lower value purchases (referred to as set-asides) may be restricted to businesses within the favored category, (b) tenders submitted by these businesses may be first considered and only if none of the submissions is suitable or their number is too few will tenders from firms outside that category be considered, (c) a quota may be set determining the proportion of contracts to be awarded to businesses in the favored category, (d) a preferential percentage margin may be applied to the prices offered by businesses in this category (Arrowsmith, 1998, pp. 8–10). Sometimes, preferences are given to companies who include a certain percentage of their product that originate from businesses belonging to the favored category (usually domestically owned businesses). In addition, preferential consideration may be given as a matter of practice to certain categories of business on an informal basis. Country Examples of Preferential Access The Thai government both applies a preferential margin, and gives first priority to Thai owned businesses. A 7% preferential margin is applied in favor of Thai companies registered with the Ministry of Industry and selling products that meet national standards. In addition, if there are three or more Thai companies engaged in bidding, only their bids will be considered. For consultancy and engineering services, a Thai consultant must be engaged as the leading firm (APEC, 2008). It is interesting to note that public procurement has not been incorporated into the Thailand–Australia Free Trade Agreement (TAFTA), which came into force in 2005. A working party has been set up to discuss how incorporation could be achieved, with a view to ensuring that the TAFTA shall, ‘‘to the extent possible, promote and apply open and effective competition and non-discrimination’’ in procurement for suppliers and contractors from the partner country. The caveat is of course the phrase ‘‘to the extent possible’’ (Department of Foreign Affairs and Trade, Australia, 2005). Under the Procurement Reform Act of 2003 in the Philippines, purchase contracts must be awarded where it is feasible, to companies in which the ownership stake of Filipinos is a least 60%, and public works contracts awarded to firms in which the ownership stake is at least 75%. Only when


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such companies do not submit suitable bids, can foreign suppliers be considered. Thus, the main way foreign suppliers can gain access to the procurement market is by teaming up with domestic firms (Congress of the Philippines [COP], 2003; World Bank, 2005a, p. 54; APEC, 2005, pp. 15–16; APEC, 2008). Nevertheless, such requirements represent a step toward a more open procurement market, as previously it was obligatory for contracts to be awarded to companies wholly owned by Filipinos (IMF, 2004, p. 3). Similar obstacles to foreign competition exist in Vietnam. Under the 2006 Tender Law, contracts may be awarded to foreign suppliers if there is no suitable domestic bidder. This condition is only met where there is no local tenderer meeting the project requirements, or for projects in which domestic tendering has been held without selection of a ‘‘winner,’’ as well as in cases where the tender is for procurement of goods that are not ‘‘manufactured locally’’ (GSRV, 2006). To be treated on an equal basis as a domestic supplier, a foreign company must ensure that certain components of the goods supplied are manufactured in Vietnam equal to at least 30% of the total cost of those goods, or alternatively must create a local partnership company or joint venture in which Vietnamese ownership is 51% or more (GSRV & WB, 2005, p. 144; GSRV, 2006; Department Public Procurement [DPP], Vietnam, 2007, p. A1). Moreover, provincial authorities in Vietnam when procuring goods may exercise preferences in favor of suppliers located within the province (GSRV & WB, 2005, pp. 144–145; DPP, 2007, p. A1). In Vietnam, SOEs are given preference in contract wards. In the World Bank’s procurement assessment reports of Vietnam in 2002 and 2004, and in its public expenditure review and fiduciary assessment of Vietnam in 2005 (coauthored with the Government of Vietnam), it was noted that in many tenders, as a matter of practice, special priority was given to SOEs. A further advantage enjoyed by SOEs was their ability to draw upon government funding when necessary, and the willingness of banks to write off their nonperforming loans, so enabling them to underbid private sector competitors (WB, 2002a, pp. 29–31, 77–79; GSRV & WB, 2005, p. 144). This greatly limited access to public procurement contracts for foreign suppliers, as well as private sector domestic businesses. In the other one party state in the region, Laos, SOEs have similarly obtained the lion’s share of government procurement contracts and figure prominently in the awards for World Bank sponsored projects. This has happened even when ‘‘it is questionable whether some of the winners meet eligibility criteria under the Bank’s guidelines’’ (WB, 2002b, pp. ii, 18). In Malaysia, a preferential system in government procurement is applied under an official affirmative action policy, which ensures opportunities for

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the Malay (Bumiputra) business community. This is exercised through setasides, preferential margins, and quota restrictions. Under the set-asides arrangements, all products of small value must be purchased from Malayowned businesses. Such businesses also enjoy preferential margins up to 12½% for medium-value and in some cases high-value tenders. What’s more, up to 30% of the annual value of public works contracts must be awarded to Malay-owned businesses (WTO, 1997; APEC, 2008). The preferential system is part of a long-standing policy in Malaysia to promote the business and employment opportunities of the Malay population and upgrade their living standards. According to the information provided by APEC, Malaysia’s public procurement policy supports its objective of ‘‘achieving developed-nation status by stimulating local industry through maximum use of local materials and resources and technology transfer, supporting Bumiputra business, and promoting local service industries.’’ In consequence, ‘‘government agencies are required to procure supplies and services from local sources. International tenders will only be invited if goods and services are not available locally’’ (APEC, 2008). Indonesia exercises a preferential system to benefit both Indonesianowned businesses and small and medium enterprises through set-asides and preferential margins. Only Indonesian-owned businesses may tender (or quote) to supply goods and services up to Rp 25 billion (US$ 2.32 million), provide contracting-out services up to Rp 10 billion (US$ 930,000), and undertake consultancy work up to Rp 1 billion (US$ 93,000). Although foreign companies may compete for contracts above these thresholds, a preferential percentage margin is accorded to Indonesian firms. For goods, it is 15% above the lowest foreign bid, and for contract services it is 7.5%. This derives from a policy of ‘‘increasing the use of domestic production, capacity, design and engineering talent y with the aim of expanding domestic employment and national industries’’ through government procurement (Government of the Republic of Indonesia [GRI], 2000, 2003). Moreover, the set-asides in Indonesia are tailored to benefit small and medium enterprises. Reserved for small-scale and cooperative enterprises are the supply of goods and services up to the value of Rp 500 million (US$ 46,500), the supply of contracting-out services up to Rp 1 billion (US$ 93,000) and consultancy services up to Rp 200 million (US$ 18,590). Reserved for medium enterprises are the supply of goods and services in the value range of Rp 500 million (US$ 46,500) to Rp 4 billion (US$ 372,000), contracting-out services in the value range of Rp 1 billion (US$ 93,000) to Rp 10 billion (US$ 930,000), and consultancy services in the value range of Rp 200 million (US$ 18,590) to Rp 1 billion (US$ 93,000) (GRI, 2000, 2003).


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Imprecise Legal Provisions Governing Modes of Procurement Competition in procurement is further undermined in several states by imprecise wording of those provisions in the procurement laws, which specify the conditions under which direct contracting and limited tendering may be adopted at the expense of open tendering. This enables such provisions to be interpreted by procurement entities according to what suits, and, if necessary, to escape obligations to permit open and competitive procurement. Direct Contracting A particular concern is the imprecise wording of provisions governing direct contracting. This is exemplified in Cambodia. Despite the commitment of the Cambodian government to open competition, as affirmed in the procurement laws, several broadly defined conditions are stipulated under which direct contracting is permitted. These include the ‘‘urgency’’ of the procurement, and the lack of sufficient number of suitable bidders in a previous tender, the necessity for ‘‘special qualifications’’ in providing the goods and services to be acquired. Furthermore, goods that are the same as but additional to those already supplied in a contract awarded through the bidding process may be procured from the same supplier without any bidding, when ‘‘it is improbable that a cheaper price will be obtained in a new call for tender’’ (RGC, 1995; Jones, 2009, p. 379). In the case of infrastructure projects in Cambodia, direct contracting may be adopted if there are ‘‘special criteria’’ necessitating a ‘‘special concessionaire,’’ or a ‘‘qualified concessionaire,’’ or if an open tender had been held in which ‘‘the bidding process was not successful.’’ Direct contracting is permitted too if additional works are needed that are a ‘‘normal extension’’ of an already on-going project (RGC, 1995, 1998; WB, 2004a, pp. 12, J-1; Jones, 2009, p. 379). In being so imprecise, such terms are open to wide interpretation. In its procurement assessment report of Cambodia of 2004, the World Bank noted how as a consequence, these provisions relied on ‘‘judgment in their application,’’ and ‘‘are being applied more widely than intended’’ to enable direct negotiation to be adopted (WB, 2004a, p. 12; WB, 2004b, pp. viii, 60, 62; Jones, 2009, p. 384). For this reason, the IMF in 2003 bluntly described the procurement process in Cambodia as ‘‘closed, opaque and non-competitive’’ (International Development Association [IDA] and IMF, 2003, p. 13). In Thailand too, although open tendering is required for procurements of ThB2 million (US$ 56,290) or above for goods and services, competition can be waived in favor of direct contracting on grounds of the urgency of the

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procurement. This often leads to the selection of companies in the wellconnected business networks (APEC, 2008; Poocharoen & Tangsupvattana, 2006, pp. 33–35). In Vietnam also, under the Law on Tendering, direct contracting is permitted for ‘‘national confidential projects or urgent projects in the national interest or for the safety and security of energy as decided by the Prime Minister’’ (GSRV, 2006). It is not hard to see how the broad nature of these conditions gives procurement entities and government leaders a great deal of latitude in deciding when to adopt this form of procurement. Limited Tendering Competition is eroded too by imprecise wording of provisions permitting limited tendering. In the Philippines, under the Government Procurement Reform Act of 2003, limited tendering may be chosen for ‘‘procurement of highly specialized types of goods and consulting services which are known to be obtainable only from a limited number of sources’’ and for the purchase ‘‘of major plant components where it is deemed advantageous to limit the bidding to known eligible bidders in order to maintain an optimum and uniform level of quality and performance of the plant as a whole’’ (COP, 2003). Terms such as ‘‘specialized,’’ ‘‘limited number,’’ ‘‘advantageous,’’ ‘‘optimum,’’ and ‘‘as a whole’’ are all a matter of interpretation, so weakening the constraints on procurement entities in adopting limited tendering. In Vietnam, limited tendering is allowable, under the 2006 Tendering Law for projects of ‘‘a research and experimental nature,’’ when ‘‘only a limited number of tenderers are capable of satisfying the requirements of the tender package,’’ and for projects where ‘‘the tender package has highly technical requirements or technical peculiarities’’ (GSRV, 2006). Again the lack of precision of key terms (such as ‘‘research and experimental,’’ ‘‘limited,’’ and ‘‘highly’’), gives procurement entities significant scope to interpret these provisions so as to justify limited tendering.

Threshold Values, Splitting of Contracts, and Repeat Orders Southeast Asian states follow the normal practice of setting threshold limits for less competitive modes of procurement, which is the maximum value up to which they are permitted. Of particular significance is the threshold limits for domestic open tendering relative to international open tendering, and shopping relative to tendering. In most states in the region, the thresholds


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are sufficiently low in themselves not to harm competition and broadly correspond with those adopted by the World Bank and ADB in their own procurements. However, thresholds are exploited to harm competition in a few countries in the region through the practice of splitting contracts. This involves splitting the quantity of a bulk item to be purchased into several smaller quantities. The value of the procurement of each quantity is thus reduced to the extent that a less competitive form of procurement is permissible such as domestic tendering or shopping. The ADB, OECD, and Transparency International have drawn attention to the way splitting can reduce competition, and have emphasized the need to strictly prohibit it (ADB & OECD, 2006, p. 9; Transparency International [TI], 2006a, pp. 35, 169, 188). The authors of Transparency International’s report on the integrity system in Thailand in 2006 remarked that to avoid international tendering that is required for procurements valued at more than ThB2 million (US$ 56,290), contracts are ‘‘in practice’’ broken down into smaller ones below this value (Poocharoen & Tangsupvattana, 2006, p. 33). According to the World Bank’s report on corruption in Indonesia, a similar practice is followed there (WB, 2003, p. 32). In the Philippines, the Government Procurement Reform Act expressly prohibits ‘‘splitting of contracts which exceed procedural purchase limits and competitive bidding,’’ the violation of which carries a jail term (COP, 2003). How far such violations are monitored and the prohibition actually enforced is difficult to say. A further way to diminish competition is to allow the same supplier to be retained for a repeat order or for extending an existing contract for a public works project. In several Southeast Asian states, procurement laws sanction such repeat orders and contract extensions. For example, as already stated, Cambodia’s procurement law permits a repeat order for goods to be purchased from the same supplier when it is ‘‘improbable’’ that a cheaper price could be obtained from other suppliers (RGC, 1995). The Philippines Procurement Reform Act specifies that the same supplier can be retained if the unit price of the item procured is ‘‘equal to or lower than that provided in the original contract’’ and does not exceed 25% of the quantity purchased in the original contract (COP, 2003). In Vietnam, under its Tendering Law of 2006, the same supplier can be retained to provide equipment and materials for the purposes of maintaining or expanding a facility ‘‘in order to ensure compatibility’’ provided they cannot be purchased from other suppliers (GSRV, 2006). In the assessment of government procurement in Vietnam conducted by its Department of Public Procurement in 2006, the external assessor noted that there was no limit on the quantity of an item

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that could be purchased through a repeat order ‘‘which could be twice or thrice the original quantity,’’ expressing concern that this could have the effect of ‘‘lessening the impact of open bidding’’ (DPP, 2007, pp. 14, 15, A2). In Thailand, as noted by Transparency International, additional goods or an extension of a public works project are often procured under an existing contract without a further tender (Poocharoen & Tangsupvattana, 2006, p. 33).

Corruption Corruption is a major constraint limiting competitive access to procurement opportunities across the region. In most of the states, corrupt practices continue to be widespread (with the notable exception of Singapore), as confirmed in the Transparency International, World Bank, and other indexes, with little improvement recorded in recent years. Procurement is an area widely recognized as pervaded by corrupt dealings. Types of Corruption in Procurement One of the main types of corruption that occurs in procurement transactions are bribes paid by companies to procurement and other officials, government leaders and elected politicians. Bribes from such companies are intended to ensure specifications are tailored to the types of goods, services, and works in which they specialize, and/or to guarantee a favorable decision at the tender evaluation and contract award stages. Alternatively, a company may pay lucrative bribes so as to be chosen for a contract through direct negotiation without any tendering. A survey of business opinion in 125 countries in 2005, conducted by the World Economic Forum, measuring bribery in government procurement, based on business perceptions, reveals how extensive it is in Southeast Asian states (see Table 1). Along a scale from 1 (maximum bribery) to 7 (least bribery), the average ratings given by businesses for Cambodia, Indonesia, Philippines, and Vietnam were all below 3.5 with their rankings above 100 out of the 125 countries (the higher the ranking the greater the perception of bribery). Malaysia achieved a modest average rating of 4.8 out of 7 whilst that of Thailand was less favorable at 3.9. By contrast, Singapore was awarded a high rating of 6.6 and was ranked as 4th out of the 125 countries. These figures and rankings broadly correspond with their overall scores for corruption given in the Transparency International and World Bank surveys.


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Table 1. World Economic Forum Measure of the Frequency of Bribery in Public Contracts from Executive Opinion Survey, 2005.

Singapore Malaysia Thailand Philippines Vietnam Indonesia Cambodia

Score from 1 (Common) to 7 (Never)

Global Rank out of 125 Countries (1 Being the Highest Rank)

6.6 4.8 3.9 3.1 3.0 2.5 2.7

4 37 71 112 106 124 122

Source: World Economic Forum (2006). Note: Myanmar, Laos, and Brunei were not covered in the Executive Opinion Survey.

Another form of corruption undermining competition in procurement in Southeast Asia is the frequent practice of senior officials, government leaders, and politicians of favoring businesses to which they, their family members, personal and business associates, or political allies have a financial or ownership connection. Such self-enriching, nepotistic, and crony deals are done with little transparency under direct contracting, as mentioned above, and often favor business networks dominated by powerful elite families and influential cronies. Companies may also engage in corruption to limit competition in procurement by fixing the price through collusion (sometimes called rigging of the tender). This can occur in at least three ways. One is for suppliers within the collusion ring to segment the procurement market for a particular range of goods, and to allow each supplier exclusive access to a specific segment. The market could be segmented according to region within a country, with a designated supplier within the ring having sole access to a tender within each region. Equally the market could be segmented according to the particular goods to be supplied within a range of related goods (e.g., computer hardware accessories), with each supplier having the right to supply one type of good within the range (e.g., printers). A second type of collusion is rotational bidding for goods and services for which there are regular tenders. Suppliers in a collusion ring agree to take turns to submit a bid for each of the tenders over a number of years, with the other suppliers at each tender withholding their bids. A third type of collusion occurs when one supplier bribes the others in the ring not to bid, to withdraw a bid, or to offer an excessively high price (OECD, 2007, pp. 12, 24, 30, 39).

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It is often difficult to prove collusion but there are tell tale signs. These include a lower than expected number of bids submitted, given the range of eligible suppliers, and the number of initial expressions of interest to bid. Equally suspicious is an anomalous pattern of consistently high (often identical) bid offers, well above the cost estimates calculated by the procurement entity, but with one bid just below the rest. That bid, still above the cost estimates, is usually the one earmarked by the collusion ring to win the contract (Albano, Buccirossi, Spagnolo, & Zanza, 2006, pp. 368–370). Corruption in Procurement: Country Examples In Indonesia, corruption has undermined competitive procurement over many years. Particularly prevalent are cronyism, bribery, and collusion. As mentioned in the World Bank reports in 2001 and 2003, government procurement is still largely controlled by particular business cliques with close connections to the higher reaches of government. Firms within these crony networks continue to win most government contracts. To ensure this outcome, bid specifications are routinely tailored to favor members of such networks. Further entrenching their influence is the insistence on preregistration for most procurements, with registration often restricted to favored firms. In addition, if a firm outside the favored circle submits the most competitive bid, it may find it rejected on ‘‘administrative or weak technical grounds’’ (WB, 2003, p. 32). For favoring the crony network, officials receive a proportion of the contract sum as bribes or kickbacks (WB, 2003, p. 32). Furthermore, as highlighted in the two World Bank reports mentioned above, business networks in Indonesia frequently form collusion rings to limit competition and secure a higher price. Typical practices are for members of collusion rings to agree upon taking turns to submit bids, or for one member to bribe others in the ring to withhold or withdraw their bids (WB, 2003, p. 33). Suspicion has fallen on GAPENSI, the powerful Indonesian Builders Association, as an example of both a crony network and a collusion ring. It is alleged that GAPENSI is able to block the registration for government contracts of building contractors who are not members, and can influence how bid specifications are drafted to suit certain firms. Likewise, it frequently engages in collusive practices for lucrative building and infrastructure projects (WB, 2003, pp. 32, 33). In Cambodia as well corruption is found in everyday procurement of goods and services, but is especially rife in large infrastructure projects. These include what is known as the build–operate–transfer (BOT) projects in which the project contactor for a specified period owns and operates the facility that has been built (Jones, 2009, pp. 377–379). Bribery routinely


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occurs. According to the index measuring the perception of bribery in government procurement as shown in Table 1, Cambodia was ranked at 122 out of the 125 countries surveyed. A World Bank sponsored survey of businesses in Cambodia in 2005 revealed that 80% of the sample declared the need to pay a bribe when dealing with public agencies including winning a contract to supply goods and services, and a contract for a civic works or BOT project. Seventy-one percent indicated such payments are ‘‘frequent’’ (IDA & International Finance Corporation, p. 116). Bribery, as well as cronyism and nepotism, were encouraged by the regular occurrence of direct contracting, Further, the World Bank’s fiduciary review of Cambodia in 2005 highlighted frequent collusion amongst contractors as well as fraudulent practices in submission of bid documents (WB, 2005b, pp. 1–3). Corruption on this scale has affected donor-sponsored projects. In 2006, the World Bank found evidence of corruption by Cambodian officials in 43 contracts covering five projects it was sponsoring, with a total value of US$ 11.9 million. Three of the projects were suspended until the abuses had been rectified (WB, 2006a). The Philippines fares little better. According to a survey of 705 business managers, conducted in 2006/2007 by the Philippine survey organization, Social Weather Stations (SWS), 61% of respondents declared ‘‘a lot’’ and 33% ‘‘some’’ corruption in the Philippine public sector. Government procurement is particularly prone to abuse, with the most serious being bribery. Nearly 50% of respondents stated that ‘‘almost all companies’’ or ‘‘most companies’’ in their line of business paid bribes to secure a public contract. Twenty-two percent of the respondents admitted to having to pay bribes themselves to supply goods and services. In addition, 32% of the respondents indicated the size of the bribe to be the equivalent of 21% or more of the contract sum, with a further 25% of respondents indicating it was between 11 and 20% (SWS, 2007). Many of the bribes are paid to senators in the Philippine Congress who can influence contract awards, especially in large infrastructure projects. The money received is used by senators for their own personal benefit, or to illicitly fund their election campaigns. The source of the payments are wealthy elite families in the business community who can ensure that the preponderance of government contracts go to their businesses (Global Advice Network [GAN], 2008; Quimson, 2006, pp. 12–14). There is little doubt that such bribery makes it difficult for firms to compete for contracts on a fair and equal basis. In the Philippines too, collusion is a persistent problem. According to the Philippines country procurement assessment report of 2008 by the

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Government of the Philippines (GOP), ADB, and the World Bank, ‘‘there is a perception that collusion or rigging of bids is common, particularly for big ticket contracts’’ (2008, p. 33). As an example, the World Bank found that in two contracts it was sponsoring in the Philippines, all the bids were suspiciously clustered together at a high price level. Such a pattern was repeated in three separate rounds of bidding, resulting in rejection of the bid offers in each case. The World Bank concluded that ‘‘the analysis of the bid data presented unmistakable evidence of collusion’’ (GOP, ADB & WB, 2008, pp. 33–34). The 2008 report, mentioned above, also pointed to the difficulties of taking action against collusion rings in the Philippines. It cited the example of the Panaon local government unit, which in the last few years discovered a repeated pattern of high and often identical bid offers in its tenders, but the companies concerned have continued to bid for contracts. Despite its best efforts the local government unit has been unable to obtain enough hard evidence for a prosecution to be undertaken (GOP, ADB & WB, 2008, p. 34). Despite the commitment of the government of Vietnam to creating a market-based procurement system, its efforts continue to be frustrated by widespread corruption. The report in 2006 on the national integrity system in Vietnam by Transparency International highlighted both bribery and collusion as being well entrenched in public contracting. A further problem is a tendency for procurement entities to favor suppliers and contractors within crony networks. As an example, Vietnam Posts and Telecommunications Corporation between 1998 and 2003 reportedly awarded 90% of the contracts for telecommunication projects to favored suppliers within such networks (GAN, 2008). Nepotism is equally prevalent. Transparency International’s report, referred to above, stated that ‘‘Ministers have a high degree of autonomy in awarding contracts, and while rules and standards on conducting public procurement exist, nepotism is widespread, and the accountability of Ministers is limited’’ (TI, 2006b, p. 17). As an example, a director of a state-owned gasoline trading company has been recently accused of awarding a major contract to a company controlled by members of his family (GAN, 2008). Although Thailand is less corrupt than most other Southeast Asian states, corrupt dealings continue to be a major hindrance to achieving open and fair competition in government procurement. The high incidence of bribery of officials in order to secure registration, win contracts, or circumvent contractual obligations, continues to be a source of concern. What’s more, preference in the award of contracts is often given to particular business


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networks, dominated by influential politicians and senior bureaucrats, and/or their personal and political cronies. Such companies obtain the lion’s share of high-value procurements. This is made possible by exploiting loopholes and shortcomings in the legal framework of the procurement system, as discussed above (Poocharoen & Tangsupvattana, 2006, pp. 33–35). A particular focus of concern in the last 5 years has been evidence of corrupt dealings in the building of the new Suvarnabhumi Airport in Bangkok. The evidence relates to the purchase of scanning equipment and furniture, the installation of electrical systems, the construction of a kitchen and eating area in the airport, and the building of the access roadways. Currently, investigations are being conducted by the Auditor-General, but few cases as yet have been brought to trial (Poocharoen & Tangsupvattana, 2006, p. 33). Whilst Malaysia has been more successful than most other states of the region in combating corruption, the level of corruption is still far below an acceptable standard, which in turn has distorted the market in government procurement. In fact, former Prime Minister Badawi, when he came to power in 2003, made combating corruption an overriding priority (Fuller, 2006). Contracts for large-scale building and infrastructure projects have attracted a great deal of attention with evidence of political cronyism, kickbacks, and embezzlement. Of particular concern has been the practice of direct contracting for building and infrastructure projects, which was permitted in 2000 by the Ministry of Finance. This lead to special preference for a small network of contractors known as Project Management Consultants, which in effect eliminated genuine competition in the procurement process for such projects. Not only did direct contracting open the door to crony deals, it also provided opportunities for embezzlement by contractors and kickbacks for officials, as suggested by the excessively high prices that were charged to the procurement entities (Siraj & Chima, 2006, p. 201; Bosshard, 2005, p. 21). This arrangement has now been terminated by the government.

TRANSPARENCY Also essential to the development of a well-managed government procurement system is transparency. Without it, open competition cannot prevail, corrupt dealings can proliferate, and other failings in the procurement process may be covered up, so weakening accountability.

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Transparency Requirements in Government Procurement Transparency requires full disclosure of all relevant information at key stages of the procurement process. This includes widely advertising bidding opportunities through various channels such as the official gazette, major newspapers, trade journals, and the Internet. The advertisement should contain essential details, such as the nature and scope of the goods, services and works to be procured, the mode of procurement, and the type of suppliers who are eligible to participate in the tender. A further requirement is a specification of the medium bid price or the budget ceiling for the procurement. If prequalification is necessary, it is important to convey to interested suppliers the procedures to follow and the information to be submitted, as well as the criteria of assessment. To all eligible and interested suppliers, an invitation to tender should be sent accompanied by the bid documents. These should include instructions to tenderers specifying guidelines on the drafting and submission of proposals, a list of the design and specification requirements, the criteria for evaluating tender proposals, and the time frame for tender submission and project implementation. To facilitate transparency, a pretender bid conference of interested suppliers may be called to provide additional information and to answer queries. When the bid selection has been made, it should be publicly announced, disclosing the name of the successful company and the value of the contract, with unsuccessful tenderers duly informed of why their bids failed. If limited sourcing and direct contracting have been adopted, this too should be made publicly known with reasons given. So as to ensure proper accountability, access to all information and documents relating to a procurement should be given to official monitoring and watchdog bodies, such as the central procurement authority, government auditor, ombudsman, anticorruption agency, and relevant watchdog committees within the legislature. Transparency can be undermined by fragmented and opaque rules governing procurement, arising from disparate and inconsistent laws. In consequence, individual procurement entities are able to adopt procurement practices of their own choosing. Fragmented and opaque rules leave businesses at a loss in knowing what is required to bid for and win contracts. This can be redressed when a uniform set of rules are introduced to cover most procurements. This requires an overarching procurement law, administered through a clear and consistent set of implementing regulations, and a common instruction manual, with further consistency achieved through the use of standard bidding documents and model contracts (Thai, 2009, pp. 7–9).


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An important contribution to transparency in the region is the adoption of e-procurement, with the creation of a government procurement Web site portal. This can be used, amongst other things, to disclose procurement laws, regulations and bidding procedures, and to advertise intended procurements and invitations to bid. It may indicate the mode of procurement and the bid evaluation criteria, procedures to follow in bid submission and the deadlines to observe, and arrangements for prebid conferences, as well as specifying the budget ceiling or expected median bid price. The portal can also post information required for prequalification, provide downloadable bidding documents, allow online bid submissions, and announce bid outcomes with the reasons for the selection of the successful bidder (Tomkin, 2007, pp. 218–224, 241–245).

Variable Progress in Achieving Transparency in Government Procurement in Southeast Asia In certain countries of Southeast Asia, progress has been made in making government procurement more transparent. The procurement process in Singapore is marked by a significant degree of transparency. All procurements are widely advertised accompanied by full disclosure of all necessary information, including prequalification requirements, specifications requirements for the goods, services and works to be procured, and criteria of selection. In addition, bid results are publicly announced, and explanations given to unsuccessful bidders of why their bid submissions failed. This has been facilitated by the comprehensive adoption of e-procurement through the special procurement portal at the GeBiz Web site (and for construction projects at the procurement portal of the Building and Construction Authority). Through these portals, all tenders are advertised, the registration category and grade of those eligible to bid specified, and prequalification criteria and tender submission procedures spelt out. GeBiz is also used to send invitations to bid, and through it companies are required to submit their tender proposals in return. Bid results may be found as well on the GeBiz Website. Underpinning Singapore’s procurement system are standardized and clear procurement procedures based on a detailed procurement instruction manual, IM3B (Singapore Civil Service [SCS], 2007; Jones, 2007, pp. 192–193). Following in Singapore’s footsteps, certain other countries in Southeast Asia have now adopted e-procurement to achieve greater transparency. Thailand has recently adopted an online system under which procurement entities advertise an intended procurement, state the expected median bid

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price, stipulate prequalification and tender submission procedures, send invitations to bid, and announce bid results. Companies may use the online facility to submit documents for prequalification, to send quotations and tender proposals, and to register as a government trading partner. Names of companies who have violated procurement regulations and those suspended from future tenders are also published on the procurement Web site (WB, 2006b, pp. 7, 31; Poocharoen & Tangsupvattana, 2006, p. 34). The Philippines adopted a comprehensive e-procurement system in 2007, known as PhilGEPS, ‘‘as the primary source of information’’ for procurement and ‘‘to support a more efficient, convenient, transparent, and open procurement process’ (Philippine Government Procurement Service [PGPS], 2009). PhilGEPS publishes procurement laws, regulations and bidding procedures, and announces procurement opportunities, known as bid notice abstracts, with a facility to download bid documents. Bid notice abstracts contain information on the type of goods, services, and public works to be procured, the approved budget ceiling for the contract, and the mode of procurement to be adopted (shopping, open bidding, etc.). If prequalification is required, this is also included, with a specification of the criteria for passing the test, and if prebid conferences are to be held, details of the date, time, and venue. On downloading bid documents, a company is then automatically informed of future procurement opportunities for the same category of goods, services, and public works. The online portal also discloses the name of the company awarded a contract, the reason for the award, and the contract sum. A further provision is an e-catalog for purchasing lowvalue items (PGPS, 2009). However, there is no facility yet for submitting online quotation and bids, although this, together with electronic payment of suppliers, are part of the plan to expand the functionality of the e-procurement system (GOP, ADB & WB, 2008, pp. 9–10, 16, 18–19, 40). Also facilitating greater transparency in the Philippines and Thailand has been the standardization of procurement procedures and the use of uniform bid documents, generic procurement manuals, and model contracts. This contrasts with the previously fragmented and opaque procedures, instructions, and document formats, which varied from one procurement entity to another (ADB & OECD, 2005, p. 4; GAN, 2008; GOP, ADB & WB, 2008, pp. 6, 10, 16, 51–55). In the Philippines, this has been achieved in part by aligning the procurement rules, procedures and manuals, and contract format with those of the World Bank and the ADB (GOP, ADB & WB, 2008, pp. 51–55). Despite the progress made, much remains to be done to create a fully transparent procurement system across the region (with the notable exception of Singapore). In four states, viz. Laos, Cambodia, Indonesia,


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and Vietnam, often procurement opportunities are not widely advertised and the mode of procurement is not specified. Moreover, where tenders have been adopted, procedures for drafting and submitting tender proposals and the criteria for evaluating them are frequently unclear. A few examples are worth citing. In Laos, little progress has been made in publishing a procurement bulletin or gazette in which all intended procurements can be advertised with bidding procedures clearly specified. This was strongly recommended by the World Bank as a basic requirement (WB, 2002b, p. 10; 2004c, p. 16). Nor have any steps been taken to create an online system for advertising procurement opportunities, disseminating tendering information, and facilitating tender submissions. Lists of bidders with prices offered are not normally published, and in some cases there may be no public announcement of the name of the successful bidder. Similarly in Cambodia, there is no official channel for advertising procurement opportunities. This has allowed many contracts to be awarded through direct negotiation, as noted earlier. Two World Bank reports on Cambodia in 2004 (the procurement assessment report and a report on investment and reform) repeatedly referred to the lack of transparency in public procurement (WB, 2004a, pp. 9, 13, 26, B7, J2; 2004b, pp. vii, viii, 2, 5, 39, 66–67). This also applied to procurements in projects the World Bank itself sponsored (WB, 2005c, pp. 2–3). Initial progress has been made in Indonesia with the requirement to advertise tenders in newspapers and on the Internet, but there is a long way to go to achieve an acceptable level of transparency (WB, 2003, p. 34; GAN, 2008; WB, 2007, pp. 133–135). Likewise, in Vietnam, whilst the government has sought to improve transparency, there is a lot more scope for improving disclosure, including developing a comprehensive procurement Web site (a portal with a very limited functionality has just been set up), and advertising procurement opportunities in national newspapers. The procurement system would be further enhanced by abandoning the requirement for procurement advertisements to be only in Vietnamese, which disadvantages foreign suppliers (DPP, 2007). Contributing to the lack of transparency in these countries is the absence of uniform procurement rules, sometimes as a result of the existence of different and conflicting laws governing procurement, and the absence of a generic instruction manual, standard bidding documents, and a model contract applicable to all state agencies. In consequence, procurement entities resort to creating their own in-house and opaque procurement procedures (WB, 2004c, pp. 9, 29; ADB & OECD, 2006, pp. 5–7, 9, 13). In Vietnam, despite the umbrella Law on Procurement of 2005, standard bidding documents have yet to be issued, and a generic procurement

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instruction manual, and model contracts do not exist, allowing a fragmented procurement system to continue with different entities following their own ill-defined rules (DPP, 2007). Similarly, in Laos, the procurement system continues to be fragmented and opaque in the absence of standard bidding documents, a generic procurement manual and model contracts (WB, 2004c, p. 16; WB, ADB, IMF & European Commission [EC], 2007, pp. 11, 15, 50). Indonesia has fared little better despite the umbrella Procurement Law of 2003. The rules governing procurement continue to be opaque and inconsistent, with subnational entities in particular, which are responsible for much public purchasing, following their own purchasing practices (WB, 2003, p. 34; GAN, 2008). The 2007 public expenditure review of Indonesia conducted by the World Bank observed that ‘‘public procurement is still confusing due to the multitude of legal instruments across levels of government.’’ It noted how local governments are able ‘‘to establish their own arrangements for public procurement,’’ and likewise that ‘‘ministries and state-owned enterprises can also issue regulations on public procurement’’ (WB, 2007, p. 103). A similar situation exists in Cambodia. Government procurement still lacks a clear and unified procurement framework, making it difficult for suppliers and contractors to know what procedures to follow and what criteria to adhere to for the purposes of both registration (which is required) and bidding. The resistance amongst Southeast Asian states to full transparency in government procurement was indicated during the WTO negotiations to reach a plurilateral agreement on this matter, which were held between 2001 and 2003. Such an agreement was to be a sequel to the GPA, but the negotiations were stalled by the lack of consensus amongst the delegates. The delegates from three of the four Southeast Asian states who were represented at the talks (Malaysia, Philippines, and Thailand), expressed misgivings about the disclosure of bid evaluation criteria, and the obligation to inform companies whose bids had failed, of the reasons why (WTO, 2001, 2002, 2003). Reflecting this concern, the Malaysian delegate stated in 2002 that ‘‘any eventual agreement shall be based on national practices’’ (WTO, 2002). A contrary view was expressed by the delegate from the other state, Singapore, which advocated a greater degree of transparency.

Influence of International Donor Organizations The role of international donor organizations (such as the World Bank, ADB, and UNDP) in promoting transparency and other acceptable


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procurement practices across Southeast Asia deserves some credit. Their regular diagnostic studies, reports, and forums have repeatedly highlighted the lack of disclosure, opaque procedures, and inconsistent rules. As part of their technical assistance programs, procurement laws, and regulations have been drafted partly with a view to enhance transparency and standardization in procurement practices. An example of this was the World Bank’s contribution to drafting the Government Procurement Reform Act in the Philippines promulgated in 2003 (GOP, ADB & WB, 2008, pp. 8, 15). Moreover, in projects funded by international donor organizations, it is usually obligatory to adopt the transparent and standardized procedures laid down by them in their procurement guidelines and operating manuals. These include full disclosure of bidding opportunities, the mode of procurement, specifications requirements, procedures to follow for prequalification and bid submission, prequalification and bid evaluation criteria, and award results. To ensure both clarity and standardization, it is commonly stipulated in the project agreement that the standard bid documents of the donor organization be used. The recipient government is responsible to undertake the procurement, but increasingly in recent years, its actions are more closely monitored by the donor organization, and unacceptable and noncompliant practices vetoed. Here are precedents that may set the course for higher standards of purchasing in the future and enable procurement officials to become more attuned to the practice and requirements of transparency (ADB, 2007, pp. 1–64; WB, 2004d; UNDP, 2009).

CONCLUSIONS Several reasons may be posited to explain the restrictions on competitive and transparent procurement in Southeast Asia. One of the factors restricting competition is the ambivalence amongst political leaders and policy makers in several states in the region toward free markets and global trade. On the one hand, political leaders and policy makers across the region have increasingly recognized the benefits arising from free markets and global trade, and have pursued policies that have facilitated them. At the same time, there still exists a belief that a degree of protection is still required to safeguard businesses owned by citizens, small and medium enterprises, and business drawn from particular social groups, which would lose out if exposed to global or national competition. This belief is reflected in procurement practices that restrict competition such as limited tendering, shopping, and various preferential arrangements favoring certain types of

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businesses especially those owned by nationals of a country. Such benefits are considered as outweighing any possible compromise in value for money in terms of higher costs or a lower quality of the product or service acquired. To further encourage protectionism is the possible fear of the political consequences in creating an open procurement market, in light of the perception that public revenue is used to reward overseas suppliers at the expense of local companies. Further causes of the restriction on competition in procurement are the close links between the ruling elite of political leaders and senior bureaucrats on the one hand and powerful business networks on the other. In several countries of the region it is common for political leaders and senior bureaucrats, their families and cronies to have a sizable stake in companies within such networks. Despite conflicts of interest, such companies are then favored by means of limited tenders, direct contracting, or the manipulation of bid specifications to suit them, so preventing a level playing field based on open competition. Two reasons may be cited for the limits placed on transparency in procurement. One is that full disclosure could lift the veil on waste and inefficiency in the procurement process, which could result in more rigorous accountability to watchdog institutions such as the national audit office and committees of the legislature, and expose government to greater public scrutiny from civil society, the media, and opposition parties. The fear is that this could undermine the credibility of the governing elite and the authority of the government and the bureaucracy. The second reason is that the lack of transparency enables corruption to proliferate, crony networks to be sustained, and nepotistic favors to be granted if procurement opportunities are not widely advertised, bid procedures remain opaque, and little information is provided on the method of procurement, specification requirements, bid evaluation criteria, and bid outcomes. In these circumstances, it is all too easy for back-room deals to be struck with favored companies and bribes and kickbacks to be given, without much chance of coming under the public spotlight and being identified and dealt with by watchdog and enforcement bodies. Thus, as with the limits placed on competition, the lack of transparency is crucial to maintaining the close links between the governing and business elite and to ensure that both extract the maximum personal advantage from such links through corrupt dealings in the procurement process. The creation of a more competitive and transparent system of procurement in Southeast Asia will likely depend on changes in values and culture. Such changes would entail the emergence of an economic philosophy that is


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less ambivalent about the free market and global competition, a political culture that recognizes the importance of public accountability, and a social ethos in the governing and business elite upholding ethical integrity and respect for legal obligations. While e-procurement offers the prospect of a more competitive and transparent system of government procurement as it is increasingly adopted in the region, the potential benefits will only be realized if it is supported by an economic philosophy, political culture, and social ethos conducive to these ends.

REFERENCES ADB. (2007). Procurement guidelines. Manila: ADB. ADB & OECD. (2005). Anti-corruption policies in Asia and the Pacific: Thematic review on provisions and practices to curb corruption in public procurement Self Assessment report – Thailand. Manila: ADB & OECD. ADB & OECD. (2006). Curbing corruption in public procurement in Asia and the Pacific: Progress and challenges in 25 countries. Manila: ADB & OECD. Albano, G., Buccirossi, P., Spagnolo, G., & Zanza, M. (2006). Preventing collusion in procurement. In: N. Dimitri, G. Piga & G. Spagnolo (Eds), Handbook of procurement (pp. 347–380). Cambridge: Cambridge University Press. APEC. (2005). Non-binding principles on government procurement submitted by the Philippines. Singapore: APEC. APEC. (2008). Government procurement resources. Singapore. Available at: http://www.apec. org, downloaded on April 16, 2009. Arrowsmith, S. (1998). National and international perspectives on the regulation of public procurement: Harmony or conflict?. In: S. Arrowsmith & A. Davies (Eds), Public procurement global revolution (pp. 5–26). London: Kluwer Law International. Bosshard, P. (2005). The environment at risk from monuments of corruption. In: Transparency International (Ed.), Global corruption report (pp. 19–23). Cambridge: Cambridge University Press. Congress of the Philippines. (2003). An act providing for the modernization, standardization and regulation of the procurement activities of the government and for other purposes. Republic Act No. 9184. Manila, RO Department of Foreign Affairs and Trade, Australia. (2005). Thailand–Australia free trade agreement TAFTA. Available at: http://www.dfat.gov.au/trade, downloaded on November 3. Department of Public Procurement, Vietnam. (2007). Vietnam national public procurement system assessment report. Ministry of Planning and Investment, Government of Vietnam, Hanoi. Fuller, T. (2006). Malaysia’s crackdown on corruption has its skeptics. International Herald Tribune, 31 May. Global Advice Network. (2008). Business anti-corruption portal country profiles. East Asia & the Pacific. Copenhagen. Available at: http://www.business-anti-corruption.com, downloaded on February 18. Government of the Philippines, ADB & World Bank. (2008). Philippines country procurement assessment report. WB, Washington, DC.

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Government of the Republic of Indonesia. (2000). Presidential decree on government procurement. Keppres No. 23. GRI, Jakarta. Government of the Republic of Indonesia. (2003). Presidential decree on government procurement. Keppres No. 80. GRI, Jakarta. Government of the Socialist Republic of Vietnam and World Bank. (2005). Vietnam managing public expenditure for poverty reduction and growth: Public expenditure review and integrated fiduciary assessment, Vol. 1, Cross-Sectoral Issues, WB, Washington, DC. Government of the Socialist Republic of Vietnam. (2006). Law on tendering, law 61-2005-QH11. GSRV, Hanoi. International Development Association & International Monetary Fund. (2003). Cambodia poverty reduction strategy paper joint staff assessment. IMF, Washington, DC. International Development Association & International Finance Corporation. (2005). Country assistance strategy for the Kingdom of Cambodia. Washington, DC: World Bank. International Monetary Fund. (2004). Philippines report on the observance of standards and codes: Fiscal transparency module-update. Country Report No. 04/180. IMF, Washington, DC. Jones, D. S. (2007). The features and recent reforms of government procurement in Singapore. In: L. Knight, et al. (Eds), Public procurement international cases and commentary (pp. 160–178). Oxford: Routledge. Jones, D. S. (2009). Public procurement in Cambodia. In: K. Thai (Ed.), International handbook of public procurement (pp. 375–392). Boca Raton, FL: Taylor & Francis. McCrudden, C. (1998). Social policy issues in public procurement: A legal overview. In: S. Arrowsmith & A. Davies (Eds), Public procurement: Global revolution (pp. 219–239). London: Kluwer Law International. OECD. (2007). Integrity in public procurement: Good practice from A to Z. Paris: OECD Publishing. Philippine Government Procurement Service. (2009). PhilGEPS Philippine government electronic procurement system. Manila. Available at: http://www.philgeps.net/GEPS, downloaded on April 17. Poocharoen, O., & Tangsupvattana, A. (2006). National integrity systems: Transparency International country study report. Thailand 2006. Transparency International, Berlin. Quimson, G. (2006). National integrity systems: Transparency International country study report. Philippines 2006. Transparency International, Berlin. Royal Government of Cambodia. (1995). Anukret of July 31st governing public procurement. No. 60. RGC, Phnom Penh. Royal Government of Cambodia. (1998). Anukret on build-operate-transfer BOT contract. RGC, Phnom Penh. Singapore Civil Service. (2007). Instruction manual IM3 – Store, works and services, IM3B: Contracts and purchasing procedures. Singapore: Ministry of Finance. Siraj, M., & Chima, S. (2006). Country reports Malaysia. In: Transparency International (Ed.), Global corruption report (pp. 199–203). Cambridge: Cambridge University Press. Social Weather Stations. (2007). The 2006–2007 surveys of enterprises on corruption. Quezon City, Philippines: Asia Foundation. Thai, K. (2009). International public procurement concepts and practices. In: K. Thai (Ed.), International handbook of public procurement 2–24. Boca Raton, FL: Taylor & Francis. Tomkin, C. (2007). E-procurement: A cross-jurisdictional comparison. In: L. Knight, et al. (Eds), Public procurement international cases and commentary (pp. 216–246). Oxford: Routledge.


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Transparency International. (2006a). Handbook: Curbing corruption in public procurement. Berlin: TI. Transparency International. (2006b). National integrity systems: Transparency International country study report. Vietnam 2006. TI, Berlin. Trepte, P. (2004). Regulating procurement: Understanding the ends and means of public procurement regulation. Oxford: Oxford University Press. UND. (2009). Procurement: How we operate. New York. Available at: http://www.undorg/ procurement/operate, downloaded on April 18. World Bank. (2002a). Vietnam country procurement assessment report: Transforming public procurement. Report No. 25144-VN. WB, Washington, DC. World Bank. (2002b). Lao PDR country procurement assessment report. Report No. 25334-LA. WB, Washington, DC. World Bank. (2003). Combating corruption in Indonesia: Enhancing accountability for development. Washington, DC: WB. World Bank. (2004a). Cambodia procurement assessment report. Report No. 29950-KH. WB, Washington, DC. World Bank. (2004b). Cambodia: Seizing the opportunity. Investment climate assessment and reform strategy for Cambodia. Report No. 27925-KH. WB, Washington, DC. World Bank. (2004c). Implementation completion report on a credit in the amount of SDR 13.5 million to the Lao People’s Democratic Republic for a financial management adjustment credit. Report No. 30064. WB, Washington, DC. World Bank. (2004d). Procurement policies and procedures. Washington, DC. Available at: http://web.worldbank.org, downloaded on April 19. World Bank. (2005a). Philippines country procurement assessment report – 2nd update. WB, Washington, DC. World Bank. (2005b). Cambodia: Summary of fiduciary review. Washington, DC: WB. World Bank. (2005c). Country assistance strategy for the Kingdom of Cambodia. Report No. 32118-KH. WB, Washington, DC. World Bank. (2006a). Cambodia: The fight against corruption. WB, Washington, DC. Available at: http://web.worldbank.org, downloaded on May 2, 2008. World Bank. (2006b). Thailand-Economic monitor. Report No. 37439. WB, Bangkok. World Bank. (2007). Spending for development: Making the most of Indonesia’s new opportunities, Indonesia public expenditure review. Jakarta: WB. World Bank, IMF, ADB, & European Commission. (2007). Lao PDR: Public expenditure review integrated fiduciary assessment. Report No. 39791 – LA. WB, Washington, DC. World Economic Forum. (2006). Global competitiveness report, 2005–2006. Geneva. Available on: http://www.weforum.org, downloaded on February 18. World Trade Organization. (1997). Malaysia: Trade policies and practices by measure government procurement. Geneva: WTO. World Trade Organization. (2001). Working group on transparency in government. Procurement Report on the Meeting of 4 May. WTO, Geneva. World Trade Organization. (2002). Working group on transparency in government. Procurement Report on the Meeting of 29 May. WTO, Geneva. World Trade Organization. (2003). Working group on transparency in government procurement. Reports on the meetings of 10–11 October 2002, 7 February 2003, 18 June. WTO, Geneva.

CHAPTER 6 WHY DID ANTICORRUPTION POLICY FAIL? IMPLEMENTATION OF THE ANTICORRUPTION POLICY OF THE AUTHORITARIAN NEW ORDER REGIME IN INDONESIA, 1971–1998$ Roby Arya Brata INTRODUCTION This chapter evaluates the effectiveness of the implementation or enforcement of the Anticorruption Law 1971 of the authoritarian New Order regime in combating corruption in the public sector. Thus, the central research question that will be investigated and answered in this chapter is to what extent and for what reasons had the implementation or enforcement of the Anticorruption Law 1971 failed or been ineffective, to some degree, in achieving its legally mandated objective?

$

Presidential Working Unit for Reform and Program Management, The Office of the President of the Republic of Indonesia Jakarta. Indonesia; the views in this article are personal opinions of the author.


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Therefore, the purpose of this chapter is to examine and evaluate the extent to which the implementation or enforcement of the Anticorruption Law 1971 had failed or been ineffective, to some degree, in attaining its legally mandated objective, and to explain the contributing factors or reasons for its implementation or enforcement failure or ineffectiveness. This chapter argues the implementation or enforcement of the Anticorruption Law 1971 of the authoritarian New Order regime failed or been ineffective in attaining its formal objective of reducing or controlling corruption – as legally defined in the Anticorruption Law – in the public sector, and the defects in the top and bottom (operational) levels of the implementation or enforcement structure and processes were the primary explanatory factors or reasons for its policy implementation or enforcement failure or ineffectiveness.

THE AUTHORITARIAN POLITICAL SYSTEM UNDER THE NEW ORDER REGIME Under the New Order regime, even though the state was constitutionally constructed as a rule of law-abiding state (negara hukum), in practice we were a power-oriented state (negara kekuasaan). (Frans H. Winarta, Member of the National Law Reform Commission and a Lawyer)1

The New Order regime, in Indonesian Rezim Orde Baru (ORBA), was an authoritarian, militaristic, centralistic, corporatist rule, with a limited political party system under the leadership of former President Suharto who governed the country from 1966 to 1998. The New Order emerged into power as an antithesis or ideological and political reactions to the ideologies and political leadership of the Old Order (Orde Lama) regime under the first president of the country, Sukarno (1945–1967).2 Suharto, leading the elite Army Strategic Reserve (Kostrad), emerged into power after his troops countered an attempted coup on September 30, 1965. In this failed coup, six generals of the army were killed. Suharto blamed the coup and the killings on the Indonesian Communist Party and led anticommunist military operations that killed between 500,000 and one million of the party’s activists and followers (Cribb, 2002). On March 21, 1968, the Provisional People’s Representative Assembly named Suharto as an acting president, replacing the first president and founder of the republic and the Old Order regime, Sukarno. Under his ‘‘New Order’’ strong centralized and military-dominated administration, Suharto’s 32-year rule achieved significant economic growth

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and industrialization (Miguel, Gertler, & Levine, 2005). Under his regime, the country dramatically improved the health, education, and living standards of the people (McDonald, 2008). During the Cold War, his strong anticommunist stance and ability to maintain political stability won him the economic and diplomatic support from the West. In particular, Noam Chomsky (1998, p. 1) observed that ‘‘Mr. Suharto’s rule relied crucially on US support.’’ According to him, to sustain Suharto’s violent power the White House even backed the regime by repeatedly evading congressional restrictions on military aid and training. Suharto ruled his regime with an authoritarian and military style of government. No one could question and compete against his leadership. Even talking about the succession of his presidency was politically a taboo under his rule. For example, Admiral Sudomo – the then coordinating minister of political affairs – was forced to apologize to Suharto for raising the issue of succession (Majalah Tempo, 1990a, 1990b, 1990c, 1990d, 1990e, 1990f). Moreover, under Suharto’s rule, ‘‘All strategic institutions and positions were controlled and held by the military members.’’3 The military karyawan (public officials) in all levels of the government – in particular in the higher central bureaucracy – played a significant role in maintaining the New Order regime (MacDougall, 1982, pp. 89–121). MacDougall observed that they, with their civilian colleagues, were influential and had significant decisionmaking powers of the government. Antonious Sujata (2000, pp. 214–215), former deputy attorney general and a senior long-serving prosecutor under the New Order regime and the Reform Order regime, observed how influential the military was in the politics and government of the New Order. Under the New Order regime, the military was a strong and influential institution, influencing and controlling almost all sectors of the government and society. It was, however, untouchable and difficult to control. The military led and controlled all branches of the state from the highest state organ (the People’s Consultative Assembly or MPR) and other state bodies such as president, house of representatives (dewan perwakilan rakyat or DPR), supreme advisory body (dewan pertimbangan agung or DPA), supreme court (mahkamah agung or MA), and state auditor general (badan pemeriksa keuangan or BPK), and also led the attorney general office. The armed forces also controlled the workings and politics of the regional governments, leading them as their heads of village, district, legislative, and provincial administrations. Thus, he further observed that the military which was previously designed as a supporting institution was now changing into a controlling agent.

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However, this dual function of the armed forces as the defense and political forces of the state can be historically dated back since its formation in 1945 at the beginning of the revolution against the Dutch (Crouch, 1991, p. 574). The collapse of the Old Order regime’s parliamentary democracy after it failed to deal with the separation movements in the regions in 1957 forced the regime to introduce a martial law. This law enabled the army to expand its role to the political, administrative, and economic functions of the government. Since then the army officers were appointed and controlled influential positions in the cabinet, bureaucracy, and regional governments. Thus, under his administration and through his military machine, Suharto tightly controlled political activities. He banned all political parties except three amalgamated ones4 and largely proscribed critical civil society groups such as independent labor unions, NGOs, and activist student groups (Weiss, 2007, p. 34). In 1998, the People’s Consultative Assembly through its Decision Number XI/MPR/1998, formally stated that the regime had systematically weakened the social control of the government. Crouch observed how the military’s dual function had led to the depoliticization of the masses: More than a decade of military domination led to a substantial depoliticization of the masses. The army’s repressive measures resulted in the political parties’ losing much of their potential for mobilizing mass protests against the government, although they had not been made completely prostrate. (Crouch, 1991, p. 576)

The amalgamation of the political parties was officially regulated in Law Number 3/1975 on political parties and Golongan Karya. In the preamble of this Law, the lawmakers expected that the political parties and Golongan Karya maintain and advance the unity of the state, political stability, and national development. The policy to maintain the national unity and political stability and to advance the national economic development had become the top priority of the New Order government. It can be seen from all of its five-year development plans. Even in its first five-year development plan as officially stated in decision of the People’s Consultative Assembly Number IV/MPR/1973 on state policy guideline, the regime had emphasized this national policy priority. However, to achieve the national policy goals and maintain his power, Suharto controlled all branches of the government. For example, under Law Number 16/1969 on structures and status of the People’s Consultative Assembly, the house of representatives, and regional legislatures, he appointed one-third of the number of members of the People’s Consultative


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Assembly – the highest state organ which had the power to elect the president. He also exerted control over the judiciary, making it possible for the executive to intervene in the judicial matters.5 Failure of the 1945 constitution to guarantee the judicial power independency, and the constitution’s executive-heavy characteristics, also had made the interventions to occur (KHRN, 1999, p. 19). In policy and decision making, the president also had a central role. Members of the cabinet were required to seek his approval for any major policy initiatives; therefore, Malley (1998, p. 156) observed that ‘‘One should not make too much of Soeharto’s cabinet choices.’’ If the advice he needed was not available from the cabinet, Malley further observed, he would readily seek it from his outside advisers or personal assistants.6 Thus, under the New Order regime, powers were centralized and centered on the hands of the president. Through its Decision Number XI/MPR/1998 on administration of the state clean and free from corruption, collusion and nepotism, the People’s Consultative Assembly (MPR) – after the regime had collapsed – officially declared this authoritarian centralization of powers. The regime was also characterized by a patron–client economic governance. Muhaimin (1990, pp. 7–8) observed this corrupt patron–client relationship between politicians, bureaucrats, and entrepreneurs: What is happening in Indonesia is that the role of the state in nurturing indigenous capitalists y has only culminated to the point where it has produced patron-client relations between the politicians in the bureaucracies, the entrepreneurs, and certain business groups. In this type of relation, capitals, contracts, concessions, and loans from the state are firstly directly given to the state-owned corporations and particular national entrepreneurs y thus they have become client-entrepreneurs. These entrepreneurs operate with the support and under the protection of the various network of the government powers; they have patrons in the political bureaucratic power groups, and are dependent on the concessions and monopolies given by the government.

This patron–client relation and the authoritarian rule of the regime had chronically corrupted the administration of the New Order’s government. Suharto himself and his family were corrupt, and ranked as the most corrupt leader of the world (BBC News, 2004), with an estimate of embezzlement ranging from US$ 1.5 billion to US$35 billion (Haskin, 2008). The centralized, authoritarian, and corrupt government had in turn defected the institutional political structures of the regime. In the MPR’s Decision Number XI/MPR/1998, this highest body of the state formally recognized that in the administration of the state the regime had centralized the powers, authorities, and responsibilities of the government, ‘‘causing the dysfunctionality of both the highest and high institutions of the state.’’

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Thus, like in Bosnia–Herzegovina where corruption has disabled the government (Chandler, 2002, p. 102), corruption in Indonesia had also made the political institutions of the regime dysfunctional. The regime’s authoritarian rule and widespread corruption had then become a source of much discontent (BBC News, 2004). Following the devastating effects of the 19971998 Asian financial crisis on Indonesia’s economy and standard of living, popular, military and political support for Suharto’s 32-year government dramatically eroded. On May 21, 1998, following mass demonstration and bloody violence, Suharto was forced to resign, ending the New Order authoritarian rule. The authoritarian political system of the New Order regime, however, was reinforced by the weaknesses of the country’s constitution enabling the ruling government to abuse it. This can be seen from the constitutional power structures and relations – that will be analyzed in the following section – which gave the president significant and influential powers to run the government.

SOURCES AND PATTERNS OF CORRUPTION Corruption and Politics In the Suharto era, corruption was under the control of the Palace [Suharto]. It was impossible that Suharto allowed the corruptors to win over him. He used any strategy to stop his competitors y. (Adnan T. Husodo, deputy coordinator, Indonesian Corruption Watch)

To understand how corruption evolved in the New Order regime, we need to examine the economic and political motives of corruption in this regime. Even though corruption during the Suharto era was pervasive, the New Order government had successfully maintained high economic growth. On the other hand, Suharto had effectively used corruption as a political strategy to keep him in power for 32 years. In his writing, MacIntyre (2001)7 explains the interplay between investment growth, property rights protection, and corruption variables in Indonesia. Critically evaluating Douglas North’s institutionalist logic (1981), MacIntyre offers three valuable theoretical–empirical explanations of Suharto’s Indonesia strong investment and high economic growth. According to Northian institutional theoretical framework, the source of underdevelopment and economic stagnation in the developing world is deeply rooted to the ineffective and costly enforcement of contractual


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property rights and the existence of corrupt and partial legal system. Under this institutional legal framework, property rights are not securely protected, therefore weakening economic and investment growth. In contrast to the widely accepted theoretical notion, MacIntyre critically questions the case of Indonesia: Why under the corrupt and authoritarian Suharto’s New Order regime had Indonesia experienced strong (private) investment and economic growth? Recognizing that there were various contributing variables to the phenomenon, the author then approaches the phenomenon from economic, political, and policy perspectives to explain the case. Considering economic variables such as the regime’s sound macro and microeconomic management, the author argues that the cause of the strong investment could be attributed to the investors’ high expectation of return on investment. He contends that – acting rationally – investors would bear the transaction costs associated with corruption and the risk of insecure protection of property rights if the rate of return on investment could be highly expected. From political and institutional perspectives, MacIntyre explains the phenomenon by drawing on Shleifer and Vishny’s theoretical model of corruption (1993). Building on Augustin Cournot’s (1838) conceptual framework of complementary monopolies, Shleifer and Vishny – the author states – use an analogy of industrial organization theory to explain the impact of political and institutional arrangements on the level of corruption and the degree to which corruption can constrain investment and economic development. Assessing the regime’s political and institutional structure, MacIntyre classifies Suharto’s Indonesia governance as a single political and economic complementary monopolist. Unlike multiple independent complementary monopolists where power was decentralized, power under Suharto’s single monopolist regime was concerted in the hands of the president, therefore empowering him to effectively control the pricing of bribes in buying regulatory goods, and monitor and punish his deviant agents. Thus, the transaction costs associated with corruption could be tolerated and effectively controlled. Consequently, the demand for regulatory goods could be kept reasonably high, providing the investors economic incentives to invest more capitals. However, how much would the transaction costs associated with corruption be tolerable to the investors? How could the author measure it? Is it in terms of the percentage of the firms’ revenues? How could the author explain some instances of ‘‘intolerable’’ corruption cases such as those of Pertamina under Ibnu Sutowo?

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Under the New Order regime’s single complementary monopolist power and economic structure, how could the author be convinced that the price of bribes would be kept reasonably low and the demand for regulatory goods would be increased? In contrast to what the author claimed I should argue that – by applying the law of demand and supply – as the demand for regulatory goods had increased, the prices of bribes and regulatory goods would in turn increase, producing more supplies of the goods. Under these circumstances, the economy would be highly regulated and market be distorted, conversely providing economic disincentives to the investors and subsequently weakening investment and economic growth. Finally, the author claims that it was the New Order regime’s credible commitment to creating policy environment conducive to investment that caused private investment to grow. This was evident when Suharto promulgated a presidential decree freeing the investors to open capital accounts and convert the currency. This policy, the author argues, provided an early warning mechanism for investors to transfer money out of the country if the policy environment threats their asset security. Therefore, investors had more confidence about their future investment decisions. Thus, MacIntyre assumes that Suharto, as a single monopolist power, had the capacity to control his deviant agents and selectively punish them as a political strategy to maintain his power or economic legitimacy. Corruption in the New Order was used by Suharto to manage the power balances and political struggles between three political powers: the military, bureaucracies, and firms. Suharto was great and effective in using this strategy to maintain their loyalties and political supports, as one observed:8 y Corruption used as political strategy, and the great guru [for this strategy] was Suharto. The armed forces, bureaucracies, entrepreneurs were the powers of their owns. Mr. Suharto clearly knew that there was corruption in the military and bureaucracies y This corruption occurred as the struggle between these groups. They had become smarter [in (mis)using their powers] y. (Agung Hendarto, executive director, The Indonesian Society for Transparency/MTI, 2006)

Patterns of Corruption y All corruption offences contain the elements of the general criminal offences as extortion, y Its other characteristics are that the offence is committed by a smart and educated person who has power connected to his office. Generally, it was collectively committed. The offender will always justify his actions by manipulating the evidence. Such justifications may use document, receipt, or contract. There are many modes of corruption y. (Kombes Pol (police colonel) Djaswardana, director, Criminal


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Investigation Division, Provincial Police Office, West Java; former investigator of the Indonesian Corruption Eradication Commission).9

In the period between 1970 and 1976, corruption in the public sector had become (more) chronic. To attack this problem, President Suharto issued Presidential Instruction Number 9/1977 on the law and order operation (Operasi tertib/OPSTIB). Interestingly, this instruction had identified various patterns or modes of corruption which had occurred in the public sector. The corrupt activities that were targeted by the presidential instruction to combat were: 1. The illegal taking of some proportions of the salaries and pensions of public officials allowance by the person in charge of the payment of the salaries and pensions in the official’s agency. 2. Extortion in the recruitment and promotion of public officials by the recruiting agency. 3. Illegal taking of money from the public official’s transport allowance by the person in charge of the payment of the allowance in the official’s agency. 4. The inflated prices of goods and services in the government procurement. 5. Extortion in the granting of government’s licenses, for instances, licenses for businesses, trade, work, building, and issuance of a passport. The president observed that these corrupt activities occurred in almost all of the licensing government agencies. 6. Extortion by the officials of the state’s payment office/treasury in the paying out of the routine and development budget proposal. 7. Extortion in the importation of goods, particularly by the custom officers. 8. Extortion and illegal taking from the tax revenues by the tax officers. 9. Formal ‘‘taxing’’ or money collection by the agencies in the central and regional governments, which was not based or contradicted with the legitimate legislation. 10. Extortion or money collection by state-owned banks in the granting of loans or credit. Thus, the government combated a type of corruption of what Alatas (1990) termed as a two party, ‘‘transactive’’ or ‘‘extortive’’ corruption. In the context of the New Order regime, the occurrence of these patterns of corruption was partly attributed to the weak financial system of the government and low salaries of the public officials. As one observed:10 In the Suharto era, the government budget was proposed in April of the financial year, but the money was disbursed later in August. It means that there was a financial gap

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between April and August. From what sources then did the government agencies finance their activities? Therefore, they created a [corrupt] system to survive, usually in the procurement y Thus, there was a system which forced them to corrupt y also their low salaries, and to cope with this, the official [sometimes by the knowledge and instruction of his bosses] falsified, for instance, the official transport document. He wrote 5 days, instead of the actual 3 days in the document y. (Anung Karyadi, lobby coordinator, Transparency International Indonesia, 2006)

These confirm what some authors claimed that inadequacy of public sector salaries and weak financial management (Stapenhurtt & Langseth, 1997) were, among others, the sources of corruption in the public sector administration. Typology of Corruption From the analyses of many corruption patterns and activities investigated and prosecuted by the prosecutors of the high prosecution offices in all 27 provinces in Indonesia, the typology, patterns, and location of the corruption offences can be identified as follows (Table 1). Table 1. Typology

Embezzlement Fictious payment

Extortion

Fraudulent project activities

Typology and Patterns of Corruption. Patterns of Corruption (Modus Operandi)

Location of the Offence (Locus Delicti)a

Illegal taking of money or property under an official’s control or influence Payment to someone or activity which is nonexistent or has no legal right for such payment or gains Use of direct or indirect threat by an official in a position of influence to someone in a position of need, for payment or personal gains Corrupt bidding, fictious or unnecessary activities, value marking up, and deceptive degraded qualities in the panning, design, procurement, and implementation of a project

1, 3, 5, 7, 9, 10, 11, 12, 13, 16, 18, 20, 21, 22, 23, 24, 26, 27 9, 10, 16

2

2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16, 18, 20, 21, 22, 23, 24, 25, 26, 27

Note: The above typology and patterns of corruption are based on the report of the investigation and prosecution by all high courts in Indonesia, 8th July 1983 (see Hamzah, 1984, pp. 163–168). a 1. Aceh, 2. North Sumatra, 3. West Sumatra, 4. Riau, 5. South Sumatra, 6. Jambi, 7. Bengkulu, 8. Lampung, 9. DKI Jakarta, 10. West Java, 11. Central Java, 12. Yogyakarta, 13. East Java, 14. Bali, 15. West Nusatenggara, 16. East Nusatenggara, 17. East Timor, 18. West Kalimantan, 19. Central Kalimantan, 20. South Kalimantan, 21. East Kalimantan, 22. North Sulawesi, 23. Central Sulawesi, 24. South Sulawesi, 25. South East Sulawesi, 26. Maluku, 27. West Papua.


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To understand these typology and patterns of corruption, and therefore to effectively combat it and assess the effectiveness of the anticorruption measures of the New Order regime, we need to comprehend the theoretical notions of corruption. Robert Klitgaard’s theory on corruption proposes a theoretical model that corruption is a function of monopoly (M)þdiscretion (D)accountability (A) or C ¼ MþDA. Therefore, he prescribes that to control corruption, political power and economic monopoly of government and discretion of the policy makers must be reduced, and accountability of the governance process must be increased (Klitgaard, 1997). Using the principal–agent–client (PAC) analytical approach, Klitgaard prescribes policy measures to control corruption. Corruption, he suggests, can be controlled by carefully recruiting agents (public officials), effecting reward and punishment mechanisms, restructuring PAC relation, changing attitudes to corruption, and designing effective management information system. However, Klitgaard should also consider other causal variables in his model such as cultural determinants, for instance, people’s tolerance to corruption, the political will of government, the rule of law, transparency of the decision-making process, and participation of the civil society in the policy-making process as important factors in controlling corruption. The Klitgaard’s theory cannot explain well the case of Singapore that has less democracy or weak accountability mechanism and poor development of civil society’s participation in the decision-making process, but has effectively curbed corruption. The political will of the Singaporean Government particularly the leadership of Lee Kuan Yeuw was the key factor of the success story. Moreover, the case of India has again demonstrated the importance of the political will of the leaders to combat corruption. Even though this country is regarded as a democratic state with relatively developed accountability structure and people’s participation in the policy-making process, it still has a serious problem of corruption. It is assumed that the political leaders are not strongly committed to eradicating corruption. Corruption can also be explained by public choice theory, transaction cost economics (TCE), and rent-seeking theory. Public choice theorists view bureaucrats as self-interested and potentially corrupt budget maximizers. On the other hand, TCE theorists view corruption as an exchange strategy to reducing costs due to uncertainty and disbelief between parties in the transaction; while rent-seeking theorists sees corruption as a competitive market strategy for getting preferential treatment from bureaucracies.

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To combat corruption, therefore, these behavioral corrupt tendencies should be taken into account. To combat the various activities and patterns of corruption, the New Order government had enacted some policies and employed strategies to implement them. These policies and strategies can be mapped in the following section.

MAPPING THE HISTORY OF ANTICORRUPTION MEASURES IN THE NEW ORDER REGIME When Suharto rose to power he established an anticorruption team. The instructions for this team in fact were clear: to use preventive and repressive approaches in combating corruption. Suharto appointed General Sugiarto to lead this team. He told me that the repressive approaches were easy [these had] already the law the court, the suspect, and the police. But using the preventive approaches, we did not know what to be done. So in the past, only the law enforcers concerned with combating corruption; the preventive approach was not yet implemented. The experts on management, culture, and finance were not involved in this combat. The presidential instructions for the Commission IV under Mr. Wilopo’s leadership was to evaluate anticorruption measures and recommend the president on this issue. President Suharto also tasked the Commission to handle special corruption cases in Pertamina [state oil company], Bulog [food logistic board], and illegal logging. (Amin Sunaryadi, commissioner and vice chairman, the Indonesia Anticorruption Commission)11

To combat the various corrupt activities, the New Order government had enacted anticorruption policies and employed strategies to implement them. On December 2, 1967, Soeharto – in his capacity as the country’s acting president – issued Presidential Decree Number 228/1967 on the formation of anticorruption team. Led by the Attorney General Sugiharto and advised by chief of the armed forces, minister of justice, and chief of the national police, the team was tasked to assist the government to combat corruption – both in preventive and repressive measures. President Suharto in state presidential address before the People’s Consultative Assembly on August 16, 1968 explained the purpose of establishing the anticorruption team: In the concrete effort to realize the clean and law-abiding state officials we have taken special measures to combat corruption. In order for the measures to be done faster and stronger towards any person both civilian and military, we have created an anticorruption team led by the Attorney General.


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In 1970, the president, through Presidential Decree Number 12/1970, established an anticorruption commission, called ‘‘Komisi-4’’ or Commission Four, consisting four distinguished members, led by Mr. Wilopo, former prime minister, and advised by Mr. Muhammad Hatta, former vice president, both under the Old Order regime. In the preamble of the decree, the president stated that the purpose of creating the commission was to combat corruption more effectively and efficiently, while its duties were to research and evaluate the anticorruption policies and their outcomes, and recommend the government on necessary policies to further combat corruption. To perform their duties, the president gave the commission the authority to contact government officials – both civilian and military – and persons in the private sector to request necessary information and materials. It also had the authority to examine the letters, documents, and accounting books of the government and private organizations. After performing their duties, the commission gave their recommendations to the president on both repressive and preventive anticorruption measures, as follows:12 A. Repressive anticorruption measures: 1. for the enforcers to combat corruption faster and more professionally; 2. reform the anticorruption team; 3. prioritize the investigation corruption cases: COOPA, CV Waringin, Mantrust Company, Department of Religious Affairs, and Telekom Company. B. Preventive anticorruption measures: 1. reform the structures and procedures of the public administration; 2. reform the procedure and supervision of the government procurement; 3. forbid the receiving of commission by public officials; 4. record the state property; 5. seriously implement the repressive and preventive supervision; 6. regulate the selling of the houses for government officials, and forbid the renting of the government’s property; 7. the obligation for the public officials to deposit their foreign currency income in domestic state-owned banks, and give the information on this deposit; 8. tighter control on the activities of the custom and tax offices; and 9. properly manage the deposit of state money.

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To combat smuggling-related corruption which frequently occurred in 1966, 1967, and 1968 – including those corrupt smuggling offences committed by the military officers or by misusing the military institution – the government had also established an antismuggling team or Team Pemeriksa Penjelesaian Perkara Penjelundupan (TP-4). This had the authority to investigate smuggling cases involving both civilian and military personnel. In his state presidential address before the People’s Consultative Assembly on August 16, 1970, President Suharto reported the preventive anticorruption measures that the government had taken. The measures to reduce the opportunities for corruption, among other, were: 1. 2. 3. 4.

stricter supervision on state-owned companies; tighter control on the use of the government’s money; regulation on the management of the state properties; improvement in the sale of government houses and vehicles to public servants; and 5. regulation on the use of government annual budget. The year 1971 was the milestone of the anticorruption movements under the New Order regime, as in this year an important anticorruption act, the Anticorruption Law Number 3/1971, was passed by the parliament and came into force in March 27, 1971. This Law was introduced to replace the Anticorruption Law Number 24/1960 – which was judged ineffective in combating corruption. Responding to the public complaints on the practices of extortion or ‘‘illegal taxing’’ (pungutan liar or Pungli) by public officials, in 1977 the regime staged a law and order operation to restore public order. The team was tasked to improve and restore the public performance and trust of the state apparatus and to eradicate any forms of the misuse of public authority. To effectively implement his orders, the president issued Presidential Instruction Number 9/1977 on the law and order operation (Operasi tertib/OPSTIB). The objectives of the instruction were to combat corruption practices in the public sector, in particular extortion, in its various forms by public officials and to improve the effectiveness and efficiency of the government agencies and their officials. Through this instruction, the president ordered all the ministers and heads of the executive’s agencies to reinforce the supervision and control of their own agencies and officials and take administrative and legal actions to those who broke the law. To effect this instruction, the president appointed the minister for public administration affairs as a coordinator for its implementation, and assigned the chief


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of law and order operational command, General Sudomo, as operational coordinator. The scopes for the instruction were extended to improving and reforming the organization, administration, and operation of government agencies. The interesting part of this implementing policy was that it had identified the real examples or types of corruption that were targeted to eradicate – this instruction were based on the concrete instances of pervasive corruption practices in the government sector. In 1980, the regime enacted Law Number 11/1980 on bribery, punishing both the givers and recipients of the bribe. In this year, the government also promulgated Government Regulation Number 30/1980 on public servant discipline. Thus, the anticorruption policies and their implementation in the New Order regime had evolved, responded, and adapted from the weaknesses of the anticorruption policies and their ineffective implementation under the Old Order government. These were what the hybrid theorists see implementation as evolution (Majone & Wildavsky, 1978) and as mutual adaptation (Browne & Wildavsky, 1984). Corruption and anticorruption in the New Order rule, however, was used by Suharto to manage the power balances and political struggles between three political powers: the military, bureaucracies, and firms. Suharto was great and effective in using this strategy to maintain their loyalties and political supports, as one observed:13 Corruption used as political strategy, and the great guru [for this strategy] was Suharto. The armed forces, bureaucracies, entrepreneurs were the powers of their owns. Mr. Suharto clearly knew that there was corruption in the military and bureaucracies y. (Agung Hendarto, executive director, the Indonesian Society for Transparency/MTI)14

Thus, like political leaders in the authoritarian political system of some developing countries, Suharto used corruption and anticorruption measures as his political strategy to protect his power through developing and maintaining political patronage in the New Order’s political system (Brata, 2007). In the Suharto era, ‘‘corruption was under the control of the Palace [Suharto],’’ and he used any strategy to stop his political competitors.15 By developing what MacIntyre (2001) called a single political and economic institutional monopolist structures – where the economic and political powers were concerted in the hands of the president – Suharto could effectively control his corrupt deviant agents for his economic and political purposes.

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Through this corrupt political–economic structures, Barr (1998, p. 1) observed, Suharto had corruptly profited his own family and cronies over the last three decades in power. In his struggle with the International Monetary Fund, Suharto, as Barr further noted, was forced to offer assurances to this influential monetary institution to reform the corrupt and authoritarian political and economic system. Before realizing his assurances, however, on May 21, 1998, Suharto – due to mass demonstrations against his corrupt authoritarian political governance and economic mismanagement, thus indicating the failure of his anticorruption measures – had resigned, ending the New Order regime rule. The year 1971 was the milestone of the anticorruption movements under the New Order regime, as in this year an important anticorruption act, the Anticorruption Law Number 3/1971, was passed by the parliament and came into force on March 27, 1971.

ANALYSIS OF THE ANTICORRUPTION LAW OF 1971 Wang An Shih (A.D. 1021–1086), the great Chinese reformer, had long years ago warned that bad laws and bad persons were the key factors attributed to the occurrence of corruption (Alatas, 1968, p. 6). He further cautioned that the (good) law itself cannot effectively solve the problem of corruption, without the right persons to enforce it. He states, ‘‘y history proves it to be impossible to secure proper government by merely relying on the power of the law to control officials when the latter are not the right men for their job’’ (Alatas, 1968, pp. 6–7). To remedy the problem of corruption, therefore, a good law or system of government and the right, moral public officials or law enforcers are conditio sine quanon for effectively curbing corruption. For this purpose, the following section will analyze whether the Anticorruption Law 1971 was ‘‘good’’ to combat corruption in the New Order governance.

Background and Policy Objectives Literal translation of the law is Law on the eradication of criminal offences of corruption. In the preamble of the Law, the policy makers considered that the offence of corruption had seriously damaged the state finance or the country’s economy and impeded the advancement of national development. The Law was also intended to replace the Law Number 24/1960 on the


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investigation, prosecution, and trial of the offence of corruption, which was no longer seen to meet the social development and need, and was judged as ineffective in attaining the policy objectives of this Law. Thus, the objective of the Anticorruption Law 1971 was clearly to reduce or control corrupt activities in the public sector as these corrupt acts had impeded the country’s development. This objective, however, would be difficult to attain as corruption is a complex social problem involving many social, economic, and political factors. Mazmanian and Sabatier (1989) argued that the successful implementation of a policy or program is associated with the tractability of the social problem being dealt with. The problem of corruption in the public sectors of the New Order government was so complex, involving many factors, actors, and stakeholders. Therefore, the probability of the effective implementation of the Anticorruption Law 1971 was low.

Scope and Definitions of Corruption The Anticorruption Law 197116 specifically defined the scopes and definitions of corruption which the Law intended to combat: Convicted, due to the commission of corruption offences, are: (1) a.

Any person, unlawfully enriching himself or others, or a corporation, which directly or indirectly damages the state’s finance and or economy, or reasonably known or foreseen by him that his act damages the state’s finance and or economy. b. Any person, intending to enrich himself or others, or a corporation, misuse of his authority, opportunity, or facility affixed to him because of his office or position, which directly or indirectly damages the state’s finance and or economy. c. Any person committing offences as stipulated in articles 209, 210, 387, 388, 415, 416, 417, 418, 419, 420, 423, 425, and 435 of the KUHP [Criminal Code]. d. any person, giving gift or promises to a public official as stipulated in article 2, by consideration of power or authority attached to his office, or by the giver of the gift and promises, was reasonably assumed as attached to the official’s office or position. e. Any person, without any reasonable reasons, in due time, after accepting the gift or promises given to him, as stipulated in articles

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418, 419, and 420 of the KUHP, did not report such a gift or promise to the appropriate authority. Any person attempting or conspiring to commit the criminal offences as stipulated in section (1) a, b, c, d, e of this article.

The public official defined in this Law shall be extended to those who receive salaries or payment from the state or regional government’s finance or from a body or legal body that received the assistance from the state or regional government’s finance, other legal bodies benefiting from the capital resources and special treatment from the state and society.17 Thus, the Anticorruption Law 1971 adopted the public office-centered definition of corruption which views corruption as misuse of public office for private gains (Brown, 2004). However, the Law not only punished the corrupt public official, but also penalized any person or private parties giving gift, promises, or bribes to the public official. The scopes and definitions of corruption contained in the Anticorruption Law, therefore, extended to the ‘‘abuse of public power for private gain’’ (World Bank, 1997, p. 6) or ‘‘abuse of public roles or resources or the use of illegitimate forms of political influence by public or private parties’’ (Johnston, 1997, p. 62). In practice, however, the scopes and definitions of corruption stipulated in the Anticorruption Law, in particular the meanings of ‘‘unlawfulness or against the law (melawan hukum)’’ and ‘‘damage to the state’s finance’’ had created problems and controversies. The following prominent, experienced law enforcers and law professor observed and explained the background, benefit, problems, and controversies of the meanings: If we look back to the history, the definition of ‘unlawfulness’ was extended from against the positive law as stipulated in the statute [formiil delict, legality principle] to against the unwritten law [materiil delict]. H1,2 The formiil delict was seen not to meet the feelings of justice in the society, and many [corrupt] public officials used this legality principle for their legal protection. On the other hand, the materiil delict [unwritten, living law] is about the principle of justice. In practice, however, these two principles were sometimes contradictory y but in the Anticorruption Law 1971, this [integration of the two principles] was progressively tried y. (Prof. Dr. Indriyanto Seno Adji, SH, MH, law professor of the University of Indonesia, a team member of the legal drafters of the Anticorruption Laws 1999 and 2001)18 The Anticorruption Law 1971 did not explain the meaning of ‘unlawfulness’ [melawan hukum, against the law], so that it created diverse interpretations of this meaning. As this was related to the legal development, some of the legal experts objected [to the use of this legal regime], as the extension of this substantial unlawfulness contradicted with the legality principle. The Anticorruption Law 1971 adopted the formal and substantial unlawfulness y In the implementation, however, the prosecutor was most likely not to


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file the corruption case if there was no concrete, proven evidence of the state’s financial loss y.’’ (Dr. Marwan Effendi, SH, MH, director for the prosecution of special criminal offences, Attorney General Office)19

Thus, the scope and meaning of the word ‘‘unlawfulness’’ was subjective. This legal term created problems in practice as this was open to different interpretations. There was no objective criterion to judge what act would be socially accepted. The final interpretation would be in the subjective judgment of the judge. This problem was typical of a public office-centered definition of corruption as there was no objective measure of when a person acted against the living or unwritten law or unclear when the public office was misused (Gillespie & Okruhlik, 2000, p. 78). Moreover, reliance to the written legal norms or ‘‘formal unlawfulness’’ may be problematic too. For example, the corrupt act may contradict with the written legal norms, but this act is seen ‘‘as part of the way things are done’’ (Hindess, 2004, p. 5), thus socially acceptable. The problem in the Anticorruption Law in defining a precise, accurate definition of corruption, however, is typical in any effort to objectively define the scope and meaning of corruption. The concept of corruption is always hard to define in theory and ethics (Mulgan, 2004, p. 1). The concept is ‘‘a term of dispute,’’ with almost no conceptual precision, therefore attracting political [and legal] debates (Alemann in Heidenheimer, Johnston, & LeVine, 1989).

Powers of the Implementing Agencies Even though the powers and authorities of the police, prosecutor, and judge in the investigation, prosecution, and trial of criminal offences were regulated in their relevant legislation, the Anticorruption Law 1971 granted them specific powers to combat corrupt activities. For the investigator, the Law granted the power to hear and require a witness to disclose information, even though he or she was legally forbidden to disclose such information.20 Moreover, based on the request from the attorney general, the minister of finance might give a permission to the investigating prosecutor to require a bank to disclose financial information of the suspect21 and the bank was obliged to disclose such information.22 The permission must be given in 14 days from the acceptance of the letter of request by the minister of finance.23 Furthermore, the investigator had the authority to open, inspect, and seize a document or delivery from the post and telecommunication offices, and other agencies, if he suspected that these documents and deliveries had a

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connection with the investigated case.24 For the investigation purpose, the investigator was also authorized to enter a premise or place.25 For the trial examination, the general district court was authorized to try corruption cases.26 If the trial judge so wished, the accused might prove that he was not guilty of committing the charged corruption offence.27 This discretionary permission of the judge, however, might be given if the accused reasonably believed that his actions did not damage the state’s finance or economy28 or were done for the public interest.29 If the accused was able to prove that he was innocent of the crime, this information was used to support his case or argument. The prosecutor had the authority, however, to prove the guiltiness of the accused.30 On the other hand, if the accused did not successfully provide the evidence to disprove his accused offence, this information would be used against him.31 In the trial court, the accused had the obligation to disclose all his/her wealth and the wealth of his wife/her husband, the children, and every person and corporation which were known or presumed by him/her to have a connection with the case, if the judge so required.32 If he failed to satisfactorily prove his legitimate sources of wealth proportionate to his income or earnings, this information may be used to support the evidence given by the witnesses confirming that the accused had committed the corruption offence.33 As with the investigator, the judge had the power to hear and request a witness to disclose information, even though he or she was legally protected from disclosing such information.34

Specific Criminal Procedures (Implementation Process) Corruption cases are complex, not only touch the criminal law, but also administrative and civil legal regimes y. (Prof. Dr. Bagir Manan, chief justice of the Indonesian Supreme Court, professor of administrative law, Padjadjaran University)35

The Anticorruption Law 1971 not only contained substantive law or norms against corruption, but this Law also structured its implementation or enforcement. It contained the procedural law in the investigation, prosecution, and trial of corruption offences. The Anticorruption Law stipulated that if it did not specifically regulate the investigation and prosecution of corruption offences, the pretrial process would be conducted according to the applicable procedural laws.36 Thus, the legal principle that lex speciali derogat lex generali. In some cases, the Anticorruption Law did not follow the criminal process as detailed in the


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Criminal Procedural Code (kitab undang-undang hukum acara iidana/ KUHAP). But in most cases, the implementation process in the investigation, prosecution, and trial of corruption offences was conducted according to the KUHAP. In the Anticorruption Law 1971, the lawmakers had a sense of priority by obliging the prosecutor to prioritize the corruption case for trial from other criminal cases and the corruption case must be tried in a speediest fashion.37 The suspect had the obligation to disclose all his/her wealth and the wealth of his wife/her husband, the children, and every person and corporation which were known or presumed by him/her to have a connection with the case, if the investigator so required.38 For the smoothness of the investigation process, the investigator might at any time require the suspect and any person connected with the case to present or deliver required documents or possessions, and the investigator had the power to forfeit these exhibits.39 Moreover, those who had the legal right not to disclose secret information could not refuse to present and deliver the requested exhibits.40 Based on the request from the supreme court, the minister of finance might give a permission to the trial judge to require a bank to disclose financial information of the suspect41 and the bank was obliged to disclose and present the required information.42 The permission must be given in 14 days from the acceptance of the letter of request by the minister of finance.43 If the accused did not appear before the court without legitimate reasons, after he was lawfully summoned, the court might try the case in absentia (without the presence of the accused).44 Against the decision of the court trying without his presence, the accused or his lawyer might appeal to the high court.45 If the accused was deceased before a final, unappealed decision of the court was reached and there was strong, reasonable suspicion that the accused had committed the accused corruption – based on the request of the prosecutor – the judge might decide to confiscate the forfeited evidence.46 Against this decision, however, the lawyer or the deceased accused’s legal representative was not allowed to appeal.47 If the corruption offence committed by a member of the armed forces and a civilian who were under different jurisdictions, the attorney general, as the highest prosecutor, had the power to coordinate the investigation of corruption offence.48 The criminal process under the New Order regime mainly was governed by the Law Number 8/1981 on Criminal Procedural Code. Therefore, we need to explore how the investigation, prosecution, and trial of criminal and corruption offences were structured by this code.

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IMPLEMENTATION OUTCOMES OF THE ANTICORRUPTION LAW OF 1971 y Before the reform (in the New Order era) the handling of the corruption case was not intensive, but that time corruption was probably pervasive y The investigation of corruption that we did was limited y. (Liuetnant General (Police) Makbul Padmanegara, vice police chief, the Indonesian National Police, former head of the Criminal Investigation Board).

This study adopts the synthesized or refined implementation model of Sabatier and Mazmanian (1980). As has been argued, this model is essentially a refined model of the top-down implementation theory. Thus, similar to the top-down model, the refined implementation approach stresses the important role in the analysis of a policy objective to evaluate its implementation effectiveness. From the analysis of the Anticorruption Law 1971, we could state now that the formal objective of the Anticorruption Law is to eradicate (reduce/control/combat) the corrupt activities and behaviors in the public sector, opening the way to the promotion and advancement of the state’s economy and development. Thus, the policy objective-related outcome criteria can be formulated as follows: 1. strong positive people’s perceptions on the decreasing levels of corruption in the bureaucracies or public sectors; 2. significant recovery of the corrupted state finance; 3. significant increasing public confidence in the capacity of the criminal justice system in combating corruption; and 4. strong anticorruption attitudes of the people. The implementation or enforcement of the Anticorruption Law 1971 will be judged as effective if the outcomes of the implementation meet these criteria.

RESEARCH FINDINGS The research employed the case study approach combining the paradigmatic strengths of the qualitative and quantitative methods. The study interviewed 67 key informants including law enforcers (judges, police, prosecutors, lawyers) – both at the top and bottom levels – experts, academics, NGOs, anticorruption commission, and policy makers, in 9 provincial

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administrations and 15 districts. Employing a theoretical sampling, 253 undergraduate and graduate students in law and government at 13 universities located in 7 provincial regions were surveyed. The study found that from the 253 respondents surveyed, most of them (98.5%) judged that the implementation or enforcement of the New Order’s Anticorruption Law 1971 had failed or been ineffective in combating corruption. Most respondents (93.3%) and interviewees agreed that the most fundamental factor or reason for the implementation failure of the Anticorruption Law 1971 was attributed to the corrupt, dysfunctional, and defective government, judicial, and law enforcement systems and institutions of the New Order regime. The following is the respondents’ evaluation on the implementation effectiveness of the Anticorruption Law 1971. Thus, from Table 2, we could confidently judge that according to some significant proportions of the respondents evaluated, the implementation or enforcement of the Anticorruption Law 1971 was ineffective (63 people or 24.9%) and very ineffective (115 people or 45.5%). If we classified these responses of ‘‘ineffective’’ and ‘‘very ineffective’’ in the category of ‘‘failed implementation,’’ we therefore can say that the majority of the respondents (249 or 98.5%) judged that the implementation or enforcement of the Anticorruption Law 1971 had failed or been ineffective in combating or reducing bureaucratic corruption in the New Order government. No respondent (0%) judged that the implementation of the Anticorruption Law 1971 was very effective. Only 1.6% (four people) of them perceived that it was effective. Table 3 shows the poor performance of the enforcers in recovering the corrupted state finance.49

Table 2.

Implementation Effectiveness of the New Order’s Anticorruption Law 1971.

Responses Very effective Effective Less effective Ineffective Very ineffective Total Source: Roby Arya Brata (2008).

f

%

4 71 63 115 253

1.6 28.1 24.9 45.5 100.0

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Table 3.

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Recovery Rate of the Corrupted State Finance 1977–1981.

Year

Monetary Value of the Corrupted State Finance (Rp)

Monetary Value of the Recovered State Finance (Rp)

Percentage of the Recovered State Finance (%)

1977 1978 1979 1980 1981 Total

4,021,626,824.79 30,055,259,157.77 27,461,992,239 28,441,704,454.66 47,434,959,136.61 137,415,541,812.83

140,535,177.95 18,577,849,448.88 177,359,809.92 17,938,666,735.50 2,967,831,116.64 39,802,292,288.89

3.49 61.81 0.64 63.07 6.25 28.96

Source: Attorney General Office of Indonesia (adapted from Hamzah, 1984 , p. 169) .

Table 3 shows that in the period from 1977 to 1981 the prosecution could only save Rp. 39,802,292,288.89 or 28.96% of the total stolen assets Rp. 137,415,541,812.83. In 1992, Lopa (1992, p. 58), citing a national newspaper, stated that the recovery rate was only 10–15%. However, the prosecution performed differently every year. The best performance was in 1980, while the worst was in 1979. In 1980, the prosecution had increased its capacity to recover the corrupted money by 62.43% – that is, from 0.64% in 1979 to 63.07% in 1980. On the other hand, in 1979, the prosecution’s performance was the worst, as its capability to recover the corrupted finance was reduced by 61.17%. The recovery rate was reduced from 61.81% in 1978 to 0.64%. What is most worthy of note is that if we weigh the total corrupted state finance of Rp 137.4 billion against the perceived widespread corruption in the public sector, it was very small. As Sumitro had indicated that the financial leakage was more than 30% of the state budget.50 The budget revenue in 1978/1979 was Rp 5,301.6 billion (Rosendale 1980, p. 12). Thus, calculated from this budget revenue, the 30% leakage amounted to Rp 1,590.4 billion. Or if we weight the leakage against the country’s GDP in 1977, which was 8,770 billion (Garnaut 1979, p. 23), it was 2,631 billion. However, the total five-year corrupted government finance that the prosecution had detected was only 2.5% of the budget revenue 1978/1979 or 8.6% of the possible leakage of the 1978/1979 budget revenue. If we calculate the detected corrupted money in 1979 only, which was Rp 27.4 billion, against the possible budget leakage in 1978/1979 (Rp 1,590.4 billion), the prosecution could only detect 1.7% of the leakage. Moreover, the law enforcers not only poorly detected the corrupted state finance, they were also inferior in their capacity to recover the stolen

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government assets. If we compare the total five-year recovered state finance – which was Rp.39.8 billion – to the possible leakage of the 1978/ 1979 budget revenue (Rp 1,590.4 billion), the total money recovery was only 2.5%. If we weight the recovered state wealth in 1979 only, which was Rp 0.17 billion, against the possible 1978/1979 budget leakage, it was much lower – just 0.01%. Thus, from the above calculations, we may conclude that in terms of the recovery rate of the corrupted state finance criteria, the law enforcement institutions of the New Order regime – in particular the prosecution and the courts – had generally, especially in the period between 1977 and 1981, failed to recover the stolen state assets. Moreover, internationally the ranking of Indonesia under the New Order regime in terms of corruption perceptions was one of the worst in the world. In its first release of corruption perceptions index (CPI) in 1995–1998, Transparency International (TI) – Berlin-based anticorruption nongovernment organization – had always ranked the country among the top 10 of the corrupt countries in the world. In 1995, the country was even perceived as the most corrupt country in the world. Table 4 shows the relative position of Indonesia in terms of perceived corruption as indicated by the TI CPI.51 Table 4.

Corruption Perceptions Index 1995–1998 (Indonesia – the New Order regime).

Period Number of Countries Surveyed 1995 1996 1997 1998

41 54 52 85

Ranking of Indonesia

Relative Position of Indonesia to Other Countries (% Ratio)

CPI Score

41 45 46 80

100 83 88 94

1.94 2.65 2.72 2.0

Standard Survey Deviation/ Used Confidence Range 0.26 0.95 0.18 0.9

7 10 6 10

Note: Since the number of countries surveyed is different every year, I use a percentage ratio to calculate the relative position of Indonesia in CPI. The percentage ratio was calculated by dividing the ranking of Indonesia in a particular year with the total number of countries surveyed. Percentage of countries perceived as corrupt ranges from 0%, as the least corrupt country, to 100%, as the most corrupt country. For example, in 1996, Indonesia was ranked 45th from the 54 countries surveyed. The country’s relative position in term of the percentage ratio, therefore, was (45:54) 100% ¼ 83%. This means in that year Indonesia was among 17% in the top ranking of the most corrupt countries in the world. However, the different standard deviations or margin of errors and survey used should be taken into account when comparing the relative position of Indonesia over time. Source: Roby Arya Brata, 2008; adapted from corruption perceptions index 1995–1998, Transparency International.

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Thus, from Table 4, we can see that in terms of the frequency and size of bribes, in the period from 1995 to 1998, Indonesia was perceived to be among the top 20 of the most corrupt countries in the world. The country’s CPI percentage ratio experienced a decrease by 17%, from 100% – the most corrupt – to 83%. However, since 1996 – in particular since the monetary crises in June 1999 – the country’s CPI had the tendency to increase. Therefore, from the country’s CPI trends from 1995 to 1998, we can say that in terms of the public perceptions on corruption reduction criterion, in particular those of the country experts and business leaders, the performance of the New Order regime in combating corruption – in the form of bribes – was extremely poor.

IMPLEMENTATION FAILURE FACTORS y Whatever the law was best made, if the man did not implement it, it was useless. Therefore, the key factor is the man, not the law. The law enforcers could be like this [corrupt and did not properly enforce the law] were because the problems in their morals, low salaries, not given proper attention [by the government], and the influence of the [bad] system. (Frans H. Winarta, member of the National Law Commission, a lawyer)

After the respondents judged that the implementation of the New Order Regime’s Anticorruption Law 1971 had failed in attaining its policy objective, they were then asked to freely identify the key factors influencing the failed implementation of the Anticorruption Law. From the factors perceived and identified by the respondents, there were only six key factors influencing the implementation failure of the Anticorruption Law which was frequently identified by the respondents. These factors were systemic corruption, chronic nepotism in the government, political interventions, corrupt law enforcers, dysfunctional judiciary, and poor respect of the people to the rule of law. Most respondents, however, perceived the problem of systemic corruption in the New Order governance and society as the most influential factor contributing to the implementation failure of the Anticorruption Law 1971. The respondents were then asked to rank the theoretical factors identified from the literature review to know their perceptions of the most influential factor attributed to the implementation failure of the New Order’s Anticorruption Law 1971. However, the respondents were free to judge whether the theoretical factors were perceived as a factor or not. Table 5 shows the findings.

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Table 5. Perceived Ranking of the Theoretical Factors Attributed to the Implementation Failure of the New Order’s Anticorruption Law 1971. Theoretical Factors

Ranking (Score)

Corrupt New Order government system Corrupt enforcement processes Centralistic, authoritarian govt. system Partial judiciary (political interventions) Weak political will of the president Bad anticorruption law Conflicts of interest between the enforcers Poor law enforcement management Discretion of the police and prosecutors to investigate the reported corruption cases Limited resources of the law enforcers Judicial discretion of the judges Prosecuting discretion of the prosecutors

1 2 3 4 5 6 7 8 9

(2305) (2265) (2182) (2089) (1642) (1473) (1433) (1393) (1348)

10 (1341) 11 (1146) 12 (1121)

Source: Roby Arya Brata (2008).

Table 5 indicates that the respondents perceived the corrupt New Order government system as the most influential theoretical factor contributing to the implementation failure of the New Order’s Anticorruption Law 1971, while the discretion of the prosecutors was perceived as the least influential factor. From the survey, most respondents agreed that the theoretical factors were indeed the factors influencing the implementation failure of the Anticorruption Law 1971.

CONCLUSIONS In the New Order era, it was hard to expect the enforcers to combat corruption since they were part of the problem. If corruption had already widely proliferated and entered all sector of the government – where the enforcement was part of the corrupt sectors, even more corrupt – combating corruption was difficult. The authoritarian political system and leadership of the New Order regime had induced the proliferation of corruption. On the other hand, the centralized power, but corrupt structure, of the system had defected the control and accountability mechanisms both at the top and bottom implementation structures to effectively combat corruption.

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NOTES 1. Interview with author, October 7, 2006. 2. This argument concluded the historical observations and arguments of Sebastian Pompe on the Old Order regime and the New Order regime (2005). 3. Author interview with informant B, head of district prosecution office B, December 12, 2004. 4. They were Golongan Karya or Golkar (the regime’s functional group or ‘‘party’’), Partai Persatuan Pembangunan or PPP (United Development Party), and Partai Demokrasi Indonesia or PDI (Indonesia Democratic Party). 5. Author interview with M. Syaiful Aris, director and public lawyer, Surabaya Legal Aid Institute, August 15, 2006. 6. One of the president’s influential, but ‘‘infamous’’ personal assistants in the 1970s and 1980s was General Ali Murtopo, the then minister of information. 7. Drawn from author paper, presented at Indo-governance research group of the Asia Pacific School of Economics and Government, the Australian National University, May 27, 2004. 8. In an interview with me, 2006. 9. In an interview with me, July 11, 2006. 10. Author interview, August 18, 2006. 11. Author interview, June 6, 2006. 12. See state presidential address before the People’s Consultative Assembly on August 16, 1970. 13. Author interview, July 7, 2006. 14. Author interview, July 7, 2006. 15. Author interview with Adnan T. Husodo, deputy coordinator, Indonesian Corruption Watch, July 13, 2006. 16. Article 1. 17. Article 2. 18. Author interview, May 25, 2006. 19. Author interview, July 4, 2006. 20. Article 8. 21. Article 9 (1). 22. Article 9 (2). 23. Article 9 (3). 24. Article 12. 25. Article 13 (1). 26. Article 14. 27. Article 17 (1). 28. Article 17 (2a). 29. Article 17 (2b). 30. Article 17 (3). 31. Article 17 (4). 32. Article 18 (1). 33. Article 18 (2). 34. Article 21. 35. In an interview with me, June 21, 2006.


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36. Article 3. 37. Article 4. 38. Article 6. 39. Article 11 (1). 40. Article 11 (2). 41. Article 22 (1). 42. Article 22 (2). 43. Article 22 (3). 44. Article 23 (1). 45. Article 23 (2). 46. Article 23 (5a). 47. Article 23 (6). 48. Article 26. 49. The data originated from the Attorney General Office and from all provincial prosecution offices. Some government agencies, including the enforcement ones, were not careful and transparent – sometimes manipulative – in preparing statistical data. Under the authoritarian New Order regime, the public did not have proper access to the public information. To some extend, the regime suppressed the making of independent data. Thus, the tables should be read with caution. However, the tables at least indicated the performance of the enforcement institutions in recovering the stolen government assets. 50. Sumitro stated the statement in the beginning of 1990s. However, he might also refer the financial leakage to previous years. 51. The TI CPI is based on a survey and expert opinion, measuring the extent of corruption in terms of the frequency and size of bribes. The respondents are experts such as from risk agencies or country analysts – both residents and nonresidents – and resident business leaders. See the CPI methodology in www.transparency.org for more detail.

REFERENCES Alatas, S. H. (1968). The sociology of corruption. Singapore: Donald More Press. Alatas, S. H. (1990). Corruption: Its nature, causes, and functions. Aldershot, UK: Avebury. Brown, A. J. (2004). Sorting the good, bad, and ugly: In search of a new taxonomy of international corruption definitions. In: Corruption: Expanding the focus, Workshop, ANU. Browne, A., & Wildavsky, A. (1984). Implementation as exploration. In: J. Pressman & A. Wildavsky (Eds), Implementation (3rd edn, pp. 195–215). Berkeley, CA: University of California Press. Barr, C. M. (1998). Bob Hasan, the rise and Apkindo, and the shifting dynamics of control in Indonesia’s timber sector. Indonesia, 65, 1–36. BBC News. (2004). Suharto tops corruption rankings. 25 March. Available at: http:// news.bbc.co.uk/2/hi/business/3567745.stm Brata, R. A. (2007). Kolom Majalah Tempo. Korupsi politik dan politik korupsi, 10–16 December, no. 42/XXXVI.

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Chandler, D. (2002). Anti-corruption strategies and democratization in Bosnia–Herzegovina. Democratization, 9(2), 101–120. Chomsky, N. (1998). Indonesia, master card in Washington’s hand’. Indonesia, 66(October), 1–6. Cribb, R. (2002). Unresolved problems in the Indonesian killings of 19651966. Asian Survey, 42(4), 550–563. Crouch, H. (1991). Patrimonialism and military rule in Indonesia. World Politics, XXXI(4), 571–587. Garnaut, R. (1979). Survey of recent development. Bulletin of Indonesian Economic Studies, 15(3), 1–42. Gillespie, K., & Okhrulik, G. (2000). The political dimensions of corruption clean ups. In: R. Williams & A. Doig (Eds), Controlling corruption. Cheltenham, UK: Edward Elgar. Hamzah, A. (1984). Korupsi di Indonesia, masalah dan pemecahannya. Jakarta: Gramedia. Haskin, C. (2008). Suharto dead at 86. Globe and Mail, January 27, p. 2, Toronto. Heidenheimer, A. J., Johnston, M., & LeVine, V. (1989). Political corruption: A handbook. New Brunswick, NJ: Transaction Publisher. Hindess, B. (November, 2004). Corruption: Expanding the focus. ANU/ICAC Corruption and Anticorruption Executive Program. Johnston, M. (1997). Public officials, private interests, and sustainable democracy: When politics and corruption meet. In: K. A. Eliot (Ed.), Corruption and the global economy. Washington, DC: Institute for International Economics. Klitgaard, R. (1997). Cleaning up and invigorating the civil service. Public Administration and Development, 17, 500. Konsorsium Reformasi Hukum Nasional, & Lembaga Kajian dan Advokasi untuk Independensi Peradilan. (1999). Menuju independensi kekuasaan kehakiman, position paper, Indonesian Center for Environmental Law, Jakarta: ICEL. Lopa, B. (1992). Adakah langkah terbaik selamatkan kekayaan negara? Kompas, 20 June. MacDougall, J. A. (1982). Patterns of military control in the Indonesian higher central bureaucracy. Indonesia, 33(April), 89–121. MacIntyre, A. (2001). Investment, property rights, and corruption in Indonesia. In: J. E. Campos (Ed.), Corruption: The boom and bust of East Asia. Manila: Ateneo de Manila University Press. Majalah Tempo. (1990a). Di balik sengketa hakim dan jaksa. Majalah Tempo, 10 March, no. 2/XX. Majalah Tempo. (1990b). Mengempiskan vonis kedele. Majalah Tempo, 17 March, no. 3/XX. Majalah Tempo. (1990c). Menteri asongan merogoh kocek. Majalah Tempo, 31 March, no. 5/XX. Majalah Tempo. (1990d). Asydira kena, air tidak keruh, Majalah Tempo, 5 May, no. 10/XX. Majalah Tempo. (1990e). Meluruskan rel penyidikan. Majalah Tempo, 5 May, no. 10/XX. Majalah Tempo. (1990f). Vonis kunci manipulasi SE. Majalah Tempo, 12 May, no. 11/XX. Majone, G., & Wildavsky, A. (1978). Implementation as evolution. In: H. Freeman (Ed.), Policy studies review annual. Beverly Hills, CA: Sage. Malley, M. (1998). The 7th development cabinet: loyal to a fault? Indonesia, 65(April), 155–178. Marwan, E. (2005). Kejaksaan RI posisi dan fungsinya dari perspektif hukum, Gramedia Pustaka Utama. Jakarta: GPU. Mazmanian, D. A., & Sabatier, P. A. (1989). Implementation and public policy – with a new postscript. Lanham, MD: University Press of America.


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McDonald, H. (2008). No end to ambition. Morning Herald, 28 January, p. 12, Sydney. Miguel, E., Gertler, P., & Levine, D. I. (2005). Does social capital promote industrialization? Evidence from a rapid industrializer. Econometrics Software Laboratory, Berkeley: University of California. Muhaimin, Y. A. (1990). Bisnis dan politik: Kebijaksanaan ekonomi Indonesia 1950-1980, Jakarta, LP3S. Mulgan, R. (2004). Aristotle on legality and corruption. Unpublished article, ANU. Rosendale, P. (1980). Survey of recent development. Bulletin of Indonesian Economic Studies, 16(1), 1–33. Sabatier, P., & Mazmanian, D. (1980). The implementation of public policy: A framework of analysis. Policy Studies Journal, 8, 538–560. Sujata, A. (2000). Reformasi dalam penegakan hokum. Jakarta: Djambatan. Weiss, M. L. (2007). What a little democracy can do: Comparing trajectories of reform in Malaysia and Indonesia. Democratization, 14(1), 26–43. World Bank. (1997). World Development Report 1997 – the state in a changing world. Accessed at http://go.worldbank.org/1AF3C6JFZ0

LEGISLATION AND CASES Decision of the People’s Consultative Assembly. (1973). Number IV/MPR/1973. State Policy Guideline (Five-Year Development Plan I). Decision of the People’s Consultative Assembly. (1978). Number IV/MPR/1978. State Policy Guideline (Five-Year Development Plan II). Decision of the People’s Consultative Assembly. (1983). Number II/MPR/1983. State Policy Guideline (Five-Year Development Plan IV). Decision of the People’s Consultative Assembly. (1988). Number II/MPR/1988. State Policy Guideline (Five-Year Development Plan V). Decision of the People’s Consultative. (1998). Assembly Number XI/MPR/1998. Administration of the State Clean and Free from Corruption, Collusion and Nepotism. Law Number 51, (1969). Elections of Members of Legislatures. Law Number 16. (1969). Structures and Status of the People’s Consultative Assembly, the House of Representatives, and Regional Legislarures. Law Number 3. (1975). Political Parties and Golongan Karya. Law Number 8. (1985). Mass Organizations. Presidential Decision. (1959). Number 5/1959. The Authority of the Attorney General and the Military Attorney General to Increase the Severity of the Charged Punishment against Criminal Offences Threatening the Policy Implementation for the Supply of Essential Food for the People. Stapenhurst, F., & Langseth, P. (1997). The role of the public administration in fighting corruption. International Journal of Public Sector Management, 10(5), 311–330. State Vs Soetopo. (1968). Magelang District Court Decision Number 1/Pid/1968. Supreme Court. (1965). Circuit Letter Number 3/1965. Implementation of Law Number 13/1965 on Cessation. Supreme Court. (1973). Circuit Letter Number 4/1973 on Appeal (Cessation) of Criminal Cases and Clemency. Supreme Court. (1977). Regulation Number 1/1977 on Cessation Procedure for Military and Religious Courts. Supreme Court. (1976). Decision Number 58K/Kr/974, 4 February.

PART II PUBLIC FINANCIAL MANAGEMENT REFORMS

CHAPTER 7 ASSESSING WORLD BANK SUPPORT FOR PUBLIC FINANCIAL MANAGEMENT AND PROCUREMENT$ Clay Wescott ABSTRACT In recent years, the World Bank has channeled up to one-sixth of its lending and advisory support to reform of central governments. A recent evaluation tried to understand what was working, what needs to be improved, and what needs to be added or discontinued. The evaluation looked at four key central government tasks: public financial management and procurement (PFMP) reform, administration and civil service reform (ACS), tax administration reform, and combating corruption. This chapter looks at the first of these tasks. The advice provided by the World Bank on improving public financial management and procurement is influenced by debates on theory and practice in developed and developing countries. This chapter touches on $

This chapter draws from Wescott (2008) and World Bank (2008). An earlier version was published in Governance, 22(1), 139–153. The findings, interpretations, and conclusions expressed here are those of the author, and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent.


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some of the highlights of these debates, drawing from indicative literature mainly since 1990 from scholars and practitioners. The second part of the chapter discusses examples of Bank support for reform of budget planning and execution, financial management, and procurement, looking at the Bank’s diagnostic work, design, and implementation of project support. It also assesses evidence of outcomes and attribution, and ends with questions for further research.

BACKGROUND TO EVALUATION Fig. 1 shows two features of Bank project support to public sector reform (PSR): (1) a modest increase in the 1990s, and a sharp increase from 2000– 2005, peaking in 2005 at over 20% of all Bank projects; and (2) most of this increase came from PSR support through adjustment projects such as Poverty Reduction Strategy Credits (PRSCs). This increase was accompanied by the Bank’s (2000) governance strategy, and built on the President’s ‘‘cancer of corruption’’ speech in 1996, the Bank’s (1997) World

Fig. 1.

World Bank Support for Public Sector Reform. Source: Reprinted with permission from the World Bank (2008).

Assessing World Bank Support for PFMP

Fig. 2.

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Variation in World Bank Support. Source: Reprinted with permission from the World Bank (2008).

Development Report focusing on governance, and a growing international awareness that weaknesses in public institutions and governance were holding back economic development and poverty reduction in many of the Bank’s borrowers (World Bank, 1997). Fig. 2 shows the variation in Bank support across time, and across the four central government tasks. This shows that the increases in Bank support in the 1990s, and the sharper increases starting in 2000 went across all four task areas. It also shows that PFMP was the leading area of Bank support in all periods, and ACS the second. Tax administration reform was the third area of support in the first two periods. Although support in this area increased in the third period, it was overtaken by support to combating corruption, which had a sharp increase starting in 2000.

SOME KEY DEBATES ON PFMP To begin the evaluation of the PFMP task area, we looked at some of the key debates on PFMP in the years before and during our evaluation, to get a sense of what ideas and experience might have helped to shape the Bank’s thinking. There were two main pressures driving public financial management reforms in developed countries starting in the 1970s and 1980s: first, to

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cut spending and reduce fiscal deficits, and second, to facilitate performance improvement through greater efficiency, effectiveness, and quality of public services. In responding to these pressures, OECD countries pursued eight broad reform components (OECD, 1995; OECD/World Bank, 2003; Pollitt & Bouckaert, 2004; Diamond & Khemani, 2006; Brumby, 1999; Rubin & Kelly, 2005; World Bank 2000a, Annex 3)1: achieving budget savings through more robust central controls, or by providing greater flexibility to managers and organizations in reallocating funds within budget line items to reflect changing conditions and priorities; restructuring budgets to include expenditures for all government activities, global budgetary targets, hard budget constraints, and program allocations to facilitate results monitoring and evaluation; a multiyear budget linked to a clear fiscal policy and realistic revenue estimates; regular use of performance information in monitoring against targets to facilitate accountability, and to better manage performance; shifting from cost accounting2 toward accrual accounting;3 shifting from compliance auditing4 toward performance auditing;5 computerized information systems providing timely financial and related information to all parties in the budget process; and greater use of devolved budget management, and market mechanisms such as user and capital charges, market testing, outsourcing, performance agreements, and international standards such as the 1994 Government Procurement Agreement of the WTO, with key principles of non-discrimination and transparency. These reforms were a response to powerful drivers of change, including chronic fiscal deficits, and a crisis in legitimacy, with declining public trust in the ability of government to effectively manage public affairs and solve socioeconomic problems. Other drivers included theories of public choice, a sharp reduction in information costs and other factors that seemed to increase the payoffs to free markets, deregulation, and systemic and integrated approaches of strategic allocation, operational management, and performance measurement. And yet, much of the actual reform that took place was incremental, based on targets of opportunity, rather than drawn from a coherent strategy, even with the most ambitious Anglo-Saxon reformers. There was a gap in most reforming countries, between the promise of new announcements and initiatives on the one hand, and the actual delivery of reforms on


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the other. For example, in the United Kingdom work to link medium-term planning to government budgeting started in 1961, and yet a robust system was not introduced until 1998. The UK government’s ability to keep to its medium term plans is now being severely tested by the global economic recession (Wynne, 2005, p. 5). While there is lots of evidence of heightened discourse on financial management and other public sector management reforms, and better tracking of inputs and outputs, there is little evidence that the considerable cost of the reforms is justified by the benefits achieved (Pollitt & Bouckaert, 2004, pp. 103–142, 194–196). Among the reasons for this is that various public sector rules, regulations and processes instituted for diverse reasons including control, accountability, transparency, affirmative action, regional balance, and the politics of compromise among elected leaders, often work against achievement of efficiency and effectiveness in transforming inputs into results (Jones and Thompson, 1999).

APPLYING OECD EXPERIENCE TO DEVELOPING COUNTRIES Given the challenges in rolling out reforms in developed countries, the difficulties in doing so in developing countries should come as no surprise. Indeed, untested, avant-garde, budget innovations may be transferred to developing countries before they have been fully implemented in the country of origin (Wynne, 2005). Even when well-tested budget basics are being transferred, there is a consensus in the literature that important differences between developing and developed countries require that public financial management tools be used selectively, and adapted to local conditions. Batley and Larvi (2004, pp. 5–6, 29–30) point out some key differences in context between developed and developing countries. First, the pace and nature of reforms in developed countries are designed and carried out by the respective governments, and with the democratic support of their electorates. By contrast, reforms in developing countries are often designed by international agencies, and not fully understood or supported by citizens. In some cases, these reforms may be carried out by bureaucratic and political elites with the intent of preserving their existing interests, although the eventual outcome could be different (Cheung, 2005, pp. 276–7). Secondly, common reform packages designed to address fiscal crises in developed countries are being transferred

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to a highly diverse set of countries, including transition economies, weak capacity and postconflict states, postauthoritarian democracies, and Confucian meritocracies. Many of these developing countries have much deeper fiscal crises and sharper declines in public service than developed countries, yet programs often used OECD country designs as models. Where programs vary, the reason is often more failure to meet negotiated conditions, rather than differences in design. Thirdly, implementation of reforms in developing countries is uneven, with stroke-of-the-pen reforms often moving quickly, while necessary structural changes move slowly or not at all. In addition, chronic institutional weaknesses in many developing countries hinder reform effectiveness. For example, rivalries between planning and finance ministries lead to conflicts over fiscal goals, poor communication, and decisions on personal appointments and projects overlooking technical merit in favor of personal and political considerations (Nwagwu, 1992). There are also considerable differences among developing countries, even within the same region (Cheung, 2005, pp. 274–5). In countries with weak capacity, centralized management models provide the best starting point, since decentralized models typically rely on complex financial reporting systems (Nunberg, 1992). Another difference concerns election year increases in fiscal deficits. Although these occur in both developed and developing countries, they are larger in developing countries because potential rents are larger, and the proportion of informed voters in the electorate is lower (Shia & Svensson, 2006). There are also very different interpretations of words like public management, efficiency, and transparency when translated into different languages, even among people with common historical and cultural traditions (Pollitt & Bouckaert, 2004, p. 18). Some keywords from the reform toolkit, such as accountability, have no equivalent in other languages (such as Vietnamese and Chinese (Pei, 1999, p. 100) in this case). Wildavsky (1986) and Stevens (2004) stress the differences between formal, managerial budgeting in developing countries, and the informal budgeting that actually takes place, responding to their poverty, uncertainty, and differing political cultures. Jabbra and Dwivedi (2005) and Fukuyama (2004) question transfers of Western models, drawing the language, practices, and values from business to the public sector, to nonwestern societies. Sarraf (2005) finds that integrated financial management information systems (IFMISs) can facilitate recurrent/capital budget integration and improve accounting and reporting systems, but only if the country’s budget and accounts classification is reformed and the system is appropriately phased and adapted to a country’s capacity to maintain it.


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From a donor perspective, Dorotinsky and Floyd (2004) make the related point that smaller, more focused projects are more likely to succeed than larger and more complex projects. However, they point out that projects should not be too narrowly focused, taking opportunities to help PFMP institutions support and reinforce one another. The requirements of accession to the European Union (EU) would seem to have motivated PFMP reforms to meet requirements in accession countries, although it is difficult to assess the relative attribution of other factors that may have contributed to these positive outcomes, including the dual transitions from totalitarian regimes to democracy, and form state-planned to market economy (McKendrick, 2007). Another difference from developed countries is that aid can have the unintended consequence of weakening governance because governments can raise significant financing without having to rely on increasing taxes; thus they have less need to provide a conducive business climate, and to provide accountability to their citizens6 (though they may be held accountable by international donors) (Braütigam, 1992; Craig & Porter, 2003). Aid can divert scarce skills from government, encourage corruption and conflicts over control of aid funds, and reduce citizen demand for reform. Aid can also weaken administrative effectiveness through high transaction costs, the fragmentation and weak coordination of donor projects, the lack of integration in the budget process, moral hazard, soft budget constraints, and unrestrained future claims on recurrent budgets to maintain donor investments (Knack, 2001; Godfrey et al., 2002; Braütigam & Knack, 2004; World Bank, 2000, p. 20; Moss, Pettersson, & van de Walle, 2006).

BANK SUPPORT TO PFMP SINCE 1990 We now turn to review the available evidence on the extent to which the Bank has achieved the following objective of the Bank’s PSR Strategy (2000, p. 60): ‘‘y more efficient use of public resources for development through improved public expenditure analysis and management.’’ Four key elements of Bank support will be addressed: i. ii. iii. iv.

diagnosis, strategy, and expectations, design and implementation of PSR program and projects, overall country outcomes, and attribution.

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Although some statistical analysis was carried out on all borrowers receiving PSR support, detailed case studies, in some cases supported by field visits, were carried out on 18 of these countries, selected to be representative of the countries benefiting from the support. These countries ranged from democracies like Argentina, Bulgaria, Ghana, Indonesia, and India, to not so democratic countries like Cambodia and Russia; fragile states like Sierra Leone and Ethiopia; and countries representing different administrative traditions, including Anglophone, Francophone, and ex-Soviet. This diversity is one of the challenges that the Bank faces in coming up with relevant support.

Diagnosis, Strategy, and Expectations In terms of scale, there has been a sharp increase in PFMP diagnostic work and lending since 2000 in all regions, with the most notable lending increases in Africa, Europe and Central Asia, and Latin America and the Caribbean. Lending operations are generally well informed by PFMP studies that have moved from a focus on fiscal policy issues in the early 1990s, to increasing coverage of fiduciary, financial management, and institutional issues. More recent studies show greater awareness of political economy contexts, and how to overcome political and organizational obstacles. Greater numbers of recent studies involve substantial participation by clients in PFMP data gathering and analysis to facilitate borrower ownership of the analytical results. One qualifier here is that participatory processes in diagnostic work may lead to bland recommendations, rather than conclusions flowing from evidence and technical analysis. In some such cases, seeking optimal quality may not be the best approach, where good enough is enough. There were also references in Bank-supported programs to the strengthening of parliamentary oversight of PFMP. However, there is great scope for deepening the institutional and governance content of these studies, for better prioritizing recommendations so they are more realistic and in line with institutional capacities, and for better integrating findings into common sets of recommended actions.

Design and Implementation of PFMP Programs and Projects There are good practices cases where the Bank supported basic public finance building blocks in self-contained modules, introduced in a logical


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sequence of increasing sophistication. However, there were other cases where project designs were unmanageably ambitious, and complex project components such as IFMISs were promoted before addressing challenges such as manipulation of formal rules by powerful interest groups, and introducing simplification and modernization of procedures, and operation of reliable accounting and treasury systems. Pervasive procurement delays also made a number of IFMIS components less effective than desired. As a result of these and other shortcomings, an estimated 96% of IFMIS projects may not be sustainable (Dorotinsky, 2003). Likewise, medium-term expenditure frameworks (MTEFs) were in some cases successfully adopted, and proved helpful both in strengthening government’s PFMP, and the predictability of funding from donors. Yet, even the successful cases have uneven results. In the Uganda case, where the adoption of an MTEF is widely considered successful and linked with improved macroeconomic stability, there is no evidence that it had the expected effect of shifting funds to poverty-reducing areas. In Tanzania, another highly regarded case, funds have been shifted to poverty-reducing areas since the MTEF was adopted, but the shift of actual amounts is much less than budgeted amounts (Wynne, 2005, pp. 10–11, 13). In other cases, MTEFs proved too complex to be useful in a developing country context, without first addressing basic weaknesses such as cash rationing, lack of predictable resource flows to line managers, off the books transactions, and hidden deficits. Some countries found it helpful to pilot nascent MTEFs and other reforms in ministries with demonstrated PFMP capacity, to draw lessons from the pilot, and then to gradually scale up to other ministries. Other types of diagnosis and reforms supported by the Bank were also initiated at the sectoral level, such as public expenditure tracking surveys, accelerated disbursement pilots, and outsourcing. Subnational jurisdictions were also entry points for PFMP support, with mixed results depending on the reform context. These initiatives were most successful when core ministries provide the space for the sectoral or subnational interventions to succeed. Regarding lending instruments, there has been a shift toward more flexible, long-term lending instruments since 2000, including a shift in PFMP assistance from investment to policy-based loans. The results of this shift are broadly favorable, with strong performance, for example, in Guatemala, Tanzania, and Ghana. Yet a delayed treasury system in Indonesia, and the modest PFMP improvements evident in Uganda in recent years point to continuing challenges under the new instruments. In Mali, there are

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indications that investment rather than policy-based lending might have achieved greater results. Bank interventions in some cases avoided unintended consequences from past practices, while in other cases new PFMP approaches created unintended negative consequences. The shift toward greater predictability of funding, providing financial information to governments for budgeting and reporting, and using government systems to manage aid helps to avoid the unintended consequences of past practices that weakened countries’ abilities to manage their resources. Yet other new approaches have had unintended, negative consequences. The Bank is reportedly overly cautious in considering use of procurement processes of governments or other donors, preferring ring-fenced projects rather than using government systems. This can slow down improvements in government systems, exacerbate the delays discussed above in IFMS projects, and does not ensure that procurement will be corruption-free.

Overall Country Outcomes The evaluation found that PSR investments are increasingly linked with improvements in PFMP, as measured by country performance and institutional assessments (CPIA) (from 1999), by highly indebted poor country (HIPC) tracking in 23 countries (from 2001 to 2004), and by public expenditure and financial accountability (PEFA) assessments ongoing or completed in over 70 countries (from 2005). The development of these indicator sets by the Bank and donor partners were major steps forward in underpinning borrower PFMP monitoring and evaluation frameworks. Out of 75 countries where the Bank provided PFMP assistance after 1999, and for which CPIA data is available in 1999 and 2006, 48 (64%) showed an improvement by 2006 in PFMP performance based on the CPIA question 13, 11 (15%) showed no change, and 16 (21%) showed a deterioration.7 However, there is evidence that some of this improvement may stem from broader forces (e.g., global and professional standards, business lobbying) leading to improvements in weak performers. For example, out of 22 countries with 1999 CPIA question 13 scores at/or below 3.0 where the Bank did not provide PFMP assistance (again, for those with CPIA data in 2006), 7 (32%) showed an improvement in PFMP performance based on the CPIA, 9 (42%) showed no change, and 6 (28%) showed a deterioration. Based on a simple OLS regression, the presence of Bank PFMP projects is significant in explaining movements in CPIA 13 between 1999 and 2006,


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after controlling for the initial CPIA level. However, one should not, at this stage, interpret these as the causal impact of PFMP projects. These results are confounded by a long list of factors, including difficulty in capturing the timing of the impacts of the programs, nonrandom selection of countries for PFMP programs, bias that results from the selection of the countries that do not receive CPIA ratings, omitted variable biases (e.g., changes in incomes, governments, and so on), and the lack of information about non-World Bank PFMP reforms, and other considerations. In addition to PFMP lending support and analytical work, an important incentive for PFMP improvement has been the process of HIPC accession. Taking the 23 countries participating in HIPC that were monitored first in 2001, and then again in 2003–2004, and considering the benchmarks set for 15 PFMP elements, the number of countries meeting or exceeding the benchmarks increased for 8 indicators, declined for 6, and stayed the same for 1. Given the length of time normally required for PFMP systems to improve, this relatively rapid, net positive result is modestly encouraging, and reportedly due to the incentive that would accrue to countries achieving HIPC accession. An evaluation of the enhanced HIPC initiative found that increased resources from debt relief have been targeted for poverty reduction, with 49% allocated to the education and health sectors for a sample of countries with available countries (World Bank, 2003a). The ongoing improvements in PFMP systems before and after HIPC accession helps to facilitate such targeting. For example, the indicator with the highest number of countries meeting the benchmark (21) was ‘‘Budget expenditures are classified on an administrative, economic, and detailed functional or programmatic basis,’’ thus facilitating the targeting expected under HIPC. Despite the progress, much work is still needed. Of the three main PFMP areas, budget reporting improved the most, with 14 countries improving and four worsening. Within this indicator group is for example, ‘‘Regular fiscal reports track poverty reducing spending,’’ where countries meeting the benchmark increased from 3 to 7. A total of 42% of reporting benchmarks in the reporting area were met in 2004, up from 33% in 2001. However in the other two PFMP areas of formulation and execution, there were modest declines between the two reporting periods in countries meeting the benchmarks (World Bank & IMF, 2005). Traditionally, the Bank gave more attention to budget formulation than to budget execution, and traditional financial management looked mainly at Bank projects, not the whole spending cycle. While somewhat more attention now goes to the downstream aspects, more consistent effort is still needed in that direction.

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The evaluation also looked at outcomes by subtask area such as budget comprehensiveness, predictability, and internal control. Most countries showed a mixture of good and weak performance across subtasks. For example, in the procurement area, Bangladesh, Burkina Faso, Ghana, Senegal, Vietnam, Tanzania, Uganda, and Sierra Leone showed some improvement. Georgia showed no improvement in procurement, although its CPIA 13 rating went up. Guatemala showed no improvement in procurement, nor in its CPIA 13 rating. Ukraine improved in procurement, along with its CPIA 13 rating; then the rating stabilized, but procurement practices worsened as a new government reversed many of the improved regulations. A concern going beyond PFMP is the challenge of measuring institutional development (ID) impact of Bank support. In the recent past, all Bank projects were given a rating as part of their implementation completion report (ICR) on ID impact. However, no guidance was provided to staff on how to ascertain this. For example, staff commonly confused organizational with institutional impact and challenges; when confronted with weak performance, the advice offered is often to restructure organizations, rather than to address the institutional rules and incentives that may be at the heart of the problem. Draft guidance to address this was prepared by the Bank (cf. Fuhr & Krause, 2003, p. 8), but it was never adopted. The ID impact rating was then discontinued as a result of the Harmonized Evaluation Criteria of 2005. The definition of ‘‘outcome’’ was changed in such a way that it now encompasses the project’s ID impact, thus, there is no more separate ID impact rating. Yet there is still no guidance provided on how to ascertain ID impact as part of outcome.

Attribution The outcomes indicated above can be attributed to many factors, including the Bank’s work. The overall statistics on country PFMP performance indicate many instances where the presence of Bank PFMP projects was associated with measurable improvement in PFMP. Yet there were many other factors at play, including policy loans, conditionality, analytical work, technical assistance, policy advice from other donors, debt relief, and greater aid harmonization and alignment. One of the Banks most important partners in PFMP is the IMF. The collaboration in PFMP among the Bank and Fund was clarified in a 2003 agreement (World Bank and IMF, 2003) and a subsequently strengthened approach (World Bank, 2005), and


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coordination between the two organizations in the country cases was reportedly good. The UK’s Department for International Development was another important partner, taking a leading role in PFMP support in, inter alia, Bangladesh and Ghana, in close partnership with the Bank. Other donors played important, supporting roles, including the regional international financial institutions, bilaterals, and UN agencies. There are reportedly 50 donors providing PFMP support, and on average, 7 working in each country; thus, close coordination to avoid duplication and mixed messages is essential (Allen & Last, 2007). Progress in harmonizing PFMP support in recent years has put in place a unified dialogue between government and most donors, including joint participation in PFMP analytic studies, joint support of the overall PFMP reform program, and the joint PFMP review mechanism, where six donors8 have joined the Bank and Fund in participating in PEFA assessments. These steps forward on harmonization are expected to reduce duplication of effort on analytic work, to reduce the burden on borrowers, and to provide mechanisms for reaching consensus among all concerned partners, leading to a more coherent and prioritized support to PFMP reforms. In many countries, the Bank has a leading role in building this consensus among partners, including providing technical expertise and analysis to persuade government and partners of the merit of the jointly supported policy choices.

CONCLUSIONS In summary, World Bank increased PFMP lending and analytical work can be linked with encouraging PFMP improvements among borrowers, usefully adapting PFMP tools from other jurisdictions, and carrying out effective monitoring with robust assessment tools accepted by major donors. However, Bank performance might have achieved greater success with deeper institutional and governance analysis, greater attention to addressing basic systems before moving to advanced PFMP tools, and improvements in the Bank’s procurement practices. In addition, more research would be useful on possible links between PFMP and ACS improvements. Comparisons of PFMP and ACS country ratings suggest that improvements in PFMP, although they may run ahead of improvements in ACS, are typically no more than a score of 0.5 ahead as measured by the relevant CPIA questions9 (World Bank, 2008, p. 65). There are reasons why reforms may move faster in PFMP than in ACS.

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For example, PFMP technical changes can be designed and implemented with a large role for external consultants, assuming there is guidance by local officials to ensure that improvements are appropriate in light of prior practices and expectations. By contrast, ACS changes, even of a technical nature (e.g., HR information system linked with payroll) are more difficult to hand over to external consultants, because they require more subtle, behavioral, cultural, and political understanding to effectively design, implement, and gain acceptance. Another reason for PFMP moving faster than ACS is that the information produced by improved PFMP, for example, on size of the payroll and expenditure on salaries versus O & M, can be important wake-up calls to politicians and senior officials that ACS issues need to be addressed. In addition, the Bank may be more successful with PFMP than ACS because Bank staff are part of a finance institution whose main counterpart is the borrower’s Ministry of Finance; PFMP work is better aligned with the Bank’s organizational culture and relationships than ACS work. And yet, although ACS support offered by the Bank may have not achieved the objectives set out for it,10 civil service management needs to improve along with improvements in PFMP. PFMP systems are made to work by government officials, and systems can only improve in a sustainable manner if a critical mass of these officials are appointed and promoted based on merit, work in appropriate organizational settings, and are given proper incentives. These improvements typically require ACS reform going beyond the Finance Ministry. A related issue concerns the ‘‘basics first’’ approach to PFMP improvements (Andrews, 2006). There are reported cases where low capacity countries have adopted advanced reforms such as IFMS, MTEF, and accrual budgeting and accounting. As discussed above, PFMP technical changes can be largely outsourced to external consultants. Yet these may not be sustainable, nor translate into systemic improvements, without corresponding if lagged improvement and improved capacity of government staff. There is also the risk that by relying on outsourced capacity, government officials can be cut off from the on-the-job training that would ensue if government used its own staff, postponing the time when government has the capacity to take on functions themselves. In addition, officials may be unable to provide effective supervision to the outsourced consultants and entities, and thus government may not be able to play its role as ‘‘principal’’ in managing its ‘‘agents,’’ the outsourced providers, leading at a minimum to loss of government strategic direction over its core services, and perhaps to emerging forms of corrupt practices surrounding the provided services. More comparative work looking at how this tradeoff plays out over time would be useful.


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Finally, more work is needed to demonstrate the causal links between improved PFMP processes, reducing corruption, and achieving more responsive and accountable service delivery to the poor. The outcome ratings used in this chapter focus on evidence of technical processes followed and PFMP outputs achieved. PFMP theoretical and empirical research suggests that following such processes and achieving such outputs reduces the risk of corruption, and increases the likelihood that desired outcomes and impact will be achieved, including more responsive and accountable service delivery to the poor, contributing to propoor growth, poverty reduction, and empowerment and social inclusion of the poor. However, this body of research is based on normative assumptions of what constitutes good PFMP practice that may not always apply in weak governance countries, where formal practices and systems may be undermined by informal and innovative practices pursued by key actors to protect their perceived interests. More work is needed to gather evidence to confirm the causal links between PFMP outputs achieved, and desired outcomes.

NOTES 1. Although mainly including developed countries, OECD (1995) includes Turkey, and OECD/World Bank (2003) includes as OECD members six additional emerging market countries. 2. Recognizes cash transactions only. 3. Recognizes transactions when commitments are made, and accounts for depreciation of capital assets. 4. Audit measuring compliance with laws and regulations in the use of resources. 5. Audit measuring economy, efficiency, and effectiveness in the use of resources. 6. Resource-rich countries face similar challenges (Collier, 2007). 7. Question 13 measures Quality of Budgetary and Financial Management. Thirteen countries do not have CPIA data in both years. These are excluded from all totals and percentages. Only data since 2005 are publically available. 8. The donors are the European Commission, DfID, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, and the Strategic Partnership with Africa. 9. Score for CPIA, Question 13 on quality of budgetary and financial management minus score for CPIA, Question 15 on quality of public administration. This does not mean that a numerical score on Q15 is necessarily equivalent to the same score on Q13. It means that as the PFM score improves, the ACS one does as well. 10. For more, possible reasons, see World Bank (2008, pp. 52–57) and Wescott (2008a).

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REFERENCES Allen, R., & Last, D. (2007). Low-income countries need to upgrade financial management. IMF Survey, 36(11), 170–171. Andrews, M. (2006). Beyond ‘best practice’ and ‘basics first’ in adopting performance budgeting reform. Public Administration and Development, 26, 147–161. Batley, R., & Larvi, G. A. (2004). Changing role of government the reform of public services in developing countries. Basingstoke, Hampshire, UK: Palgrave Macmillan. Braütigam, D. (1992). Governance, economy, and foreign aid. Studies in comparative international development, 27(3). Braütigam, D., & Knack, S. (2004). Foreign aid, institutions, and governance in sub-Saharan Africa. Economic Development and Cultural Change, 52(2). Brumby, J. (1999). Budgeting reforms in OECD member countries. In: S. Schiavo-Campo & D. Tommasi (Eds), Managing government expenditure (pp. 349–362). Manila: ADB. Cheung, A. B. L. (2005). The politics of administrative reforms in Asia: Paradigms and legacies, paths and diversities. Governance, 18(2), 257–282. Collier, P. (2007). The bottom billion: Why the poorest countries are failing and what can be done about it. Oxford: Oxford University. Craig, D., & Porter, D. (2003). Poverty reduction strategy papers: A new convergence. World Development, 31(1), 53–69. Diamond, J., & Khemani, P. (2006). Introducing financial management information systems in developing countries. OECD Journal on Budgeting, 5(3), 102–138. Dorotinsky, W. (2003). Implementing financial management information system projects: The World Bank experience – Preliminary results. Washington: World Bank. Available at: http://www1.worldbank.org/publicsector/egov/ReinventingGovWorkshop/dorotinsky.ppt Dorotinsky, W., & Floyd, R. (2004). Public expenditure accountability in Africa: Progress, lessons, and challenges. In: L. Brian & S. Kpundeh (Eds), Building state capacity in Africa: New approaches, emerging lessons (pp. 179–210). Washington, DC: World Bank. Fuhr, H., & Krause, P. (2003). The World Bank’s assistance to public sector reform in Latin America: Experiences and new challenges. Draft. Fukuyama, F. (2004). Why there is no science of public administration. Journal of International Affairs, 58(1), 189–201. Godfrey, M., Sophal, C., Kato, T., Piseth, L. V., Dorina, P., Saravy, T., Savora, T., & Sovannarith, S. (2002). Technical assistance and capacity development in an aiddependent economy: The experience of Cambodia. World Development, 30(3), 355–373. Jabbra, J. G., & Dwivedi, O. P. (Eds). (2005). Administrative culture in a global context. Whitby, Ont.: de Sitter Publications. Jones, L. R., & Thompson, F. (1999). Public management: Institutional renewal for the twenty-first century. Stamford, CT: JAI. Knack, S. (2001). Aid dependence and the quality of governance: Cross-country empirical tests. Southern Economic Journal, 682, 310–329. McKendrick, J. (2007). Modernization of the public accounting systems in central and eastern European countries: The case of Romania. International Public Management Review, 8(1), 168–185. Moss, T., Pettersson, G., & van de Walle, N. (2006). An aid-institutions paradox? A review essay on aid dependency and state building in sub-Saharan Africa. Working Paper no. 74. Center for Global Development, Washington, DC. Nunberg, B. (1992). Managing the civil service: What LDCs can learn from developed country reforms. Policy Research Working Paper no. 945. World Bank, Washington, DC.


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Nwagwu, E. O. C. (1992). Budgeting for development: The case of Nigeria. Public Budgeting and Finance, 12(1), 73–82. OECD. (1995). Budgeting for results: Perspectives on public expenditure management. Paris: OECD. OECD/World Bank. (2003). Budget practices and procedures database. Available at: http:// ocde.dyndns.org/ Pei, M. (1999). Will China become another Indonesia? Foreign Policy, 116, 94–108. Pollitt, C., & Bouckaert, G. (2004). Public management reform: A comparative analysis (Revised edition). Oxford: Oxford University Press. Rubin, I. S., & Kelly, J. (2005). Budget and accounting reforms. In: F. Ewan, L. E. Lynn, Jr. & C. Pollitt (Eds), The Oxford handbook of public management (pp. 562–590). Oxford: Oxford University Press. Sarraf, F. (2005). Integration of recurrent and capital ‘‘development’’ budgets: Issues, problems, country experiences, and the way forward. Washington, DC: World Bank Public Expenditure Working Group. Shia, M., & Svensson, J. (2006). Political budget cycles: Do they differ across countries and why? Journal of Public Economics, 90(8–9), 1367–1389. Stevens, M. (2004). Institutional and incentive issues in public financial management reform in poor countries. Washington, DC: PEFA. Wescott, C.G. (2008). World Bank support for public financial management: Conceptual roots and evidence of impact – Background paper to public sector reform: What works and why? An IEG evaluation of World Bank Support. IEG Working Paper. Independent Evaluation Group, World Bank, Washington, DC. Wescott, C. G. (2008a). The inter-relationship between public financial management (PFM) reform and administrative and civil service (ACS) reform in fragile states (FCAS), with examples from country governance and anti-corruption (CGAC) pilots (Draft). Washington, DC: World Bank. World Bank. (1997). World development report: The State in a changing world. New York: Oxford University Press and World Bank. World Bank. (2000). Reforming public institutions and strengthening governance. Washington, DC. World Bank. (2000a). Indonesia public spending in a time of change. Washington: World Bank. World Bank. (2003). Debt relief for the poorest: An evaluation update of the HIPC initiative. OED. World Bank. (2005). Strengthening the Bank’s public financial management work. Joint Memorandum of the Vice Presidents of the OPCS and PREM Networks. World Bank. (2008). Public sector reform: What works and why? An IEG evaluation of World Bank support. Washington, DC: Independent Evaluation Group, World Bank. World Bank and IMF. (2003). ‘‘Bank/Fund Collaboration on Public Expenditure Issues’’. Wildavsky, A. (1986). Budgeting: A comparative theory of budgetary processes (Revised edition). New Brunswick, NJ: Transaction Books. World Bank & International Monetary Fund. (2005). Update on the assessments and implementation of action plans to strengthen capacity of HIPCs to track poverty reducing public spending. International Development Association. Wynne, A. (2005). Public financial management reforms in developing countries: Lessons of experience from Ghana, Tanzania and Uganda. ACBF Working Paper no. ACBFWP/07/ 2005. African Capacity Building Foundation, Harare. Available at: http://www. acbf-pact.org/knowledge/documents/Working%20Paper%207%20on%20Financial%20 Management-Final.pdf

CHAPTER 8 UNLOCKING CAPACITY AND REVISITING POLITICAL WILL: CAMBODIA’S PUBLIC FINANCIAL MANAGEMENT REFORMS, 2002–2007 Robert Taliercio1 INTRODUCTION By all accounts, Cambodia has been a postconflict country for much of the last 15 years, stretching as far back at 1991, when the Paris Peace Accords proclaimed a truce between the Vietnamese-backed government and the Khmer Rouge. Subsequent attempts to put in place the desired political and governmental structures remained furtive in the midst of ongoing politicomilitary violence, which only subsided definitively in 1997. Many important institutions of governance and public sector management, destroyed by the ultra-radical Khmer Rouge regime, were only just starting to be rebuilt as recently as 2002. As a postconflict and a low-income country, Cambodia clearly faced profound development challenges in the early 2000s. The conflict, spanning more than a quarter of a century, contributed to weak governance, high levels of corruption, and a fragile political discourse. Yet progress was made The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 175–206 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018010

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implementing so-called first generation reforms (for the concept of generational reforms, see Schneider & Heredia, 2003). These first generation economic reforms included deregulation of prices and markets, privatization of state-owned enterprises, liberalization of trade, and investment flows, and management of a floating exchange rate. The impact of these reforms appear to have included a clear movement from an isolated, low-growth, statemanaged, and subsistence-oriented economy to a market-based economy open to international flows of capital, goods, and labor. Since the early 1990s, Cambodia had enjoyed over a decade of high average economic growth – 7.1% from 1994 to 2004 – driven largely by construction, tourism and, since the late 1990s, the very rapid emergence of a garment sector. The country also benefited from the fact that a nontrivial portion of growth over the past decade was due to postconflict ‘‘catch up.’’ Cambodia’s economic growth also drove moderate poverty reduction, which found that 35% of Cambodians lived below the national poverty line, down from an estimated 47% a decade earlier (World Bank, 2006). The Royal Government of Cambodia (RGC), beginning to prepare for the July 2003 elections, continued to struggle, however, with defining a successor reform program. New binding constraints had clearly emerged. On one hand, economic growth was likely to slow over the medium term unless the investment climate improved and the agricultural sector revitalized. On the other hand, delivery of public services in the priority sectors was seriously hampered by weak public financial management (PFM) and an impaired civil service. The RGC – and its development partners (DPs) – were increasingly frustrated by the fact that improvements in sectoral policies, such as in health or transportation, continued to be undermined by serious institutional weaknesses, resulting in difficulties translating good intentions into good outcomes for Cambodian citizens. Overall, the RGC continued to be dogged by low levels of capacity, resources, and accountability. The bureaucracy remained largely inefficient and ineffective in meeting the needs of its citizens, and particularly that third of its citizens who lived below the poverty line (World Bank/Asian Development Bank, 2003). Of particular frustration was the lack of progress in PFM, which the RGC and DPs had recognized as the binding constraint on government performance, from running primary schools to maintaining roads, across all sectors. Despite the efforts of a group of DPs to support PFM reform with significant resources under a common umbrella, there was very little progress after 2 years. Blame was laid by DPs on factors outside their control: a ‘‘lack of political will’’ and a ‘‘lack of a functioning civil service’’ (IMF, 2003, p. 5). By 2004, a deep-seated skepticism prevailed.

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The implications seemed uncontroversial – both political will as well as a functioning civil service were prerequisites for reform – but profoundly disappointing, given the depth of the diagnosis. Despite these dire antecedents, and clearly against the perceived odds, the Prime Minister launched a new PFM Reform Program (PFMRP) in December 2004. Cognizant both of past failures and present opportunities, the Prime Minister declared a novel approach: ‘‘y we even need to reform the way we prepare and implement the reform program’’ (MEF, 2004a, p. 3). Progress began to be noted in 2005 and 2006, and by 2007 major success in reforming the PFM system – with observable impacts on system outcomes – was being achieved. Employing the methodology developed by Barzelay, Gaetani, Cortazar, and Cejudo (2003), this case study explores three key questions: 1. Why did such significant public management policy change in PFM start to occur in 2005? 2. How did PFM reform occur given the status quo in both the level of institutional capacity and political will? 3. What lessons does the analysis of this case offer to those seeking to fulfill such acknowledged requirements for reform in low-income countries under stress (LICUS), especially ‘‘political will’’ and ‘‘institutional capacity’’ in supporting reform in LICUS? The next section explores the prior events in the period 1997–2002 leading up to the launch of the PFMRP and the contemporaneous events important for understanding the program’s preparation. The third section explains the program’s design while the fourth section analyzes the implementation of the program. Using Kingdon’s (1984/2005) model of the policy making process, the fifth section concludes by answering the key questions, as well as subsidiary questions, raised.

HISTORY OF KEY PRIOR EVENTS AND KEY CONTEMPORANEOUS EVENTS Prior Events, 1997–2000 After the violence of 1997, DPs began to focus more on supporting the development of more robust public institutions. While there had been some progress since the peace accords in the social sectors (DPs had lavished attention and resources on health and education in particular), DPs became

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increasingly convinced that the constraints on better health and education services lay in ‘‘whole of government’’ systems in public finance and the civil service. PFM reform has thus been considered a major constraint by both DPs and the RGC since the mid-1990s, when the RGC began to emphasize improving the state-budget system to satisfy the core needs of the bureaucracy. Operational expatriate technical assistance (TA) with World Bank funding was installed in the Ministry of Economy and Finance (MEF) to manage budget operations. The emphasis, however, was on actual operations rather than capacity development and system change. To take stock of the situation and craft appropriate reforms, the World Bank undertook the first Public Expenditure Review (PER) in Cambodia in 1997–1998. The PER made it clear that the main constraint on sectoral performance was the inability of the government to collect sufficient revenue and deliver it to spending agencies in a timely and predictable manner. While the PER – with its raft of recommendations – was welcomed as the first thorough analytical examination of Cambodian public finance, the reform impact of the report was minor. Besides from a few measures, such as setting up the Budget Strategy and Enforcement Committee and the introduction of the Priority Action Program (PAP), which either proved unsustainable or problematic in themselves, the PER generated scant change and the PFM system continued to be regarded as highly inefficient, ineffective, and plagued by corruption. The PAP system was an attempt to circumvent the existing system by establishing a new streamlined budget execution mechanism. Though it had some limited success in delivering operating-expenditure budgets to primary schools, it was ultimately unsustainable as it did not address the core problems limiting the performance of the PFM system. The PAP reform like the policy to steadily reallocate spending toward the social sectors and away from defense and security, demonstrated political will to improve service delivery. The PAP reform also indicated, however, that wholesale reform of the PFM system was regarded as untenable at the time. DP practices themselves inadvertently contributed to maintaining the weak state of Cambodia’s institutions. A core feature of the delivery of assistance in Cambodia, since the UNTAC period, has been the use of salary supplements in conjunction with project implementation units (PIUs). Given the destruction of Cambodia’s state bureaucracy and the policy of mass extinction perpetrated against professionals by the Khmer Rouge, the Vietnam-supported state of Cambodia found itself in 1979 with very weak capacity. Political principals found it necessary to rely on expatriate advisors to a large extent (Smoke and Taliercio, 2007).


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At the start of the UNTAC period, though state institutions were still weak, the government was run by a competent core group of returned exiles and younger Cambodians who had been educated abroad. With the sudden influx of ODA after the Paris Peace Accords in 1991, DPs turned to these Cambodian civil servants to implement donor projects. The use of salary supplements to ‘‘hire’’ civil servants to work in PIUs has been a persistent, and in some cases growing, feature of Cambodia’s aid dependence. The main problem with such salary supplementation practices is that they actually undermine efforts to build government capacity by siphoning off the ‘‘best and the brightest’’ – and MEF was no exception. These practices have also reduced the demand for civil service reform by providing a minimum amount of capacity to execute high priority projects. The second reason why whole-of-government CSR has not materialized over the last decade has to do with the political economy of public finance and coalition building in a postconflict environment (Smoke and Taliercio, 2007). The RGC has eschewed rationalizing civil service pay and employment in favor of using the civil service – in terms of patronage-based employment practices and control over state-administered resources – to cement political alliances and control. Some RGC officials have argued that it is more important to use the civil service to promote ‘‘peace and stability’’ than to deliver public services.

Contemporary Events (2001–2004) In the early 2000s, the World Bank and the International Monetary Fund adopted the policy of requiring low-income countries to produce poverty reduction strategies to continue to qualify for assistance. Work on Cambodia’s first National Poverty Reduction Strategy (NPRS) began in 2000. Led by the Ministry of Planning, including considerable consultation with civil society and nongovernmental organizations, and garnering great interesting from many DPs, the NPRS was finalized in 2002. Perhaps the most important result of the NPRS was to call attention to the wholly inadequate delivery of public services in Cambodia. Despite millions of dollars in aid and many speeches, it had become clear that in most sectors service quality and quantity were highly unsatisfactory. It also seemed that the special PAP, which was supposed to speed resources through streamlined channels to high priority ministries, had failed to meet its objectives. The systemic usual culprits – PFM and the civil service – emerged again to explain the lack of progress in service delivery.

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In a serious attempt to address this major binding constraint on Cambodia’s development, the IMF, UNDP, ADB, DFID, and the Netherlands launched the Technical Cooperation Assistance Program (TCAP) in mid-2001 to support PFM and financial sector reform. The program lasted for about 2.5 years and financed over US$ 6.7 million worth of TA and training, including relatively high monthly salary supplements for a small core group of MEF staff tasked with managing the program. TCAP, however, was deemed largely unsuccessful in PFM.2 Ex-post reviews by both the IMF and the UNDP came to similar conclusions. According to the IMF review, the impact of TA was ‘‘the weakest’’ in the area of PFM (IMF, 2003, p. 4). The UNDP review found that, though there were some achievements in some of the focus areas, ‘‘the program could have achieved much more for the amount of money spent on it’’. The IMF review blamed the RGC’s ‘‘lack of political will’’ (IMF, 2003, p. 5) for the failure of the program. In addition, both the IMF and UNDP cited another common denominator to explain the limited impact of the program: ‘‘the lack of a functioning civil service’’ according to the Fund and ‘‘the basic structure of incentives to the government officials’’ according to the UNDP. The Fund review cited the ‘‘lack of meritocratic recruitment, competitive salaries, and internal promotion and career stability’’ while the UNDP review noted the ‘‘low salary structure’’ and ‘‘uncertain career path,’’ both of which contributed to absenteeism and low productivity. The Fund review also underscored the problem of politicization of civil service appointments and internal political rivalry that undermined coordination. Moreover, because TCAP was viewed as overloading the reform agenda, it engendered a sense of helplessness. In addition to the disappointing results, TCAP also produced friction between DPs. Thus, the state of the relationship between MEF and donors was oppositional, with mutual finger-pointing, while among donors there was a lack of trust and mutual recriminations.

DEVELOPING THE PUBLIC FINANCIAL MANAGEMENT REFORM PROGRAM (PFMRP), 2002–2004 Building Trust and Defining the Problem What became the Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER) commenced in February 2002. The original intention was to support the NPRS by providing analytical inputs on public


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expenditure-related topics (expenditure policy and management, especially in the priority sectors, and civil service reform), in light of the disappointing experience with both implementation of the PER recommendations,3 as well as TCAP. Bank management decided that the IFAPER should be done in a participatory manner to build RGC ownership and to assist in improving donor coordination, given views about the lack of progress since 1999. The Bank’s task team had a clear view about the central themes that the IFAPER should address: (a) improving service delivery and (b) reducing the fiduciary risk to public funds. The service delivery theme was concerned with poverty reduction through higher quality and quantity service delivery, and focused on pro-poor expenditure policy and better public expenditure management, including human resource management. The fiduciary risk theme centered on safeguarding public funds for their intended use.4 It was also decided that the IFAPER would incorporate the Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Report (CPAR), given the interrelations among the topics covered in those reports, the need to minimize transaction costs on the RGC, and the need to harmonize recommendations across public expenditure, financial management, and procurement. The CFAA was smoothly integrated into the overall review. The CPAR, on the other hand, was not successfully integrated. After several attempts, but without sufficient management support, it was decided that the PER and CFAA would proceed on one track and the CPAR on another.5 The RGC was very much in favor of a participatory approach to the IFAPER, and believed that the merits of engaging officials in the work would outweigh the costs in terms of financial resources and time. The Bank team worked closely with the assigned counterpart in the MEF, the Deputy Secretary General (SG), who managed overall RGC participation. The role of the RGC’s counterpart team was to guide and participate in the discussions on the IFAPER drafts. Bank management was also aware of the general problem of DP coordination in Cambodia (not on PFM, but broadly across a range of issues) and intended for the IFAPER to be a collaborative endeavor with as many DPs as possible. An initial core group of collaborators was established, each playing different roles. The IMF contributed the macrofiscal section, while the ADB contributed staff and consultant time to engage on the overall project and assist in specific sectors (e.g., education). DFID provided the funding for the health chapter while SIDA provided program support funds for administrative costs, including salary supplements for the RGC counterpart team.

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After the concept note was agreed with the RGC, the IFAPER team produced the thematic background papers, followed by the sectoral papers. The 10 papers were produced over the period June – December 2002. Two small, technical workshops, involving RGC officials and interested donors, were held in October and December 2002 to review the draft background papers.6 Executive summaries of the papers were translated into Khmer and participants were requested to provide written comments on the drafts. Each workshop session was chaired by MEF with discussants from the relevant ministries/agencies and sector staff as lead discussants. RGC officials in MEF and the line ministries prepared comments, in most cases written, on IFAPER background papers; these comments were then presented and discussed in technical seminars and drafts were revised accordingly. The results of the approach were favorable. With the discussion of the draft background papers (as opposed to final products), the Bank was viewed as actively encouraging participation upstream in the process. The workshops also provided an opportunity for line ministries to engage with MEF, and for sector staff to engage on crosscutting issues affecting their sectors. The venue also allowed for DP participation at an early stage in the process. The penultimate draft was delivered in May 2003. A June 2003 mission made a presentation to the RGC’s interministerial Committee for Economic and Financial Policies. The IFAPER was published as a joint ADB–WB document – the first in Cambodia – in September. A dissemination workshop, with the participation of many DPs and NGOs, both of whom chaired and sat on panels, was held in October 2003. The IFAPER made for central arguments about the challenges facing the Cambodian public sector. First, Cambodia needed to improve resource mobilization to ensure aggregate fiscal sustainability. Despite the need for higher revenues to finance growth and poverty reduction, Cambodia’s fiscal revenue ratios, especially tax revenue, were among the lowest in the world. Cambodia’s total revenue to GDP ratio stood at 10.8% in 2005. Without significant increases in revenues, there were risks to both medium term macrofiscal sustainability and implementation of the National Strategic Development Plan (NSDP). To retain public debt sustainability by reducing the risk of debt distress and to finance higher levels of public spending, revenues would have to be greatly increased. Second, to reduce the fiduciary risk to public funds, the Government would have to engage in comprehensive reform of budget execution, public financial control systems, and procurement. Weaknesses in the PFM system not only had high costs in terms of allocative and operational efficiency,

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but also had created high levels of fiduciary risk to public funds. The cashbased payments system emerged as a major constraint. Increasingly, budget execution had suffered from delays and an unpredictable release of funds, due to cash constraints, undermining operational planning, and resulting in the build-up of arrears (see Table 1). The system was plagued by gatekeeping and deficient accounting and reporting systems, thus leading to a weak-control environment and increasing opportunities for corruption.7 Thus, in comparative perspective, Cambodia’s PFM system ranked well below average (as compared to the low-income countries assessed by a joint World Bank–IMF diagnostic tool, Cambodia scored a 3 out of a total possible 15 criteria met), indicating the need for substantial upgrading. Third, to reach the stated poverty reduction goals, it would be necessary to improve the effectiveness of spending by linking it more closely to priority outcomes. In education and health planning, processes had improved and greater linkages between planning and budgeting had been developed, resulting in somewhat improved prioritization of spending. Agriculture and road transport – the other priority sectors – had yet to make progress on this front. Fourth, Cambodia needed to undertake strategic civil service reform – focusing on pay and employment issues – to deliver poverty-reducing services. Given the serious problems afflicting the civil service – low pay, low skills, and thus low capacity – strategic civil service reform would have to be Table 1.

The Back-loading Problem: Percentage of Expenditures Posted in December, 2000 and 2001.

Economic/sector

Civil recurrent Chapter 10: Salaries Chapter 11: Operating Costs Chapter 13: Specific Program Activities Capital domestic financing Defense and security Education Health Agriculture Rural development

2000

2001

Central

Provincial

Central

Provincial

43.4 11.6 38.2 47.7 10.8 17.2 63.2 59.7 41.2 31.5

22.8 19.4 25.0 100.0

31.6 14.1 42.2 47.3 18.2 18.5 34.7 71.4 30.7 13.2

29.9 23.7 34.9 70.0

21.1 31.7 18.6 22.1

30.2 43.6 28.0 27.4

Source: Bank estimates based on MEF TOFE. World Bank/ADB (2003) Cambodia Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER).

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accelerated in the short term and carried out over the medium term if the Government’s vision of poverty reduction is to become reality. Moreover, it was clear that low-public-sector wages provided a breeding ground for corrupt practices. At the same time, it was apparent that low pay was a leading cause of Cambodia’s relatively poor standing on public sector performance. A number of initial intermediate impacts were obtained around the time of publication in late 2003. First, IFAPER analysis and recommendations were incorporated into the NPRS and the Government’s draft Rectangular Strategy (this would become the political platform of the new government formed in July 2004). Moreover, other results were seen in citations of the review in the press and its purported use in political negotiations among coalition partners and the opposition. The IFAPER was also used to teach public finance at MEF’s Economics and Finance Institute. Key sectoral recommendations were incorporated into the education sector’s core policy matrix. On the Bank side, the IFAPER agenda became one of the pillars of the Bank’s 2005 Country Assistance Strategy (CAS).

ANALYSIS OF THE CASE Intermediate Outcomes These intermediate outcomes were, more importantly, indications of two much more profound and far-reaching results. First, the participatory approach to the IFAPER entailed sufficient consensual and upstream engagement by MEF and other ministries, as well as other donors, such that more than a modicum of trust was built between government and donors. More specifically, beyond some initial trust building, the IFAPER process laid the foundation for a deeper trust to emerge during the solution design phase – trust by DPs that the government would take PFM reform seriously and trust by the government that DPs would take government’s concerns about how to effectively manage the reforms seriously. Government officials began to believe that DPs would listen to officials’ concerns about managing the pace and modalities of reform, and might also help to alleviate some of the binding constraints to reform. Second, the IFAPER process yielded an agreement on key problem definitions. The agreed problem definition consisted of the four key findings noted above. In particular, the definition of the budget problem as the lack of a credible budget – in terms of delivery of resources to budget managers


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in a timely and predictable manner – resonated broadly and deeply. The problem of unpredictable budget execution became viewed as the principal binding constraint on system performance. Thus, the IFAPER process ended with the building up of trust in a difficult environment and agreement on the definition of the main problems constraining system performance.

Designing and Managing the Solution The completion of the IFAPER came 2 months after the initially inconclusive national elections of July 2003. While the CPP had won a simple majority, it had not garnered enough support to pass the 2/3 threshold (of seats in the National Assembly) set by the constitution, and thus had to enter into negotiations about forming a government with the royalist FUNCINPEC and eponymously named Sam Rainsy parties. The complicated tripartite talks resulted in an 11-month political stalemate, which provided an unexpected hiatus in policy making and allowed MEF and DPs the opportunity to craft a more comprehensive and robust solution than would otherwise have been the case. Normally, after the production of a major report, there is pressure from DP management to move quickly to implementation of key recommendations, with little regard for management of the reform process, to demonstrate ‘‘political will’’ and reform impact. Jumping from a technical report to implementation misses a key step in LICUS – ensuring that appropriate management structures are in place to support implementation. Before DPs were able to provide a coherent design solution approach to the government, they had to agree to an approach among themselves. Given that DPs were not starting from a tabula rasa in late 2003 (and they very rarely do), and given the difficulties with implementing TCAP, though the IFAPER had generated greater consensus, DPs were far from agreement. The ‘‘PFM sector’’ in Cambodia was particularly fragmented. The IMF focused on tax, customs, budget management, and Treasury reform; the ADB focused on the MTEF and internal audit, and DFID-supported specific consultancies, in addition to financing other members’ TA. In addition, French bilateral TA focused on budget classification and tax, while JICA bilateral TA addressed tax and budget reform. The non-TCAP TA was not coordinated with the TCAP TA. Moreover, the TCAP donors did not so much work together as they did in a ‘‘division of labor’’ mode. Each donor pursued its piece of the agenda without much interaction on the

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substance of the program. This ultimately undermined the coherence of the program. In June 2003, MEF convened a meeting of the ADB, DFID, IMF, and WB to discuss post-TCAP coordination arrangements.8 Based on the experience of TCAP, which was problematic in a number of ways both in design and implementation, DPs had different views about a successor arrangement. Some DPs wanted to take a more traditional bilateral approach, while others argued for an improved coordination mechanism. The IMF, for example, felt that the difficulties with the TCAP experience argued for going back to separate bilateral interventions. Others, such as DFID, for example, argued that it was necessary to improve on the coordination and learn from the lessons of TCAP in designing a new program. The Bank felt strongly that a more coordinated approach was needed, and proposed a sector-wide approach (SWAp) for PFM, based on the BankFund board paper.9 The ADB and DFID were interested and supportive of the new approach. To operationalize the idea of a PFM SWAp, the Bank, ADB, DFID, and the RGC agreed to a series of three joint PFM missions. Other DPs – IMF, EC, AusAID, JICA, the French cooperation, and UNDP (SIDA later joined) – joined the missions on an associated basis. Slowly over the course of the year, as the work progressed, DPs became more and more convinced of the approach, and the level of engagement increased. Though one or two DPs remained skeptical, it was clear that the ‘‘train had left the station,’’ which motivated these DPs to participate, even if reluctantly at times. The purpose of the joint PFM missions was to assist the RGC with the development of a comprehensive PFM reform program, consisting of: (a) a sequenced, prioritized, costed annual (rolling) action plan, based on a clearly articulated vision of the PFM system’s key features, fully owned by the RGC; (b) a corresponding performance-management framework, based on the Public Expenditure and Financial Accountability (PEFA) performancemanagement indicators and tailored to the platforms of Cambodia’s reform program; (c) a corresponding organizational change and capacity building strategy, including attention to pay and employment reform issues that would impinge upon the ability of MEF to implement the reform program; and (d) a government management structure and coordinated donor arrangements.


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The joint PFM missions took place in January–February, March, and July 2004.10 As the objective of the missions were to assist with the development of an integrated PFM reform program – owned, understood, and internalized by staff at all levels in MEF and the rest of Government – considerable attention was paid to the mode of engagement. The joint donor mission proposed to provide support as needed and requested by the RGC, acknowledging that advice provision needed to be carefully balanced with allowing space and time for MEF to genuinely develop its program.

THE TECHNICAL SOLUTION To orient the substantive work on designing the solution, MEF management developed a vision statement (PFM Vision 2015).11 The statement put forth the objective of ‘‘instilling much higher standards of accountability and management in the mobilization of public resources and effectiveness and efficiency in their use to implement’’ the NPRS. It also specified a longterm objective: to exceed regional standards and meet best international standards by 2015. The IFAPER findings were fairly typical of LICUS PFM systems in that the systemic weaknesses pervade the public sector, and, given low capacity, cannot all be addressed at once. The typical approach is to compile a priority list of reforms in each PFM subsystem/stage, without a sense of priorities across subsystems (e.g., formulation, execution, audit). This often leads to development of a fairly predictable list of recommended reforms over a 3-year period. What was unique in the Cambodian case was a very serious attempt to develop a logic of prioritization based on the IFAPER’s problem definition. The RGC and DPs, drawing on TCAP reports and the IFAPER,12 and using the ‘‘platform approach,’’13 adopted a sequenced approach consisting of the following four platforms (Fig. 1): 1. Platform 1: The budget is made credible because it delivers resources predictably and reliably to budget managers (this provides the basis for accountability by improving budget execution). 2. Platform 2: Initial improvements are made in internal control and holding managers accountable (this enables a focus on what is done with resources by providing better data, effective discipline, and greater internal transparency).

Fig. 1.

Strengthen macro and revenue forecasting.

Streamline spending processes.

Re-design accounting and budgeting classif. & coding system. Initial design of FMIS for core business processes.

Define leadership (cadre as opposed to managerial) for internal audit function (including standard settings etc.) Re-design budget cycle and responsibilities (e.g. inclusion of MTEF process).

Accountability for performance

ENABLES

Pilot programbased budgeting and budget analysis.

Explore options for further fiscal decentralisation.

Initial full design of FMIS.

Develop of an IT management strategy.

Initial design of asset register.

STAGE ONE (short term)

STAGE TWO

STAGE THREE

STAGE FOUR

Cambodia’s Four PFM Reform Platforms. Source: MEF (2004b). Permission granted by the Cambodian Government/Ministry of Finance.

Comprehensiveness and integration of budget.

More credible budget

PLATFORM 1

Basis for accountability.

ENABLES

Effective financial accountability

PLATFORM 2

Focus on what is done with money

ENABLES

Fully affordable policy agenda through policy-budget linkage

PLATFORM 3

Effective program performance accountability

PLATFORM 4

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3. Platform 3: Improvements are made in linking policy priorities and service delivery targets to budget planning and implementation (this enables greater accountability for performance). 4. Platform 4: Accountability and review processes for both finance and performance are integrated (this would result in greater external transparency and provide a solid basis for deconcentration). The missions that MEF officials participated in directly as members were successful in attaining their goals. By the end of the last mission, MEF had produced a Consolidated Action Plan (CAP) for Stage 114 of the reform program (including capacity development and organizational reform measures), a long-term PFM vision statement, and a performance management framework (PMF). The CAP laid out a detailed sequence of reform measures for completing Platform 1 by MEF department on a monthly basis. The CAP, the blueprint of the reform program, was based on and aggregated from individual (and more detailed) departmental action plans. The CAP also formed the basis for the quarterly monitoring reports by the departments and Reform Committee Secretariat (RCS). The PMF was based on the PEFA performance indicators with modifications to both include areas that it was felt were not given adequate attention and deemphasize areas on which that the first phase of the reform program focused (Table 2). The main purpose of the framework was to manage the reform program and keep it focused on practical impact. The purpose of the performance indicators was to measure progress over time. Since the reform program spanned many years and consisted of at least four platforms/stages through which it will seek to progress, there was a need to set progressive aims as the program unfolded. There was a need to target performance changes for each platform. After the framework was agreed upon, a baseline assessment was carried out. The baseline informed target setting on an annual basis. As the baseline was measured in 2004, targets were set for 2005 and 2006. MEF’s quarterly progress reports assessed performance against the framework and baseline values. MEF and DPs also considered the problem of low capacity a binding constraint on reform, but formulated an approach to capacity development that attempted to get to the root of the problem. MEF suffered from the same problems as the rest of the civil service, and until these problems were addressed, reform programs continued to flounder. In response, it was argued that business, as usual, which mostly consisted of salary

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Table 2.

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PMF: Performance Indicators and the PFM Reform Program.

PFMRP objectives

Platform one performance indicators

To ensure that the budget is realistic and implemented as intended in a predictable manner.

Revenue outturn increasingly close to targeted level in approved budget. No accumulation of new arrears and steadily declining stock. Budget holders increasingly able to commit expenditure in line with budgets and cash flow forecasts. Service delivery units receive an increasing proportion of funds targeted at their levels (and of goods and services meant to be procured for them) increasingly timely. Public procurement based on clear rules, consistently enforced, with no major delays in processing and payment. Composition of expenditure by type close to approved budget. Better yield achieved from tax base through improved efficiency and planned use of nontax sources.

To ensure that the budget is comprehensive and policybased by capturing all relevant fiscal transactions and is prepared in an orderly, predictable way.

Single and orderly budget process producing good (and integrated) budget plans. All significant areas of both public revenue and expenditure captured in both the budget and accounts of the Government. Budget has direct influence over nominal staff roll (establishment) and decisions on post creation and recruitment.

To ensure that the aggregate fiscal position and risks are monitored and managed.

Interim measures introduced to improve accounting data aggregation and cleanse data sources. System in place to ensure that proposals for postbudget supplementary expenditure credits are always accompanied by an MEF report on realistic options for financing the expenditure involved.

To ensure that the financial management system is robust and capable of responding to in-year pressures in orderly way.

Institutionalized mid-year budget review feeding into 2nd half-year budget implementation and budget preparation for following year. Annual forecasts of all inflows and outflows prepared and regularly updated (based on accurate revenue forecasts and good budget implementation plans).

Source: MEF (2004b). Permission granted by the Cambodian Government/Ministry of Finance.


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supplements, would not be good enough this time: ‘‘Recognizing the significant problems created by piecemeal and fragmented approaches by DPs to tackling issues of public sector pay and incentives in the past, the mission agreed on the need for a significant departure from previous practice.’’15 DPs and the RGC agreed on the need for a special incentives program. By late 2004, the Merit-Based Pay Initiative (MBPI) took shape. The essence of the MBPI was to introduce into the civil service higher pay coupled with meritocratic selection and performance management on a sustainable basis to support agencies’ missions. The MBPI attempted to institutionalize an accelerated salary enhancement program based on a number of key features. First, the government agreed to pay an increasing share of the cost over time, eventually assuming the full cost of the initiative. Second, the participants were selected on merit according to agreed criteria, and there was a mechanism to remove nonperformers. The MBPI was also anchored in official government pay policy (a proviso allowing special allowances for high priority activities). The management of MBPI, supervised by the Reform Committee (RC), was based on the MBPI manual developed by MEF.16 The MBPI was also directly tied to the agreed reform program, including overall administrative reform. Key provisions included: a functional analysis to be undertaken in MEF and recommendations on rightsizing implemented; and piloting of establishment control. The MBPI also targeted salary supplements and other forms of remuneration for rationalization. Salary supplements were not allowed for MBPI participants and MEF agreed to end all salary supplements starting with Stage 2. In addition, existing departmental schemes (in tax and customs) were to be rationalized.

THE MANAGEMENT MECHANISMS The RGC and DPs also became convinced of the need for a new approach to manage the reforms. In response to the need to manage the rapidly emerging work program, MEF created a RC, chaired by the SG, to lead and monitor PFM reform, including by coordinating with other ministries and DPs.17 The RC met at least monthly with additional meetings as required. On many occasions, the minister chaired RC meetings and the RC became the instrument for the executive management to steer the ministry. The RC created a secretariat (RCS) to manage the PFMRP on a daily basis at the departmental level and to engage with DPs on an operational basis.

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The RCS became instrumental in managing the program’s operations and served as an effective bridge between MEF’s management, its departments, and the DPs. The joint missions also proposed the architecture of the RGC–DP collaboration, consisting of three mechanisms. The first was the PFM Technical Working Group (TWG), jointly chaired by the RGC and DPs. The TWG, which met on a quarterly basis, was the forum for overall RGC– DP. The TWG also met annually for a joint RGC–DP off-site retreat. The second management mechanism was the Development Partner Committee (DPC), which convened all the DPs in the PFM TWG, initially under the chairmanship of the IMF and later the Bank. The DPC met monthly for regular meetings and more frequently as needed. When funding became available, the DPC hired a full time resident specialist to manage operations for the donor group. These management mechanisms were underpinned by the ‘‘Partnership Principles,’’ which set out the collaborative rules of engagement in the sector. DPs and RGC reached consensus that the spirit of the principles entailed constantly seeking ways in which to improve program coordination, minimize the human, institutional, and financial costs of securing such coordination, and maximize the effectiveness of coordinating arrangements to secure program delivery. The ‘Partnership Principles’ were signed by the Minister of Finance and most DP heads of agencies or ambassadors. They served the purpose of providing clarity on the expectations regarding partners’ behavior. The relationship between the RC/RCS and DPC developed into a close partnership in which information was shared regularly and monitoring was done – in effect – jointly. The RCS prepared quarterly annual progress reports, which were submitted in draft and final versions to the DPC. The reports tracked the individual actions in the CAP, which allowed for close scrutiny of progress by MEF senior management as well as by donors. The reports also tracked progress on the performance indicators. In addition, an annual progress report was produced by the RCS. Moreover, to provide an impartial assessment of both MEF and the DPC, an independent External Advisory Panel (EAP) was contracted to produce an annual evaluation report covering the CAP, performance indicators, MBPI, and management mechanisms.18

Analysis The effect of the aggregate set of technical and management solutions was to address all of the binding constraints that had been noted by government and donor participants: weak ownership, inadequate incentives, weak


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capacity, and the lack of coordinated-donor advice. The technical and managerial solutions were also mutually reinforcing to a great extent. Putting the solutions in place, however, took the better part of a year. The joint missions commenced in January 2004 and the PFMRP was launched by the Prime Minister in December 2004. A number of specific benefits and insights are worth noting. The vision statement proved effective not only in focusing the strategy and action plan, but also in justifying the time frame for the reforms. The vision stated unambiguously that the PFMRP would take a decade to achieve. This was important in convincing donors and some officials that reform was a long-term process, not a game of ‘‘quick wins.’’ With the long-term roadmap effectively articulated, attention could be focused on successful implementation of the modest program of reforms in Platform 1. The vision statement, thus, also helped to deflect pressure to reform more and to do so more quickly, keeping both the workload and expectations manageable. The platform approach also played an important role by providing a useful metaphor to motivate and guide change. Platforms are constructed one at a time and on top of each another. Each platform is the base on which to build the next one, so some measures are clearly indicated as prerequisites for others. The basic approach was to first remedy key operational deficiencies and then address system upgrades, keeping the workload and expectations manageable. The platform approach yielded two main benefits for reform management. First, the logic inherent in the approach allowed MEF to keep a sharp focus on defined priorities. There is often pressure, sometimes from donors, to add on reform measures that respond in some ways to their constituencies. Unchecked, pressure can lead to overloading of capacity. The approach thus enabled senior officials and staff to design and implement a manageable set of reform activities. As simple as it sounds, this had not been possible in the recent past. Second, the manageable set of activities effectively balanced building up momentum with allowing time for internalization of change. As success of reform programs such as this depends, in part, on the pace of change, this balancing was particularly important. The pace of change allowed for sufficient momentum to be built up so that management and staff, as well as donors, could perceive progress and thus develop positive attitudes toward the reform program, thereby enabling greater support among constituencies. At the same time the pace allowed management and staff to understand and therefore feel more comfortable with the change process. The CAP and the performance-measurement framework provided the basis for accountability and successful management of the program by

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enabling highly effective monitoring of reform measures and outcomes by both MEF senior management and DPs. Actions and outcomes were tracked at a sufficient level of detail, and on a regular basis, to allow further trust building between MEF and DPs. The management mechanisms allowed senior managers on both sides to exert control over the reform process, and provided incentives for line staff to perform. These management changes induced a slow moving but perceptible change in MEF’s organizational culture. For example, MEF began to hold retreats for the first time, and the RCS began to give ‘‘road shows’’ to promote the reforms in the provinces. MEF management also strengthened its feedback loops such that learning took place, allowing for mid-course improvements and corrections. Last, it is important to note that leadership by MEF (the Minister, the SG, the Deputy SG, and the head of the RCS) was supported by leadership by the World Bank on the donor side and made for effective use of the new array of technical and management solutions. Without political leadership, of course, nothing would have happened, but the chapter will argue that political leadership was necessary but not sufficient.

STEADY AND CONSISTENT IMPLEMENTATION OF THE PFMRP, 2005–2007 By the time the political stalemate was resolved in July 2004 by the CPPFUNCINPEC alliance, the preparation for the PFMRP had taken nearly a year (and nearly 2 years if one includes the IFAPER process). The launch of the PFMRP by the Prime Minister in December 2004 provided a clear indication of the highest level of political support, and the program formally commenced implementation in February 2005 – exactly 3 years after the launch of the IFAPER. This was unheard of in World Bank and other donor processes, and naturally attracted some attention. This section briefly reviews major PFM reforms over the period 2005-2007. The next section discusses the additional management mechanisms that were put in place to support implementation. First set of Reforms – 2005 As envisioned by the platform approach, reforms were to be implemented in a phased manner. The measures undertaken in 2005 were largely preparatory steps across a range of reform areas and, in themselves, did not


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constitute fully completed reform measures that would contribute to discrete outcomes. For the most part, the measures undertaken in 2005 laid the foundations for completion of reforms in 2006 and 2007. The 2005 measures focused on: gathering information and undertaking research; establishing working groups, units, and new departments; developing technical and project plans; redesigning systems and amending decrees; and conducting seminars and workshops. The most important reforms, in terms of impact, accomplished in 2005 were: issuance of subdecree on internal audit function and establishment of internal audit offices in five line ministries; issuance of a new prakas on deconcentration of procurement authority to line ministries; reduction of the stock of payment arrears by almost 42%; and a functional reorganization of the Tax Department. At the same time, there was slower than expected progress in a number of areas, including: redesigning the budget commitment and payment process; integrating reporting of capital spending into fiscal reports; reporting on nontax revenue collections; and consolidation of government bank accounts into the Treasury Single Account.19 The main lesson learned from the first year of implementation was that crossdepartmental tasks were very difficult to accomplish. MEF’s departments had no history of cooperating with each other and the lack of cooperation and coordination very quickly emerged as a serious impediment. Specific areas of problems with coordination were highlighted in MEF’s 2005 Annual Progress Report, resulting in senior management action. To solve the problem, MEF created functional working groups composed of multiple departments working on related issues under a senior manager (Deputy SG). Cooperation between MEF and the line ministries, however, proved even more difficult to address.

Second Set of Reforms – 2006 and 2007 Major reforms measures commenced implementation in January 2007, including: a significant streamlining of budget execution procedures, the introduction of a program budget pilot, and adoption of a new chart of accounts. These followed on from significant reforms in 2006: the amount of customs revenue collected through the banking system increased (from 0 in 2004 to nearly 1/3 in 2006); more than 3/4 of all Tax Department revenue was collected through the banking system and about 3/4 of treasury payments to suppliers in Phnom Penh and Sihanoukville were made by check instead of cash by 2007; the procurement process was streamlined,

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tightened, and made more competitive with the passing of a new subdecree in late 2006; the Government had set up internal audit departments in a dozen line ministries, and, for the first time in Cambodia, a pilot program was launched to pay civil servants through commercial banks instead of by cash. Though reform measures continued to be refined and implementation was not without challenge, it was clear by early 2007 that Cambodia had finally begun to transform its PFM system. MEF continued procurement reforms as a central plank of making the budget credible. MEF accelerated the amendment of the foundational 1995 procurement subdecree and in late 2006, the Prime Minister signed a new subdecree, representing a very important accomplishment. The new subdecree provided an improved framework for implementation of public procurement in Cambodia. MEF also developed and implemented program budget pilots in priority line ministries, including Education, Health, Justice, and Women’s Affairs. MEF regarded the introduction of program budgeting as essential for introducing a stronger focus on results in public service provision, and stressed the importance of monitoring performance indicators in the context of program budgets. Refinement and expansion of the pilot was planned for 2008 and 2009. MEF continued to develop the internal audit function. By 2006, the RGC had created 19 internal audit departments in line ministries (of these, 7 were operational by 2007). To further improve accountability and control, MEF took the first steps toward procurement of a Financial Management Information System (FMIS) for budget management. Other reforms – in debt management, budget integration and comprehensiveness, and cash management – were also undertaken. As in the initial period, there were some areas of the program that saw less progress and others that saw none at all. The principal obstacle to reform in some areas was undoubtedly corruption. In some system areas, officials who were corrupt had reasons to oppose reform, as reform would have meant fewer opportunities for rent-seeking. In practice, this meant that some areas suffered significant delays. One of the most difficult measures was the implementation of new transaction processes from budget release to commitment to payment to streamline ability of budget holders to spend in line with the budget. The key features included: (a) simplification of salary approval in the seven priority line ministries; (b) streamlining of execution for nonprocurement items, including special arrangements for schools and health operating districts, and revamped commitment and payment, which reduced processing time


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from an average of 16 to an estimated 8 days; and (c) redesigned commitment processes for procurement items for program budget expenditures, such that commitment is only required twice per year. These measures had been resisted by some units in MEF, as they reduced opportunities for gatekeeping. The management, however, after initially delaying the measure in 2005, pushed it through in 2006–2007, as it understood that budget credibility would not be achievable without transaction streamlining. Another reform area that suffered delay was making greater use of the banking system for tax and customs payments, and for payments to creditors and civil servants via transfer and/or check. Originally due to a very limited banking infrastructure, Cambodia’s system had long relied on cash transactions. Cash, and weak record keeping also, facilitated corruption. The measures implemented, however, which were critical to the success of the overall reform program, moved the system a long way toward reliance on the banking system. Though these measures did not eliminate corruption, they made it costlier and riskier, and thus less likely. In other areas, it appeared that the reformers were not able to overcome the vested interests. One area that continued to stagnate was the control of the civil service establishment and payroll. Due to resistance from the Council for Administrative Reform (CAR), it was not possible for MEF to pilot establishment control arrangements. Another area that proved very tough was the consolidation of bank accounts held by line ministries. Reports indicated the existence of thousands of supposedly government accounts (e.g., for collection of fees) held and managed, in effect, as private off-budget accounts. This area continued to be problematic and progress was disappointing. There are also other serious corruption problems, in such areas as logging, that fall outside of the PFMRP entirely (see Smoke and Taliercio, 2007 for a general discussion). There is no doubt that while the PFMRP strengthened good governance overall, numerous and important corruption-related challenges remain. By mid-2007 the view that Cambodia was making solid and steady progress in PFM reform was widely held, even among civil society organizations. At the 2007 Consultative Group Meeting in June, the IMF (2007), on behalf of all DPs, declared that, There appears to be considerable political and managerial commitment and stakeholder consensus on the way forward. Challenges exist but these appear to be generally recognized, with agreement on a broad vision of the future path and identification of the steps needed to progress. There also appears to be willingness, in both MEF and the line ministries, to build the technical capacity necessary to follow the reform path.

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The 2007 EAP Report (PDP Australia, 2007: 16) also documented the progress made, noting that of the 29 subindicators used to measure performance of the PFMRP, 15 were met or mostly met, 5 were partly met, 6 were not met, and 3 were not measured. This level of broad progress across numerous PFM functions was a significant departure from the past practice. Cambodia had succeeded by reaching a critical mass of reform measures, such that improvements in outcomes (supported by evidence and measured by the agreed performance indicators) were evident. As a consequence, perceptions of Cambodia’s PFM reforms shifted from ‘‘no track record’’ to ‘‘turn-around case.’’ Cambodia had indeed, as the Prime Minister requested, reformed the way it reformed.

ADDITIONAL MANAGEMENT MECHANISMS After nearly 1 year of design work and tripartite negotiations between CAR, MEF, and DPs, a memorandum of understanding (MOU), including the operations manual, on the PFM MBPI was signed in May 2005. On August 5, 2005, the Prime Minister issued Sub-decree 98 on the ‘‘Implementation of the Merit-based Pay Supplement Incentive,’’ which established the official legal foundation for the MBPI. Undoubtedly, the MBPI that commenced in December 2005 (with payments made retroactively from July 2005) was the most important structural mechanism put in place. Though the initial phase of the MBPI included only about 5% of MEF staff and the additional remuneration was modest – the initial number of MBPI participants was 259 (including 10 staff in the RCS) with an average monthly payment of US$ 214 – the effect was transformational.20 While it is too early to definitively measure the impact of MBPI, MEF and DPs agreed that the MBPI has had an important and positive impact on the implementation of the PFMRP (ASI 2006 and PDP Australia 2007). MEF management reported that the MBPI had improved the productivity of staff and increased their overall level of output, in part by reducing absenteeism and requiring staff to focus explicitly on the quality of their contributions to the reform program. For the first time in decades, selected staff earned decent wages and, in return, were required to demonstrate acceptable performance in implementing the PFMRP. Anecdotal evidence indicates that the MBPI empowered managers to demand that staff perform up to expectations and at the same time helped staff feel valued and appreciated by management.


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On the donor side, an important additional coordination mechanism was also developed. A subset of DPs decided to pool their resources to improve TA effectiveness, in part, by reducing transaction costs for MEF. Toward this end, the Bank established and managed a PFM Multi-Donor Trust Fund (MDTF), which was funded initially by AusAID and DFID, and later by the EC, CIDA, and Sida. The MDTF funded MEF’s implementation of the PFMRP, as well as permitted the establishment of a DP Secretariat (staffed by a resident public sector specialist hired by the Bank) with management and coordination functions. In addition to the benefit of additional staff time, the trust fund had another important effect – it effectively anchored the pooling donors together and created a critical mass that could guide and manage the larger donor group. This was particularly important given that there were a dozen DPs working in PFM in Cambodia. The MDTF provide approximately US$ 17 million, while the Bank, in May 2006, approved an IDA grant of US$ 14 million to support the PFMRP. Both sources of funds are channeled into a single MEF account, enabling the RGC to manage the trust fund and the project as a singular entity. The RCS manages the bulk of the trust fund/project according to World Bank financial management and procurement procedures. The final piece of the puzzle – full financing – was thus put in place by mid-2006, ensuring adequate resources to fund the reform program for 5 years.

CONCLUSIONS Consistent with the data and analysis provided in this chapter, the conclusions to this chapter might read, ‘‘How Public Management Solved the Problem.’’ The case study of Cambodia’s PFM reforms over the period 2005–2007 raises a number of interesting questions. Perhaps most obviously: why did public management policy change occur in 2005–2007, given little change in the previous period? In comparative perspective, the turnaround that Cambodia experienced in PFM reform is also of interest given Cambodia’s status as a low-income, postconflict country. This is interesting because failure was the more likely outcome given failures of PFM programs in other such countries, failures of other reform programs in Cambodia, and the failure of the previous PFM reform program. The stock argument among development practitioners in low-income countries is that the political will is the principal determinant of reform. In fact, that was the argument made by DPs in Cambodia after the failure of TCAP (IMF, 2003). If that argument were true – that a lack of political will

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was holding back PFM reform in Cambodia – then one would have to argue that a sudden increase in political will must explain Cambodia’s implementation of PFM reforms from 2005 to 2007. The problem, however, is that there is no convincing way to make such an argument. Political will, in and of itself, is a problematic concept. For the purposes of this chapter, I define it as ‘‘political incentives for reform,’’ where incentives are considered as net benefits accruing to politicians from taking reform action. Political incentives can change when political conditions (politicians in power, change in revealed voter preferences, etc.) change. Despite the elections in 2003, very little change in political incentives was noted. First, the same ruling coalition (CPP-FUNCINPEC) was brought back to power with the same party in opposition (Sam Rainsy), thus indicating no change in fundamental party dynamics. Within the coalition, the only notable change was the increase in the number of political appointees in cabinet and ministries afforded to FUNCINPEC. At the same time, however, the total number of political posts was increased to accommodate the new appointees, so the relative balance of power between the partners did not change (though overall the total cost of patronage increased). Nor was it clear that any significant change had occurred within the CPP itself, in terms of the balance of factions. Furthermore, had some imperceptible change occurred, there is no way to draw out what the implications would have been for the reforms. This is not to say that no political change occurred – the amount of change depends on how closely one looks – but to argue that there was no political change significant enough to explain the turn of events under analysis. Nor did political principals change: the Prime Minister and the Minister of Economy and Finance remained in their posts. Within MEF, there were two promotions: the SG, who had been leading PFM reform development, was promoted to a Secretary of State (political appointee), while the Deputy SG, who was coleading on the government side, was promoted to SG. The head of the TCAP Secretariat remained as head of the RCS. Personnel changes, therefore, do not offer a convincing argument about political incentives. There were some incentives for politicians to improve service delivery, including pressure from the press and donors, yet there was no perceptible change in incentives over the period. Though citizens wanted better and more public services, Prime Minister Hun Sen, the longest serving leader in Asia, and his CPP remained in power since 1991. Donor pressure for reform was present but remained largely unchanged (ODA remained stable since the late 1990s, but increased with the arrival of China in the early 2000s).


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The RGC was concerned about public service delivery and put in place numerous programs and initiatives to improve service delivery (World Bank/ADB, 2003). ‘‘Political will’’ thus seemed to be latent before 2003, but became active and observable from 2005 to 2007. The argument is that good public management can unlock political will in cases where it exists. Alternatively put: political will is necessary but not sufficient; good public management is also needed. More specifically, the development of the IFAPER caused successful implementation of the PFMRP. Therefore, to understand the success of the PFMRP, one must understand the development of the IFAPER. Kingdon (1984/2005), though not often applied to developing country contexts in the literature, offers an analytical framework for understanding Cambodia’s PFM reforms that is far more convincing than the ‘‘political will’’ explanation. Using Kingdon’s framework enables one to explain the trajectory of PFM reform as having to do with governmental policy agendas and public management capacities. Accordingly, before 2004 PFM reform was a low-status issue on the governmental agenda. That is, PFM reform was receiving some attention from actors in the governmental system and donor community, but not steady high-level attention. In 2004, however, the launch of the PFMRP by the Prime Minister signified that PFM reform was moved to the decision agenda (i.e., an issue up for active decision). What shifted PFM reform to the decision agenda was, this chapter argues, the coupling of a compelling problem definition (‘‘the budget was not credible’’) with a policy solution. One of the factors that explains why a ‘‘condition’’ changes to a ‘‘problem’’ is getting participants to see the condition in a new way (Kingdon, 1984/2005: 121) – the IFAPER helped accomplish this by providing a compelling problem definition. The IFAPER was central to establishing a consensus-based problem definition, especially at the MEF management level. It gave management a clear understanding, provided a convincing storyline/trope, and made the problem tractable. What is important to emphasize is that the policy solution consisted of: the incremental sequencing of reforms (‘‘platform approach’’), the MBPI, and government and donor management mechanisms. Alternatively put, PFM reform changed from a condition to a problem when MEF became convinced that something should (problem definition) and could (solution design) be done about it.21 Moving PFM reform to the decision agenda was accomplished by policy entrepreneurs on both the government and donors sides. According to Kingdon (1984/2005: 214), policy entrepreneurs play the role of lobbyists

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for some position or outcome. Policy entrepreneurs in MEF (the SG, Deputy SG, and head of the RCS) and the World Bank saw the opportunity to work together to redefine the issues and put in place structures to manage in a new way. Through the accumulation of past experiences, both sides were acutely aware of the need to reform the way reform was done. Political capital was also used by both sides to bring along more reluctant officials and donors. On the donor side, the World Bank exerted leadership to create a core, and later an extended, donor PFM group. From the MEF point of view the external environment was supportive of the new approach: a growing core of donors supported the formulation of the problem definition and solution design with resources and by monitoring. Subsequently, donors took more of a back seat and put greater trust in MEF, relying more on monitoring instead of direct implementation through advisors and consultants. Government then took on more responsibility to manage the reforms and became more accountable for them, which was a natural extension of Government’s entrepreneurship. The third major question this chapter can address is: what constitutes good public management in low-income, postconflict settings? Given weak national institutions and strong DP influence, the answer to this question is not necessarily straightforward. The argument is that the practices used during development of the IFAPER and the mechanisms and initiatives introduced thereafter constitute good public management in the low-income country development context. This response implies an unorthodox approach in the sense that extraordinary management structures, such as the RC and the DPC, and hybrid initiatives, such as the MBPI, were core features of the good reform process management that drove success. Part of what could be controversial about this approach is that instead of attempting to rebuild weak institutions from scratch, the approach took the ‘‘actually existing’’ institutions as given and worked to strengthen particularly weak aspects of institutional functioning. For example, the RC and RCS resolved the problem of weak internal coordination in MEF; the MBPI addressed the problem of weak incentives; the DPC solved the problem of uncoordinated donor support. In terms of lessons learned, the core features of the approach all played important roles in solving problems. The joint government–donor analytical process led to a consensual problem definition and solution design. The reform vision effectively communicated the long-term objectives while motivating short-term reform actions. The CAP provided clear responsibilities by department, also specifying an estimated timeframe and resource requirements. The MBPI provided incentives that overcame,


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to some extent, capacity constraints. The formal coordination mechanisms for government and DPs allowed for effective communication and monitoring of progress, so problems could be identified and addressed relatively quickly. The analysis implies that the traditional donor intervention model in PFM (and perhaps public sector reforms more broadly) is too rushed and underfunded, at least in LICUS. In Cambodia, it was necessary to define collective problems and solutions, which took time and money – both in terms of initial investment costs and regular maintenance costs. Last, this research suggests that capacity is less static than typically thought. In low-income, postconflict countries, institutional capacity is often thought of as a major constraint (along with political will). The interesting insight of the Cambodia case is that capacity development had very little to do with training and everything to do with incentives and management mechanisms and approaches. The usual thinking among development practitioners is that the level of capacity is exogenous in the short term and thus that capacity development is a long-term process. This analysis shows, however, that capacity in Cambodia’s MEF was transformed over a short (2-year) period. The good news is that significant reforms took place over the first few years with the same political appointees, the same technical and line staff in place and in the same positions, and without any major training interventions. The only aspect that changed was the incentives – both for staff and management. The combination of pecuniary incentives (through the MBPI) with the new, more effective management structures (RC and RCS) and techniques (CAP and quarterly monitoring reports) provided all the incentives necessary to unlock MEF’s latent institutional capacity. This result profoundly challenges the way many DPs think about building capacity. Getting the incentives right goes a long way toward ‘‘capacity development,’’ and is likely a prerequisite for long-term capacity development.

NOTES 1. The findings, interpretations, and conclusions expressed in this chapter are entirely those of the author. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. 2. The statistics and banking sector work was judged relatively more successful than PFM, and among PFM subareas, tax, and customs saw some very modest progress in some technical areas.

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3. See World Bank/ADB (2003), Annex B, for a summary of progress against the recommendations. 4. The conceptual framework for this analytical work program was the ‘‘breaks in the chain’’ approach to service delivery analysis. The World Development Report (2004) identifies at least four breaks in the chain between budgets and desired service delivery: (a) spending on the wrong goods or people (expenditure policy); (b) failure of funds to reach frontline service providers (public expenditure and financial management); (c) weak provider incentives for service provision (civil service reform); and (d) demand-side failures that prevent households from taking advantage of service provision. 5. The CPAR was finalized in June 2004, whereas the IFAPER was published in September 2003. 6. It was decided that NGOs would not be invited to these workshops, to allow space for more candid discussion. 7. The IFAPER was the first official World Bank report to use the word ‘‘corruption’’ in Cambodia. 8. TCAP, set to expire in early 2004, was extended to mid-2004, to allow for completion of some consultancies. 9. World Bank and International Monetary Fund, ‘‘Bank/Fund Collaboration on Public Expenditure Issues,’’ February 14, 2003. 10. Details are found in the three joint mission-aide memoires. 11. Included in Royal Government of Cambodia and Ministry of Economy and Finance (2004b). 12. Once the CPAR was completed, the recommendations were incorporated into the PFMRP as one of the activities of the consolidated action plan. 13. See Brooke (2003). 14. Stage 1 comprises all of those actions necessary to implement Platform 1, as well as those actions for subsequent platforms that need to be initiated early. 15. World Bank et al. (2004). 16. For a full analysis of the genesis and design of the MBPI, see Taliercio (2009). 17. MEF Prakas No. 081, March 10, 2004. 18. See Adam Smith International (2006) and PDP Australia (2007). 19. For an independent view of progress and challenges, see the 2006 External Advisory Panel Report (Adam Smith International, 2006). 20. The 249 participants were selected from 16 MEF departments based on the number of departmental activities in the CAP. 21. The coupling of a compelling problem definition with a convincing policy solution constitutes another definition of what is often called ‘‘ownership’’ by development practitioners.

REFERENCES Adam Smith International. (2006). External Advisory Panel Report. Phnom Penh. Barzelay, M., Gaetani, F., Cortazar, J. C., & Cejudo, G. (2003). Research on public management policy change in the Latin American Region: A conceptual framework and methodological guide. International Public Management Review, 4, 20–41.


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Brooke, P. (2003). Study of measures used to address weaknesses in public financial management systems in the context of budget support. Unpublished manuscript. International Monetary Fund. (2004). Technical assistance in Cambodia FY1998–2003. Independent Evaluation Office. IMF: Washington, DC. International Monetary Fund. (2007). Remarks on macroeconomic developments, public financial management, and private sector development. Delivered by the IMF Resident Representative on Behalf of Development Partners. Phnom Penh, Cambodia. Kingdon, J. W. (1984/2005). Agendas, alternatives, and public policies. Harper Collins Publishers. PDP Australia. (2007). External advisory panel report. Phnom Penh. Cambodia. Royal Government of Cambodia, Ministry of Economy and Finance (MEF). (2004a). Keynote address by Samdech Hun Sen, Prime Minister. At the Formal Launch of the Public Financial Management Reform Program. Phnom Penh, Cambodia. Royal Government of Cambodia, Ministry of Economy and Finance (MEF). (2004b). Public Financial Management Reform Program: Strengthening Governance through Enhanced Public Financial Management. Phnom Penh, Cambodia. Schneider, B. R., & Heredia, B. (Eds). (2003). Reinventing Leviathan: The politics of administrative reform in developing countries. Boulder, CO: Lynne Rienner. Smoke, P., & Taliercio, R. R., Jr. (2007). Aid, public finance, and accountability: Cambodian dilemmas. In: J. K. Boyce & M. O’Donnell (Eds), Peace and the public purse: Economic policies for postwar state building. Boulder, CO: Lynne Rienner. Taliercio, R. R. (2009). Cambodia’s merit-based pay initiative: Building capacity by strengthening incentives. Unpublished manuscript. World Bank & Asian Development Bank. (2003). Integrated fiduciary assessment and public expenditure review: Enhancing service delivery through improved resource allocation and institutional reform. Washington, DC. World Bank & International Monetary Fund. (2003). Bank/fund collaboration on public expenditure issues. Internal memorandum, Washington, DC. World Bank et al. (2004). Third joint PFM aide memoire, July 23, 2004. World Bank. (2006). Cambodia: Halving poverty by 2015? Poverty assessment 2006. Phnom Penh.

ACRONYMS AND ABBREVIATIONS CAP CAR CAS CFAA CPAR DP DPC EAP FMIS IFAPER

Consolidated Action Plan Council of Administrative Reform Country Assistance Strategy Country Financial Accountability Assessment Country Procurement Assessment Report Development partner Development Partner Committee External Advisory Panel Financial Management Information System Integrated Fiduciary Assessment and Public Expenditure Review

206 LICUS MBPI MDTF MEF NPRS PEFA PER PFM PFMRP TWG RC RCS RGC TCAP

ROBERT TALIERCIO Low-income countries under stress Merit-Based Pay Initiative Multi-Donor Trust Fund Ministry of Economy and Finance National Poverty Reduction Strategy Public Expenditure and Financial Accountability Public Expenditure Review Public Financial Management Public Financial Management Reform Program Technical Working Group Reform Committee Reform Committee Secretariat Royal Government of Cambodia Technical Cooperation Assistance Program

CHAPTER 9 MAKING INDONESIA’S BUDGET DECENTRALIZATION WORK: THE CHALLENGE OF LINKING PLANNING AND BUDGETING AT THE LOCAL LEVEL Geoff Dixon and Danya Hakim INTRODUCTION Indonesia is an ethnically diverse nation with large interregional poverty differences and variations in regional population density.1 However, under Suharto’s highly centralized ‘‘New Order’’ regime, local service delivery agencies were administrative instruments of remote national ministries and unresponsive to the individual priorities and problems of varied local communities. The abrupt nature of the 2001 decentralization has been interpreted by some as an insurance policy against fragmentation following the disturbances at the close of the highly centralized Suharto era.2 Fiscal capacity varies greatly between regions, with local governments obtaining revenue from: (i) own sources; (ii) general allocation grants from the center (DAU); (iii) shared taxes and shared natural resource revenue; (iv) specific purpose transfers from the center (DAK); and (v) other revenue, as well as deconcentration and special assistance grants (Dekon and Tugas The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 207–245 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018011

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Pembantuan) channeled through national ministries. Financing was not decentralized in 2001 in line with expenditure assignments.3 While this results in a high level of vertical fiscal imbalance, the minimum DAU transfers must total at least 26 percent of national revenue excluding shared taxes and revenues from natural resources.4 It appears that local governments, far from being starved of funds as under many decentralized regimes, face difficulties in spending the funds available to them, and are building reserves.5 Insofar as there is fiscal stress, it appears to occur at the national level in meeting central spending obligations fuelled by debt servicing and subsidies on fuel and food, rather than at the level of local governments. Funds are being accumulated at local levels at a time of fiscal stress at the national level. The focus of this chapter is on the extent to which the decentralization will achieve its goal of making Indonesian public spending more responsive to local preferences. There is a risk that the inflexible, input focused, budgeting at the center which originally prompted the decentralization is subsequently replicated at the local level by unresponsive local bureaucracies and rigid, input focused, budget preparation. This chapter is divided in two parts. Part A provides background by reviewing the surprisingly limited evidence (available from secondary sources) on the extent to which the decentralization is achieving more responsive public spending. Part B, the core of the chapter, reviews the link between local planning and budgeting in achieving greater responsiveness to local preferences, and the potential contribution of a draft regulation to integrate local planning and budgeting. The authors’ conclude that the intention of the draft regulation to introduce performance budgeting in a medium-term expenditure framework (MTEF) at the local level will test the capacity of local governments. However, one proposal in the draft regulation in particular is quickly achievable and has the potential to contribute to the success of the decentralization, by strengthening policy contestability and flexibility in local budgeting. This involves a combination of input focused estimation of the baseline budget (as currently practiced by local governments), and, as adopted at the national level in some countries, ‘‘change packages’’ proposed by local service units.

BACKGROUND ON THE IMPACT OF DECENTRALIZATION Shah notes that prior to 2001 ‘‘centralization of responsibility and concentration of controls in bureaucracy created a culture of rent seeking and

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command and control with little concern for citizens’ preferences and needs’’ (Shah & Thompson, 2004, p. 31). The 2001 decentralization has the potential to reverse this situation through: district budgets being formulated by local authorities and approved by local elected councils (DPRDs), and a formalized local consultation process in the course of budget preparation (Musrenbang). However, some 7 years later evidence on the responsiveness of government spending to local preferences is relatively limited. While the sudden nature of the 2001 decentralization led to predictions at the time of a breakdown in delivery of basic services (due to ambiguity about functions of subnational governments and absence of implementing regulations), there is little evidence of this occurring. The World Bank (2007) notes that, ‘‘Regarding the quality of service delivery, there is no clear trend’’.6 A recent report adds, ‘‘Disappointed with the relationship between the Regional House of Representatives (DPRD) and the Regional Head following the initial 1999 reforms, the state has set out to rebalance the relationship by reworking the Regional Head’s accountability to the DPRD and by giving the Regional Head a more independent political base through direct election. Now both bodies are expected to, ‘‘y articulate and aggregate y ‘‘the people’s interest’’ (USAID DRSP, 2006, p. 28). Since local officials have closer contact with the local community than officials at the national level, it can be expected that the provision of public services will be more responsive to local need.7 It might also be expected that instances of corrupt behavior under the decentralized regime might be more apparent to local consumers of public services than when the instances occur remotely in Jakarta. However, some concerns about the effect of decentralization are also beginning to emerge. These relate to (1) fiscal equalization issues and (2) effectiveness of local budgeting.

Fiscal Equalization Issues One implication of relinquishing central control over spending has been a parallel loss of vertical accountability of local governments. ‘‘A common concern about decentralization is that the transfer of authority and responsibilities to local governments weakens the central government’s

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ability to close gaps between the richest and poorest areas of the country, aggravating regional inequalities. Districts with the most resources are frequently those with higher school enrollment rates and better school facilities, whereas districts with fewest resources are those with less favorable education indicators’’ (World Bank, 2004, p. 22). Only for DAK allocations is there a line of accountability to the central government for funds provided, while for DAU allocations accountability for appropriate and effective spending by local governments is to the elected local council.8

Inequality between Districts The World Bank notes that ‘‘Since decentralization, income levels have improved across the country, but the richest districts have outstripped the poorest. The national poverty rate declined from 24 percent (1999) to just under 18 percent (2005). Although all districts in Indonesia experienced a decline in poverty, richer districts benefited disproportionately from the recovery. The richest districts saw the poverty headcount halved but in the poorest districts the rate only fell by one sixth. Consequently, the income gap between richest and poorest districts has widened. On average, the richest districts grew above the national average, while the poorest districts were below the national average’’ (World Bank, 2007, p. 115). The Bank notes that poverty is particularly concentrated in regions dependent on agriculture while those for which manufacturing contributes a relatively large share of regional GDP are associated with below average poverty. Resource-rich regions are also likely to enjoy below average poverty, since the equalization principles underlying the provision of financial support to local governments were modified to accommodate the claims of resource-rich regions. While DAU allocations reflect differences in poverty between districts (albeit with a limited weight for equalization in the overall formula), there is no requirement that each district actually spends its DAU funds in a way that alleviates the poverty differences. For example, the World Bank found that ‘‘poorer districts do not spend more on education from their budget than richer districts despite receiving a larger allocation from the DAU’’ (World Bank, 2003b, p. 23). A World Bank study refers to ‘‘strikingly wide range in the per capita level of education expenditures across districts’’ (World Bank, 2004, p. 20).


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Inequality within Districts In addition to the risk under decentralization of greater inequalities between districts there is a risk of growing inequalities within districts. ‘‘Recent government expenditure has largely been concentrated in urban centers, captured by politically connected elites, and continues to disenfranchise the rural poor y Ensuring such ‘internal equality’ is at least as important as tackling ‘center-periphery inequality,’ both to address community grievances and to prevent elites from mobilizing based on local discontent. This requires building strong, just, accessible and legitimate institutions with a focus on delivering services, fighting corruption, improving transparency, increasing capacity, and ensuring participation’’ (Barron and Clark, 2006, Preface).

EFFECTIVENESS OF LOCAL BUDGETING While one set of concerns about decentralization relates to ineffective equalization across and within regions, another relates to the effectiveness with which local governments are spending the substantial allocations they receive from the center. Growth in regional inequality, while in part reflecting the limited effectiveness of fiscal equalization arrangements, can also reflect shortcomings in the procedures by which grant funds are budgeted by individual local governments. The current level of sub-national government revenues is high; therefore the focus should shift towards an efficient use of government resources rather than the mobilization of additional resources. One key element in ensuring spending efficiency is local governments’ performance measurements to allow comparisons across districts. Strong incentives for prudent use of local public revenues could be structured into the system of intergovernmental fiscal transfers. (World Bank, 2007, p. 134)

While there is some evidence of diversity in the way in which districts prepare their budgets, little is known about the allocative and technical efficiency of local budget preparation.9 Periodic review of budgeting processes at the national level through analytical instruments such as public expenditure reviews (PERs) and PEFA diagnostics generally do not occur at the local level of budgeting. However, the World Bank has undertaken regional PERs in sensitive provinces such as Aceh and Papua, while Indonesia’s external audit agency (BPK) undertakes audits of district financial performance. In addition, ad hoc studies are now beginning to

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emerge on a sector basis, such as the SMERU report on DAK allocation and a World Bank report on the decentralization of education spending (Usman et al., 2008; World Bank, 2004). The following section draws on these diverse studies.

Capacity Gaps at the Local Level Centralization of budgeting at the national level that existed prior to 2001 militated against the development of policy-based budgeting skills across Indonesia’s 465 local governments. Nor was capacity development for policy-based budgeting a part of the decentralization process. Given the ‘‘sink or swim’’ nature of the 2001 decentralization (as opposed to a ‘‘developmental approach’’), these policy skills may not automatically emerge as a consequence of devolution per se and there is a risk of limited capacity at all levels: mayors, DPRD members, local government officials, and civil society groups, but particularly in local service agencies (SKPDs), on whom the responsibility for making service delivery responsive to local preferences ultimately rests. Policy skills involve the ability to diagnose social and development priorities, and to translate these diagnoses into operational policy initiatives with clearly estimated impacts and budget costs, to prioritize these initiatives and to implement the most cost effective among them through budget procedures, which ensure allocative flexibility. The predecentralization budgeting arrangements instead placed a premium on accounting for inputs, rigid budget control, and implementation of policies remotely determined in the central office of the national ministries. The World Bank notes that there are ‘‘a number of areas in which local government is particularly weak, including planning and budgeting, accounting and reporting, undertaking external audits, regulation, and the management of public debts and investment y this is a challenge across Indonesia where decentralization has meant local government employees are no longer only responsible for the implementation of central government policies but also for designing and implementing locally appropriate policies. This requires the ability to allocate funds equitably across districts; to identify short-, medium- and long-term development priorities and translate these into strategic plans; to understand and tackle poverty; as well as to identify and rectify sectoral and geographical gaps. These technical skills do not currently exist and are unlikely to manifest simply through responsibilities being devolved’’ (Barron and Clark, 2006, p. 16).


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Consequence of Weak Capacity for Local Budgeting The passage of the decentralization laws cannot of itself be assumed to ensure allocative and technical efficiency in local budgeting if input focused, inflexible, and closed budget processes at the national level have subsequently been replicated at the local government level. If district budgets are based on repetitive line item budgeting with no focus on the results sought in local planning documents, or consultative processes with the local community, and there is no mechanism for ‘‘policy contestability’’ when local budgets are being prepared, there is a risk that inflexible, input focused, budgeting at the center that prompted the decentralization is subsequently replicated at the local level. Unresponsive centralized budgeting risks being replaced by unresponsive decentralized budgeting, and the rationale of the decentralization – to bring budget decisions closer to those affected by them – is weakened. A related risk is that local budgets are hijacked by local elites. In principle, elected councils are a safeguard against this. However, ‘‘In general, local council representatives often lack proper education and political experience. The level of policy awareness and the quality of political debate is poor. Budgets are incremental rather than policy based (as would be implied if they are to be more responsive to local preferences). Although they are expected to hold mayors and district heads accountable for their performance, these legislators are often ill-prepared to do so. Because of weak fiduciary oversight, opportunities for corruption and nepotism are on the rise’’ (World Bank, 2003a, p. iv). The Musrenbang process, whereby prebudget consultations are undertaken with the local community, is another safeguard against unresponsive local bureaucracies replacing unresponsive national bureaucracies. ‘‘Nevertheless, barriers still exist which prevent community organizations from participating in public policy. Access to governmental information is uneven and impeded, more often than not, by a bureaucratic preference for secrecy. Civil society groups, moreover, are often long on enthusiasm and indignation, but short on political savvy’’10 (World Bank, 2003a, p. iv). Lack of flexibility in local budgeting is reflected in under-spending of available resources (particularly due to weak project management) and a build up of reserves. ‘‘Large reserves indicate inefficiencies in the budgeting process that may not be easy to remove. First, budget approval processes need to be streamlined, which will require a change to Law No. 32/2004. Second, local governments need to build capacity to better budget and spend resources. Third, Law No. 33/2004 stipulates that transfers of shared

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revenues must occur on a quarterly basis, which requires timely production estimates from the sectoral ministries’’ (World Bank, 2007, p. 127). The Bank also proposes that the DAU allocation mechanism should be changed by eliminating the link to coverage of the subnational wage bill. Overall, public financial management systems at the sub-national level are weak and risks of corruption are very high. Findings from an in depth-assessment (and rating on a 100 percent scale) of selected local government financial management performance in 15 local governments has shown that the institutional and human capacity to manage local funds is still low and that financial management processes are still weak, and lacking in transparency and accountability. (World Bank, 2007, p. 126)

ALLOCATIVE EFFICIENCY OF LOCAL BUDGETS Allocative efficiency of budgeting refers to achievement of the most appropriate combination of spending across and within sectors (such as health vs. education) and between recurrent and capital spending (infrastructure vs. administrative and operating expenditures). It is closely linked to the replacement of input focused budgeting by results focused budgeting. The introduction of performance budgeting presents a major challenge in Indonesia, even at the national level. Experience in the Ministry of Finance and Bappenas indicates the stubborn persistence of the input focused budgeting approach, based on detailed ‘‘bottom up’’ quantifying and costing of inputs, without reference to impact of requested changes on GOI planning objectives. Budget requests are linked to the objectives described in planning documents in only a cursory fashion.11 With considerable diversity in budgeting practices across local governments, and only limited performance information (PI) available at the district level, there is little available information on allocative efficiency of local budgeting, or whether the right balance is being struck between competing local priorities, both between sectors (does high administrative spending crowd out health spending?) and across localities (does spending in towns crowd out spending in rural areas?). USAID notes that ‘‘It is nonetheless apparent that there are significant differences in service achievement across localities and sectors. While few improvements in the quality and reach of services can be seen in general, a few regions have been innovative. On the negative side, in cases some slippage has been experienced in reach and quality (e.g. immunization, early child nutrition). There is also evidence that infrastructure stock for health, schools, roads, and water works are suffering from underinvestment in selected regions’’ (USAID, 2006, p. 22).


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Sets of Minimum Service Standards: SPMs The central government has some limited control over the way in which local governments use their unconditional grants. First, an annual budget circular is issued by MOHA indicating the national priorities to be taken into account in preparing each local budget. Second, in an attempt to ensure that multiple funding streams across more than 460 local governments are consistent with implementing the obligatory functions of local governments, as well as the national planning goals in the Presidents RPJM and other documents such as the MDGs, the GOI introduced (subsequent to decentralization) a set of minimum service standards (SPMs), set by national ministries for their respective sectors.12 To date the creation of SPMs appears to have had little impact on local budgeting, both because of the diverse and sometimes nonoperational nature of the standards themselves, the limited PI available in individual local governments on gaps against standards and the failure of budget preparation templates used at the local level to link budget requests by local service units to achievement of minimum standards.13 Current reporting systems provide little information on the extent to which local governments are spending grants in accordance with national priorities. Systematic collection of soundly based PI is a high priority next step in implementing the decentralization. Given the somewhat blurred assignment of responsibilities between local and national governments, it is also unclear where meaningful responsibility for implementing a SPM resides. Under Regulation 108/2000 heads of regions are accountable for achieving the standards. However, they have limited control over most of the relevant spending decisions.14 However, at the very least, they are unlikely to achieve their desired end without the improvements in local budget preparation discussed in Part B of this chapter.

Underinvestment in Infrastructure? A further aspect of the allocative efficiency of local budgets relates to recent concerns about underinvestment in infrastructure now that spending decisions are left to district budgets. Districts provide information only on the state of regional infrastructure in the sectors that receive DAK allocations (used by MoF to determine the allocation of DAK by sector and region). ‘‘Subnational governments’ development spending on infrastructure has not matched the rate of growth in their real revenues’’ (World Bank, 2007,

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p. 82). The Bank notes particularly under-maintenance of subnational roads and local water supply. The World Bank suggests that, ‘‘This may in part reflect sub-national priorities, with education and health occupying an increasing proportion of sub-national development spending, but it is also possible that local governments have limited ability to manage increased infrastructure spending. The lower spending on infrastructure could also reflect planning delays, in which case the balance between infrastructure and other spending categories may revert over time.’’ In this respect, it is of some concern to note that subnational governments’ bank deposits have rapidly accumulated from less than Rp 10 trillion in January 2001 to more than Rp 70 trillion (2.6 percent of GDP) in April 2006, suggesting an inability or an unwillingness of subnational governments to spend their full budget allocations. A more detailed study is required to determine why subnational government infrastructure investment has not kept pace with subnational government revenues, particularly given the low quality and poor access indicators prevalent for much of Indonesia. Accumulation of reserves has been greatest in resource-rich provinces.

TECHNICAL EFFICIENCY OF LOCAL BUDGETS Differences between local governments may also occur in respect to the technical efficiency of their budgeting, particularly in regard to wasteful spending due to overmanned administrative structures, corrupt use of funds, and wasteful asset management.

Overspending on Local Administration The largest spending item of sub-national governments is government administration, followed by education. Spending on administration is particularly significant at the provincial level (38 percent of total spending) and the district level (30 percent). This is in stark contrast to what is found in more modern economies, which typically allocate 5 percent or less of their budgets to such expenses. The largest items in administrative spending include salaries and allowances for the local head of the executive and his/her staff and parliamentarians, as well as public office building rehabilitation and construction (World Bank, 2007, p. 116).

The Bank notes that districts account for more than two-thirds of all personnel spending, or 41 percent of total government apparatus spending. ‘‘Public spending on government apparatus and supervision increased by 110 percent in the period 2001–05 y. In 2001, spending in this sector


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accounted for 9 percent of the total national budget, increasing to 12 percent of total national expenditures in 2005. Sub-national governments alone account for more than 67 percent of the increase in spending on government apparatus’’ (World Bank, 2007, pp. 25–26). However, ‘‘Full coverage of the sub-national civil service wage bill provides a disincentive for sub-national governments to streamline their civil services. The main variable determining the basic DAU allocation is a district’s wage bill. Any cut in a district’s wage bill (without a concomitant cut in all other districts) implies a decrease in the basic allocation of the DAU (with a 1-year lag). As mentioned, the basic allocation is about half of the total DAU. Consequently, this component of the DAU formula effectively eliminates half of any reformist government’s savings in its wage bill savings by reducing the DAU’’ (World Bank, 2007, p. 121). The PER concludes that high levels of administrative spending particularly crowd out spending in health and agriculture. In contrast, ‘‘the cost burden of the oversupply of teachers for primary and junior secondary schools alone reaches over Rp 5 trillion, or about 8 percent of the total education budget’’ (World Bank, 2007, p. 117).

Misuse of Funds Limited evidence on the inappropriate use of funds is available from reports of the Supreme Audit Agency (BPK). A recent BPK report on budgeting in ten provinces found that more than half of the regencies and municipalities misappropriated funds received from the central government.15 BPK is reported as stating that in the second semester of 2007, there were ‘‘y 733 indications of administrative malfeasance in local governments worth Rp 20.12 trillion, 193 indications of budget inefficiency worth Rp 459.27 billion and 214 indications of budget misuse worth Rp 2.1 trillion.’’16 This was attributable to lack of transparency and accountability as well as insufficient internal control. It will always be difficult for the central government to ascertain whether it is receiving value for money from its unconditional grants to local governments. Although the national Ministry of Finance collects detailed data on local spending MOHA does not collect data on service levels, while the central government has no knowledge of the cost in each district of providing local health or other services. The technical efficiency of local spending is therefore a ‘‘black box.’’

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CONNECTING PLANNING AND BUDGETING AT THE LOCAL LEVEL Where there is limited information of a direct and evidential nature on the allocative and technical efficiency of local budgeting, it is also possible to assess the potential of the decentralization to achieve its objectives through an institutional review of the potential for local planning and budgeting procedures to link local spending to local preferences. A full review is outside the scope of this chapter. However, Part B examines the potential of a new regulation (currently being drafted by the Ministry of Home Affairs (MOHA)) for building a bridge between local planning and budgeting. Local Planning and Budgeting Processes Part A of this chapter suggests that, on the limited evidence available, decentralization may not be completely fulfilling its objective of making public spending more responsive to local preferences. The challenge is to avoid cloning at the local level the rigidities in central budgeting that originally motivated the decentralization. This requires local budgeting procedures that are more policy based and responsive to local needs. Local planning documents are the platform for articulating and prioritizing local needs and are the formal expression of local preferences. Following the election of the local mayor his/her 5-year development plan (RPJMD) is enacted by the local council.17 District work plans (RKPDs) are then developed annually in support of the RPJMD, based on the work plan proposals of local service agencies (Renja-SKPDs). Each local work unit (SKPD) prepares a 5-year plan (Renstra) and a 1-year work plan (Renja). The 1-year plans are combined by the district administration into the annual district work plan (RKPD), which forms the basis of annual budget preparation. These somewhat complex local planning and budgeting processes are described in Annex 3 and illustrated in Fig. 1, although precise procedures appear to vary between districts. Suffice to say that on paper local budget preparation appears to be firmly based on a platform of short- and long-term local planning strategies. Any lack of policy contestability in local budget preparation does not reflect the absence of a formal set of planning procedures at the local level. However, as revealed by the budget request forms completed annually by local spending units, in reality local budget preparation is more an exercise

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Making Indonesia’s Budget Decentralization Work Medium Term Plan

District Budget

Work Unit Budget Change package

Planning target 1 Planning target 2

Proposal A1 (rejected) Proposal A2 (accepted) Savings (transfer to fiscal space)

Fiscal space (Proposal A2 & B3 funded)

Local Service Unit A

Baseline Baseline

Baseline

Savings (transfer to fiscal space) Change package Planning target 3 Planning target 4

Local Service Unit B

Proposal B3 (accepted) Proposal B4 (rejected)

Fig. 1.

Change Packages, Savings, and Fiscal Space.

in cost accounting than policy choice. At present, planning and budgeting at the district level proceed on largely separate tracks as indicated below: planning priorities are described in the district’s 5-year plan (RPJMD) and its annual work plan (RKPD), and are determined with limited reference to the cost of implementing the priorities. The planning function has focused on prioritization of spending plans without costing of specific measures for achieving planning priorities, and the local budget is determined mechanistically through the detailed costing of inputs, without connecting proposed variations in input levels to impacts on the planning priorities. Thus the strong planning focus that exists at the local level fails to connect procedurally with the budget requests made by local service units. These are built up on activity-based budgeting principles from assumed levels of output (and associated unit costs) without the proposed changes in outputs being linked to achieving planning objectives.18 In a complex, paperintensive and time-consuming budget preparation process, detailed financing requests crowd out performance budgeting justifications, and planning and budgeting run on parallel tracks, with planning relatively unresponsive to budget realities and budgeting unresponsive to the planning analysis.19

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This precludes a policy contestability culture in budget preparation in which options for achieving specific planning targets are prioritized on the basis of their cost and policy benefits. If the annual budget fails to respond flexibly to the local planning process, but is driven by inputs and last year’s allocations rather than targets and next year’s results, the potential of decentralization will fail to be realized. Unresponsive budgeting at the national level will be replaced by unresponsive budgeting at the district level.20 This weakness in connecting budget requests to achievement of planning priorities occurs despite the current requirement for the budget requests of local service units (SKPDs) to specify the funding they are seeking in a multiyear context, that is, for the coming budget year and one out-year.21 Why do local planning and budgeting operate on separate tracks rather than forming a single integrated policy contestability process? Planning and budgeting currently occur at different stages in the year (planning from January to May and budgeting from June to October), involve different local officials, and focus on different issues. Local planning priorities are set on a needs or demand driven basis, without reference to the cost of possible measures or how they should be programmed to meet an annual budget constraint. Local budgets, on the other hand, are based on activity-based budgeting principles, that is, the requests for budget allocations by SKPDs are built up from the projected outputs and unit costs for each of their activities, and are not based on the impact of proposed output variations on the achievement of planning targets. The district budget committee decides budget allocations to each SKPD without knowing whether there are better ways of achieving local planning targets through alternative allocation decisions. This absence of policy contestability allows current spending patterns (for which resources are already assigned) to crowd out new spending allocations (which may require resource reallocations). It is true that program objectives are entered in the budget request forms filled out by each SKPD. However, merely stating the objective of the program provides little guidance to the local budget committee in deciding whether the budget allocation for that program should be greater or less than the amount requested, or the previous year. A policy contestability process for preparing the budget requires, for each planning target, a knowledge of different options for achieving the target, the cost of each option and its impact on target achievement (see section on Element 2 below). The best set of options across all programs (consistent with available funds) can then be chosen for inclusion in the budget.


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The Draft Regulation on Local Planning and Budgeting Breaking down the ‘‘Chinese wall’’ between local planning and local budgeting is, in the view of the authors, a key to ensuring that local budgeting is responsive to local preferences. This requires the insertion of a policy contestability process in preparation of the local budget, in which spending options (from the planning side) are prioritized on the basis of benefits and costs (the latter from the budgeting side). This requires an overlap to be introduced between the two processes, in which planning and budgeting information is considered simultaneously rather than sequentially. The period since 2001 has seen implementing regulations for the decentralization progressively being worked through. Laws 17 and 33 call for an end to ‘‘separate tracking’’ of planning and budgeting by requiring district budgets to be prepared in a performance-based MTEF. This is to commence in 2009. Achieving this integrated planning/budgeting process is the object of a new regulation on planning and budgeting currently being drafted by the MOHA. The effectiveness of this new regulation will have a major effect on the responsiveness of local budgeting to the local preferences expressed in district planning documents.22

Three Reform Elements A challenge for the draft regulation on local planning and budgeting is to introduce much simpler and more robust procedures for performance budgeting than have been considered to date at the national level. Given local capacity constraints, district budget reform needs to be simple, common sense and ‘‘bomb-proof.’’ To be successful the new regulation needs to build on existing processes and budget request forms rather than replacing them with an entirely new approach, which causes confusion and may not in reality be implemented. Within these limitations, the key design issue is the way in which local planning and budgeting processes can be combined. The draft planning/budgeting Permen contains directives for the preparation of the district strategic plan (RPJPD, RPJMD), district annual plan (RKPD), and the strategic and annual plans of district service units (Renstra SKPD and Renja-SKPD) using a performance budgeting approach and a MTEF.23 The strategy adopted is to preface the existing

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input-based budgeting process with a policy prioritization stage, which is much more ‘‘planning connected.’’ The regulation is still in draft form and stops short of a fully enumerated set of procedures for connecting local planning/budgeting. However, a key change is that a more formal process for preparing the annual district work plan (RKPD) is to be introduced, with each district using a new suite of forms for preparing its work plan. The new forms will support (at last potentially) a policy contestability process in preparing the district work plan, with the approved changes to programs and activities then migrating into the existing detailed and input-based budget preparation process. This is a significant change to the status quo. In the period since decentralization the Ministry of MOHA has been content to leave the format of the annual district work plan (RKPD) prepared each May largely to each district to decide.24 This has contrasted with the tightly defined templates to be used for detailed budget requests from service units to the local budget committee, prepared in June, which are prescribed in Permen 13 on local budgeting processes. Importantly, the new forms to be used by each district for preparing its annual work plan involve three elements: Element 1: A requirement for each local service unit to provide more detail on program targets and indicators by program and activity, including gaps in the achievement of targets for each program. Under Element 1 spending units are asked, when submitting their proposed workplans, to identify program objectives, performance indicators, gaps to be filled, together with targets for gap filling, and the funding needed for target achievement. These PIs are drawn from the district strategic plan (RPJMD). Element 2: A change in local budget preparation in which local service units break out of their detailed activity-based budget requests information about their proposed new initiatives (‘‘change packages’’) to achieve planning goals, or savings where existing spending contributes little to goal achievement (such as padded out administrative spending). For each ‘‘change package,’’ information is to be provided about the cost of individual proposals in the new budget year and two following years (‘‘out-years’’) and the impact of the proposal on the achievement of relevant planning targets. Element 3: A requirement for local service units to provide multiyear costings both for their baseline budget and the costs of their new


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initiatives. This ensures that budgeting takes place within a MTEF. Where a local service unit does not propose any new initiatives for the next budget year the previously established forward estimate for that year becomes its initial ceiling for its new budget request. As currently drafted, the new regulation on local planning and budgeting marks a significant step from input-based budgeting to a performance approach, incorporating the best practice elements of results focused budgeting in an MTEF. The regulation adopts a quite ambitious threeelement approach to linking planning and budgeting – comprehensive reporting of performance indicators at both the program and activity levels of the budget classification, identification of new initiatives and introduction of an MTEF. These three elements are closely connected. In particular, the change package proposed by each local service unit under Element 2 should be grounded in the analysis of gaps against planning targets provided under Element 1. The requirement for SKPDs to elaborate their requests for both the next budget year and two subsequent out-years under Element 3 ensures that planning priorities and their operating cost implications can be programmed over several budgets in a rolling process (Box 1).

Local Capacity Constraints The key question is whether the three-element approach is consistent with capacity constraints in local government. We conclude that the combination of the three elements presents achievability challenges, which may limit its implementation by many local governments. A large literature exists on the replacement at national government level of annual input focused incremental line item budgets by more flexible, results focused, budgeting within a MTEF. Targets derived from planning documents such as Poverty Reduction Strategies, Millennium Development Goals, 5-year plans and national sector strategies are identified and programmed into annual budgets through a rolling 3-year forward estimates process that focuses on sector strategies and policy contestability. However, where there is weak local ownership of the shift to policy-based budgeting, and despite extensive technical assistance from donors, achieving success with performance budgeting/MTEF reforms has proven a slow task, including at the national government level in Indonesia.25

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Box 1. Implementation of the Change Package Approach. The MOHA draft regulation for integrating local planning and budgeting stipulates a change in local budget preparation in which local service units (in effect) identify ‘‘change packages’’ (new initiatives) in their budget requests, including the 3-year cost of the proposed changes and the impact on planning objectives. Examples of new initiatives are new local capital works projects, increased maintenance spending on local roads or schools, and boosting of service packages provided by local health centers. This is a simple and common sense approach to introducing an element of policy contestability to the budget preparation process It enables the local budget committee to design a policy-based budget without the range of PI required by full performance budgeting. Budget allocations are assigned to approved initiatives in support of local planning goals, with necessary fiscal space for the initiatives being ensured through the detailed negotiation of each spending unit’s baseline budget. There is no necessary correspondence between the agencies asked to contribute to additional fiscal space through lower allocations in their baseline budget, and beneficiaries of additional resources. The change package approach is consistent with continuing the current input focused mode of the baseline budget request (which characterizes Indonesian budgeting at both national and subnational levels). The approach adds a performance focus to traditional input budgeting by requiring each local service unit (SKPD) to break out from the input focused detail of its budget request any new policy proposals (‘‘new initiatives’’) embedded in the request. Whereas the Renja-SKPD currently comprises a listing of SKPD priorities for the coming year in a nonfinancial (i.e., planning) environment, SKPDs will, under the draft regulation, be required to provide a list of proposed new initiatives for implementing the priorities, including the impact of each proposal on local planning targets and its multiyear cost to the budget if adopted. The change package proposed by each local service unit would comprises (one or more) policy-based proposals (spending and/or saving) for inclusion in the draft budget. While the new regulation is not yet finalized, in the current draft the budget request forms ask each local service agency to break its proposed new initiatives into ‘‘activities


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which are removed,’’ ‘‘activities that are modified,’’ and ‘‘new initiatives.’’ The intention is for preparation of the RKPD to be based on both performance and financial information, rather than prioritizing occurring on the basis of only performance or only financial information. This strengthens the link between planning and budgeting, rather than budgeting being a prioritizing exercise without reference to costs and budgeting being a mechanical exercise for financing inputs. Each new initiative would need to be costed by the proposing local service unit using a traditional input focused approach, with costs ideally being agreed with the local budget office. Each proposal making up the service unit’s change package would be submitted to the local budget committee on prescribed templates with 3-year costings (since linking of planning and budgeting is itself linked to the introduction of an MTEF). Importantly, the new initiative information is intended to support a policy contestability process in the district budget committee (in May of each year) to link the planning and budgeting processes. The district budget committee will then be in a position to approve new initiatives from SKPDs up to the limit of resources available for the district budget, basing its choice on the impact of each proposed initiative on local planning targets (and, hopefully, eventually national minimum service levels (SPMs)), and its 3-year cost (including operating and maintenance costs of completed projects). The budget committee’s approved list of new initiatives is then reflected into the ceilings transmitted to each SKPD to use in June when preparing its (conventional and detailed) input-based budget request. While each SKPD subsequently applies for funding for the inputs for individual programs and activities in the usual way, the new initiatives approved earlier, when the annual district work plan was being prepared, will be embedded in its input-based request. However, the draft Permen does not include a description of the actual stage-bystage business process for using the proposed new initiatives to prepare the RKPD. This will need to be included in documents to support the new Permen, including a manual for implementing the new forms.

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At the national level in Indonesia strongly entrenched input-based budget preparation has stubbornly resisted migration to a performance focus and medium-term framework, despite these reforms being mandated in Indonesian legislation and acknowledged in the budget request forms filled out by each national ministry. It has proven very difficult to orchestrate the necessary change in perspective, both at the level of central coordinating ministries and spending ministries, as officials find new approaches difficult to understand, are reluctant to take risks, cling to familiar and tried procedures or do not complete the parts of their budget request forms that they do not understand. Is it plausible that national coordinating ministries that find it difficult to themselves introduce performance budgeting/MTEF reforms will be able to orchestrate the necessary change in attitudes and processes across more than 460 local governments who in any case submit their budget requests to the local rather than the national level? Progress at the national level with local implementation of SPMs, does not provide reassurance. Equally, however, allowing local budget processes to ‘‘take care of themselves’’ is also not an option. Replacement of the (pre-2001) regime of centralized budgeting for local areas by decentralized budgeting that pays little attention to local planning processes risks defeating the intention of the decentralization to make budgeting more responsive to local communities. It also risks creeping recentralization as national ministries try to compensate for emerging gaps and distortions in local spending through expansion of parallel national programs for filling the gaps (Annex 2).26

CONCLUSIONS Introduction of sophisticated budget preparation techniques that have not yet been managed successfully at the national level across more than 460 Indonesian local governments involves a challenge. While there appear to be wide variations in the capacity of local governments, given capacity limitations at the district level what are the chances of more sophisticated results focused budgeting succeeding at district level when it has yet to succeed at the center? Elements 1 and 3 in particular may take some time to implement effectively. In regard to Element 1, given the absence of PI at the local level, it may be difficult for local service units to provide the requested detail on program targets and indicators by program and activity, including gaps in the achievement of targets for each program. A process of installing PI


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data collection and monitoring systems will be required by each local government, using national criteria and definitions. In regard to Element 3 (the requirement for an MTEF), the intention is that local service units should submit in their budget requests the 3-year cost of maintaining their existing service levels. In the absence of new policy proposals from the service unit, the first out-year estimate for an SKPD will then become the ceiling for its next year’s budget request. However, this means that the forward estimates must be robust and accurate, excluding any padding for hidden increases in costs or extension of service levels. This will be difficult to achieve when the forward estimates are generated by the local spending units rather than the budget office. The use of an MTEF for local budget preparation will also require projections of the district resource envelope. Since on average around 90 percent of district revenues are provided by transfers from the central government, this would necessitate the central government making forward estimates available for transfers to lower levels of government. The preparation of such FEs of grants to lower levels of government may not currently be envisaged by the Ministry of Finance. In the authors’ view the achievability of the first and third elements of the draft regulation is limited at present and they are unlikely to be effectively implemented in the initial years following promulgation of the new regulation. Since they are goals to work toward there is merit in recognizing them formally in the new regulation. However, in the shorter term they are unlikely to prevent continuation of input focused budgeting, which lacks a link to planning targets based on policy contestability. The second element of the draft regulation, however, ranks much higher on the achievability scale and offers more hope of a ‘‘quick win’’ in local planning/budgeting reform. Element 2: The ‘‘Change Package’’ Element Given the challenges involved in introducing performance-based budgeting in Indonesia’s input budgeting environment, it is desirable that the draft regulation preserve as much of the existing local budget preparation processes as possible, but nonetheless insert a ‘‘performance wedge’’ that can be built on in future years. The second and most innovative element in the draft regulation achieves this through the adoption of a ‘‘change package’’ approach to annual budget preparation. This is an approach intended to increase the flexibility and deepen the policy content of annual budgets, and has been adopted

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by countries as diverse as Ireland, Chile, and Australia. The change package approach is also incorporated in commercial software for government budget preparation. The change package approach focuses on the impact of variations in program allocations on the achievement of government objectives. This contrasts with full performance budgeting, which focuses more holistically on the impact of total program spending on the achievement of objectives, requiring clearly defined program objectives, program targets, performance indicators, estimates of gaps against targets and program allocations based on the prioritization of gap filling actions. Where change packages are used to assist budget preparation spending agencies submit their proposed ‘‘change packages’’ accompanied by the performance impact of each proposed change, as well as its cost. Available fiscal space is then distributed by the budget coordinating committee among competing change proposals from line agencies on the merits of the proposals, that is, through a contestability process. Approved proposals are then included in the ceiling for the successful line agency and its detailed input-based budget requests. The change package approach appears similar to Chile’s ‘‘bidding fund’’ approach. ‘‘The bidding fund is a pool of unallocated resources to which ministries can submit bids either for new programs or to substantially extend or reformulate existing programs. Ministries submit bids in a standard format that incorporates information on (the) contribution to the relevant agency’s overall strategic goals and outputs. These bids are sent to the Ministry of Planning, where they are reviewed and graded. They are then included in the relevant ministry’s formal budget proposal’’ (Shah & Shen, 2007, p. 166). Under performance budgeting budget allocations are directly linked to program objectives. While it is desirable to know the impact of program spending on the achievement of objectives (as under full performance budgeting) this is frequently not possible, particularly at the local level, where performance indicator information is limited. Moreover, where indicators do exist there is limited capacity in local service units and budget committees to directly link particular indicator values to a set of detailed budget requests by economic line item. Adoption of a change package approach is a compromise that improves on traditional input focused budget preparation based on often arbitrary adjustments to previous years’ allocations, but without of the need to link total program allocations to a comprehensive set of program objectives. Moreover, the change package approach should be more familiar to local governments than full performance budgeting. They are used to dealing with


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local capital works proposals as (in effect) change packages, and Element 3 generalizes this across both capital and recurrent spending in an integrated budgeting framework. Earlier in this chapter, it was stated that the strong planning focus that exists at the local level fails to connect procedurally with the financial allocations for local budget programs and activities. The review of new initiatives proposed by local service agencies introduces a formal link between planning and budget preparation (through a policy contestability process), which is missing under the current planning and budgeting procedures. It drives a ‘‘performance wedge’’ into the existing input focused budgeting process without the need for a full set of performance indicator data such as that requested under Element 1 of the draft regulation.27 This should enable the local budget committee to prepare a budget in which available fiscal space is flexibly assigned to those initiatives, which provide the most cost effective support for planning goals.

Fiscal Space at the Local Level Proposed change packages can be financed in district budgets only to the extent that local ‘‘fiscal space’’ is available. It is important to note that, under the proposed approach, the baseline budget for each local service unit continues to be renegotiated each year (rather than the starting point for budget preparation being an existing set of FEs).28 The size of fiscal space for the initiatives would be set through the current practice of detailed negotiation of each spending unit’s baseline budget, including cuts in baseline budgets by the traditional process of detailed line item negotiations or through formulaic cuts such as efficiency dividends. Local budget committees will be able to create fiscal space for performance-orientated change packages, which they wish to fund by clamping down harder on less productive spending in the same service unit or in other units in the district at the budget hearing stage. These cuts will make additional fiscal space available for achievement of planning. This is difficult under the present practice of undertaking planning and budgeting sequentially rather than as a single integrated budget preparation process based on policy contestability. Since the traditional negotiation between the budget committee and each spending unit on the details of the unit’s baseline budget gives the committee an element of control over the size of local fiscal space through the

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downward pressure it can exert on agency baselines, policy contestability’ relates not only to the selection of competing proposals from the change package submitted by each spending agency but also to trade-offs between funding of new measures and funding of agency baseline budgets.

Will it Work? As currently drafted, the new regulation adopts a quite ambitious threeelement approach to linking planning and budgeting. However, the following should be noted: as mentioned above, district planning/budgeting processes are already overcomplex, and integration of planning and budgeting should be achieved via a reduction in complexity rather than adding to it, performance indicator data is often unavailable at the district level, and recognition of spending priorities can in any case often be based on qualitative rather than quantitative information about local needs and preferences, service delivery agencies generally lack the analytical skills required to analyze their program performance, and the large number of local governments, and even larger number of local government work units, precludes assistance for budget reform being provided on an individual basis to each. While ambitious performance budgeting/MTEF reform agendas promote comprehensive and coordinated change, they do have a downside. Where capability is limited ambitious reform agendas can also obscure entry points and simple first steps. In the face of capacity constraints such as exist at the local level there is a case for applying ‘‘occams razor’’ to the design of budget reform, that is, ‘‘the simplest solution is the best’’ at least as a starting point. While the three-element approach in the draft MOHA regulation involves a quite ambitious approach to integrating local planning and budgeting processes, Element 2 provides a potentially ‘‘stand-alone’’ beginning point on the road to performance budgeting by introducing a policy contestability stage based on proposed new initiatives. This is more achievable in the light of district capacity constraints than a ‘‘full’’ three-element approach (in which the new budget is based on detailed performance reporting, plus new initiatives plus FEs of existing policy).29 It would focus reform actions by local governments unused to managing reform on those changes which make the most immediate contribution


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to more policy-based budget preparation. Fig. 1 provides a road map for building on this first step. Postscript on Regional Diversity Budget reform at the district level differs from reform at the national level in one major respect. At the level of the national finance ministry, an uncooperative director general of a budget department, or a disinterested secretary general of a finance ministry, can turn what is on paper a wellplanned reform program into slow progress on the ground. As is well recognized in the reform literature, a high level champion of reform is often necessary to break through institutional rigidities. At the local level, however, the eggs are not all in the one basket. Experience suggests that at any one time there are likely to be at least a few local governments with a reformist outlook, strongly held local goals and an interest in making their local budget work harder to achieve the local goals. The minority of better managed local governments not restricted by conservatism or capacity limitations could devote time and energy to Elements 1, 2, and 3 simultaneously rather than (as for less capable localities) focusing primarily on Element 2.30 More progressive local governments can both provide a test bed for reform, and a demonstration to other localities that reform is in fact do-able. In Indonesia even a 5 percent success rate across local governments would mean around 25 local budgets for which a policy contestability process connects local planning and budgeting, and 25 sets of officials capable of managing rudimentary policy-based budgeting. Even if processes remained unchanged in the remaining 75 percent of jurisdictions this would be a clear advance on the current situation.31 In other local governments the introduction of Element 2 might be a reform wedge. A key reason why performance data is not assembled by districts is that there is no demand for it under the current input-based approach to district budgeting. DAU grants are forwarded to local governments regardless of the benefits they generate while DAK grants are made by MoF without systematic reference to performance gaps. Since there is limited accountability of districts for the impact of budgets on planning targets there is limited need to collect PI. One implication of beginning with Element 2 will be the creation of a ‘‘market’’ for PI in the local budgeting process. This will support progress in subsequently introducing a more complete performance budgeting approach under Elements 1 and 3.

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Once a ‘‘performance wedge’’ is in place in a minority of local governments there is the possibility of a demonstration effect on other local governments (and even agencies at the national level). Reform would be capable of demonstration as well as exposition. Workshops can mix officials from best practice and unreformed local governments, and operational issues associated with reform discussed between local officials for whom reform is meaningful only in terms of changes to the business processes they actually manage – which changes are likely to cause confusion or too much additional work at key pressure points in the budget preparation cycle, and which, on the basis of peer group discussion, they feel they can make work in their own environments.

NOTES 1. ‘‘Almost 300 ethnicities speaking more or less 250 different languages live throughout the archipelago.’’ (World Bank 2007, p. 113). In regard to regional poverty indices, ‘‘Poverty rates are below three percent in selected cities (Denpasar, Bali, and Bekasi, West Java), but above 50 percent in Manokwari, West Irian Jaya, and Puncak Jaya, Papua (p. 113). The Human Development Index (HDI) average for Indonesia in 2002 was 0.66. At the district level, the HDI varied from as low as 0.47 in the kabupaten of Jayawijaya to 0.76 in East Jakarta.’’ (World Bank, 2002, p. 113). 2. See (World Bank, 2003b, p. 3; Barron & Clark, 2006), Chapters 1–3. The disturbances occurred in 1998. However, there had been several previous attempts to decentralize, the most recent of which was in Law 5/1974, which did not involve handing over of the apparatus needed for local management and was only partially implemented. An alternative explanation for the radical ‘‘front loaded’’ nature of the decentralization is that it reflected the lack of progress with implementing the 1974 law (see World Bank, 2003b, p. 3). 3. Even property taxes are set and administered by the national government rather than locally, with a portion retained as an administrative fee (see Eckardt & Shah, 2008, p. 296). 4. Article 27 of Law Number 33 Year 2004. The DAU is broken into two main components: a base allocation compensating civil service wage costs (alokasi dasar) and an equalizing amount to address the fiscal gap (dasar celah fiskal), see Law 33 Year 2004. 5. See World Bank (2007, p. 127) for estimates of reserves by region. ‘‘Between 2001 and 2005, provinces and kabupaten/kota (districts and cities) accumulated more than Rp 35 trillion in reserves y and in mid-2006 these reserves reached Rp 95 trillion or 3.1 percent of GDP. However the level of accumulated reserves varies greatly across provinces and districts, [mainly] in regions rich in natural resources, such as East Kalimantan, Riau, Aceh and Papua.’’ Expenditure need is also defined to take account of poverty in the district


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(using the HDI). However, this only leads to limited equalization due to its small weight in the formula. Resource-rich local governments receive the vast bulk of resource revenues, accommodating deeply felt grievances by these provinces in the previous centralized regime, but working against the equalization intended by the DAU. 6. ‘‘First evidence on a limited subset of kabupaten/kota shows that decentralized government services in health, education and administration have improved (Kaiser, Pattinasarany, & Schulze, 2006), while the quality of police service, which has not been decentralized, has deteriorated. However, sectoral studies have highlighted the deficiencies and decline in several key services, particularly water and electricity’’ World Bank (2007, p. 116). There are reports that resource investment may be discouraged by lack of clarity about the responsible level of government. 7. Accountability is ensured by the mayor being elected and his 5-year plan being passed as a law. The annual budget is subject to a community consultation (Musrenbang) process and the budget law must be passed by the elected council. Local officials are close to the local community and can be expected to be more aware of needs than those at the national level. See Eckardt and Shah (2008) for an overview discussion. 8. Elected local councils (DPRDs) approve the local budget and receive quarterly reports on budget execution. 9. The review of quality of budgeting at the national level through analytical instruments such as PERs and PEFA diagnostics does not generally apply to local level budgeting. However, the World Bank has undertaken PERs in sensitive provinces such as Aceh and Papua while Indonesia’s external audit agency (BPK) undertakes external audits of districts. 10. Accountability is ensured by the mayor being elected by the local council and his/her 5-year plan being passed as a law. The annual budget is subject to a community consultation (Musrenbang) process and the budget law must be passed by the elected council. Local officials are close to the local community and can be expected to be more aware of needs than those at the national level. 11. A cursory connection is made by requiring spending units to identify program objectives when submitting their input-based budget requests. However, there is no link between changes in the level of inputs requested and the consequent impact on achievement of these targets. Hence, it is impossible for Bappenas/MoF to approve or reject requests for increased financing on the basis of the impact of each request on program objectives. 12. Spending to achieve the poverty goals in the President’s national 5-year plan (RPJMN) 2005–2009 is split between national level (deconcentrated and assistance funds through the provinces and specific purpose funds (DAK allocations) disbursed through local budgets) and local spending from general purpose (DAU) allocations and own revenues. Triaswati (2006) provides estimates of the financing gap between current resourcing of main public services and financing needed for target achievement. See also UNDP (2004), which estimates the financing gap in four areas, food security, basic health, basic education and physical security, and Government regulation Number 65 Year 2005 on Minimum Service Standards (PP no. 65, Tahun, 2005).

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13. The templates are set out in Permen 13 on local budgeting procedures. 14. SPMs are discussed in more detail in Annex 1. 15. Reported in The Jakarta Post, April 24, 2008, p. 2. The full report is not publicly available. However, a BPK official commented that ‘‘I believe that most of the problems were more related to the quality of human resources than the (finance and budgeting) system’’ (The Jakarta Post, pril 24, 2008, p. 2). A BPK official is quoted in the same newspaper as indicating that many bridges and roads in the regions did not meet standards because they were built using less funds than had been intended. 16. Reported in The Jakarta Post, April 11, 2008, p. 2. 17. This may reflect situational analyses undertaken by planning staff in the local Bappeda. 18. Outputs are proposed by service agencies at the activity level and standard unit costs used to derive financing requirements. 19. This is, however, preferable to the reverse (the planning targets drive the budget) due to the reduced risk of over committing the local resource envelope. 20. One result of the disconnect between planning and budgeting is that local planning and budgeting processes are overly drawn out and complex (Annex 3). In integrating planning and budgeting the existing sequential business processes for planning and then budgeting need to be simplified and merged in a single step, avoiding the creation of additional steps and reducing complexity. This is a challenge in integrating the business processes, but even more so a coordination challenge for the separate departments of MOHA that are currently responsible for the local planning processes and local budgeting processes. The Departments are the Directorate General for Local Development (BANGDA) and Directorate General of Regional Finance Administration (BAKD). Capacity for planning and budgeting needs to be improved greatly at the local level. Budget approval processes need to be streamlined and off-budget spending needs to be incorporated. Only then will the budget reflect planning, thereby ensuring efficient government spending and preventing the occurrence of large surpluses World Bank (2007, p. 134).

21. The requirement is in Permen 13. 22. The drafting of the new regulation on planning and budgeting has involved international and local consultants advising the Planning and Development Department (BANGDA). BANGDA has tested the approach in a series of regional consultations. 23. Alta Folscher, defines performance budgeting as follows: ‘‘performance budgeting refers to the linking of expected results to budgets. Like program budgeting except that it adds an emphasis on targeting and measuring outputs and performance, with data analyzed against aims and standards. Usually used as a term across countries to cover a range of specific processes’’ (Folscher, 2007, p. 120). 24. Renjas and the RKPD have hitherto been planning documents that contain policies and priorities, but which are formulated without reference to the associated costs to the budget.


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25. MTEF and PBB have been introduced in principle at the national level in Indonesia. However, progress is elusive. Although out-year estimates are required in budget requests prepared by national ministries, they are often not filled out and seem to play no role in budget preparation. There are various versions of an MTEF for the purpose of integrating planning and budgeting, and at the national level Indonesia has not yet come out in favor of a particular approach. 26. The IMF concludes ‘‘The mechanism for coordinating fiscal management practices in the regions needs strengthening. Consideration should be given to adopting a joint decree that establishes a high level coordination forum comprising MoF, MOHA and Bappenas as core members. Such a high level forum would concentrate on improving sub-national fiscal reporting and formulate regulatory provisions for: enhancing policy formulation for expenditure and revenue assignments; and regional financial management. The group should meet at least once a month to review the current status and consider new policy initiatives’’ (IMF 2006, p. 40). 27. There is no necessary correspondence between the specific spending units asked to contribute to additional fiscal space through lower allocations in their baseline budget, and beneficiaries of additional resources. Given that wages of civil servants form a major part of local spending the approach provides the opportunity for new initiatives to be substituted for unproductive existing spending, particularly salaries. 28. The forward estimates provide an initial ceiling for service units, which do not make new policy proposals. 29. Element 2 is a simplified version of the MTEF-based budgeting approach originally proposed (but not implemented) at the national level to MoF in 2003–2004. 30. This also has the advantage of removing the need to substantially alter Permen 13 on district budgeting (which outlines the procedures for detailed activity-based budgeting) when the new Permen on planning and budgeting is issued. Amending Permen 13 itself presents problems due to the need for coordination between the MOHA planning and development departments (BANGDA) and the MOHA budgeting department (BAKD). 31. It is ironic that the cost to the budget of undertaking budget process reform is usually quite small – the changes involved are in procedures rather than inputs, and the impediments to reform are of a nonfinancial nature. However, where the reform involves the parallel implementation of an integrated financial management information system (IFMIS), which is networked across budget agencies substantial costs may be involved (frequently covered by external donor funding). 32. Regulation No. 65/2005 on Guidance in Setting Minimum Service Standard, and Ministry of Home Affair Regulation No. 6/2007 on the Guidance of Minimum Service Standard Formulation. 33. A more input focused concept such as standard spending assessments relates better to the input focused approach to budget preparation. 34. SPMs have been prepared for agriculture, health, education, public works, social, and state apparatus. 35. Lewis (2003, p. 13). 36. Even in regard to the financial information a recent PEFA report notes ‘‘Art 102 Law 33/2004 and Government Regulation No. 11/2001 require SNGs

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[sub-national governments] to submit annual financial reports to the central government. However, there is a lack of compliance by SNGs, and as at August 2007 only about 420 of the 473 SNG had submitted their reports for FY 2005’’ World Bank (2008, p. 33). 37. Under the decentralization law local governments are to liaise with the sector ministries which issue the SPMs. This information is provided through the Agency for Regional Autonomy (DPOD), which passes SPMs down to districts and receives reports on achievements. However the reports do not appear to be passed on to national ministries. While MoF maintains a data base on subnational financing, DPOD does not maintain a national database on level of achievement of SPMs. Hence sectoral agencies at the national level complain that they lack information on gaps in achieving the SPMs. 38. World Bank (2007, p. 115). 39. For example, the Ministry of National Education provides school operation grants (BOS) and a scholarship program for the poor while the Ministry of Health provides subsidies for the treatment of the poor in public hospitals and local health centers. 40. ‘‘The official governmental policy, as embodied in Law No. 33/2004, is to rechannel central spending to decentralized tasks through the special purpose transfer (DAK). However, central departments have so far managed to delay the implementation of this agenda. They have been able to do so in large part because of continuing legal ambiguities concerning precise service assignments across levels of government Smoke, 2004). A Ministry of Home Affairs government regulation, based on Law No. 32/2004, is intended to clear up the assignment problem, but has not yet been issued. This regulation will outline central, provincial, and district government spending authority in 30 sectors. However, for many sectors the delineation of authorities remains vague and the draft regulation notes that forthcoming ministerial decrees from central departments will provide additional details regarding the assignment of services across levels of government’’ World Bank (2007, p. 118). 41. World Bank (2007, p. 32). 42. A large portion of local government expenditures are lumped into a fixed costs category (tidak langsing) which is not mapped into service program categories and limits the ability to accurately cost programs. Thus, transparent budgeting is impeded and budget users are not held to account for the use of public resources.

REFERENCES Barron, P., & Clark, S. (2006). Decentralizing inequality? Center-periphery relations, local governance, and conflict in Aceh. World Bank Social Development Papers, Paper no. 39, Washington. Eckardt, S., & Shah, A. (2008). Decentralized governance in developing and transition countries: A comparative review. In: A. Shah (Ed.), Macro federalism and local finance (Chapter 8). Washington, DC: World Bank. Folscher, A. (2007). Budget methods and practices. In: A. Shah (Ed.), Budgeting and budgetary institutions. Washington, DC: World Bank. International Monetary Fund. (2006). Indonesia: Report on observance of standards and codes – Fiscal transparency module. Washington, DC.


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Kaiser, K., Pattinasarany, D., & Schulze, G. G. (2006). Decentralization, governance and public services in Indonesia. In: P. Smoke, E. J. Gomez & G. E. Peterson (Eds), Decentralization in Asia and Latin America: Towards a comparative interdisciplinary perspective (pp. 164–207). Cheltenham, UK: Edward Elgar. Lewis, B.D. (2003). Minimum local public service delivery standards in Indonesia: Fiscal implications and affordability concerns. Research Triangle Institute International. Shah, A., & Thompson, T. (2004). Implementing decentralized local governance: A treacherous road with potholes, detours and road closures. In: J. Martinez-Vazquez (Ed.), Reforming intergovernmental fiscal relations and the rebuilding of Indonesia. Northampton, MA: Edward Elgar Press. Shah, A., & Shen, C. (2007). A Primer on performance budgeting. In: A. Shah (Ed.), Budgeting and budgetary institutions. Washington, DC: World Bank. Smoke, P. (2004). Expenditure assignment under Indonesia’s emerging decentralization: A review of progress and issues for the future. Paper presented to conference on ‘‘Can decentralization help rebuild Indonesia?’’, Georgia State University, Atlanta, GA, May 2002. Triaswati, N. (2006). Financing gap on poverty alleviation programs in Indonesia: Measurement and implementation. Final Report, GRS II -SP 164A-CIDA, Jakarta. UNDP. (2004). The economics of democracy: Financing human development in Indonesia. Human Development Report, Indonesia. USAID DRSP. (2006). Stocktaking on Indonesia’s recent decentralization reforms. Summary of Findings, August, Jakarta. Usman, S., Marwardi, M. S., & Poesoro, A., et al. (2008). The specific allocation fund (DAK): Mechanisms and uses. Jakarta: The SMERU Research Institute. World Bank. (2002). Indonesia, priorities for civil service reforms. Washington, DC. World Bank. (2003a). Cities in transition: Urban sector review in an era of decentralization in Indonesia. East Asia Working Paper Series, Dissemination Paper no. 7, Washington. World Bank. (2003b). Decentralizing Indonesia: A regional public expenditure review overview report. Report no. 26191-IND, Washington. World Bank. (2004). Education in Indonesia: Managing the transition to decentralization. Report no. 29506, Jakarta. World Bank. (2007). Spending for development: Making the most of Indonesia’s new opportunities, public expenditure review, Jakarta. World Bank. (2008). Indonesia public expenditure & financial accountability. PEFA Report, Jakarta.

ANNEX 1. NATIONAL MINIMUM SERVICE STANDARDS (SPMS) FOR LOCAL GOVERNMENTS Since 2001 the approach of the central government has been one of retrospective development of implementing regulations for the decentralization, including the planning, budgeting, reporting, and transparency aspects. This is to establish procedures for local budgeting and to strike a balance between local and national priorities.

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In order to manage the risk that local priorities in sectors such as health and education may fall short of what the central government regards as minimum standards, a regulation has been passed requiring local governments to implement minimum service standards (SPMs) for individual sectors. These standards are set by the responsible national agencies.32 Ministerial decrees containing SPMs have now been issued for most sectors. After an initial burst of work on SPMs progress has slowed. While comprehensive lists have been developed for health and education progress has been slower for other obligatory functions (including infrastructure). In the case of health more than 50 PIs were developed covering outcomes, outputs, inputs. However a current Ministry of Health review is trying to limit the list to indicators based primarily on outcomes. Consistent with decentralization, districts are allowed to choose the best approach to achieving each SPM. This is reflected in the local budget through the funding of different activities, for example, if budget funds were to be appropriated directly to the objective of reducing infant mortality, the funds could be spent either on an advertising program to persuade birthing mothers to come to district health centers, or additional staffing of the health centers, or an outreach education program on avoiding dehydration of infants due to diarrhea, or a combination of all three. Whatever approach is adopted the key point is that the benchmark for infant mortality is met. The rationale of decentralization is to allow local populations in different jurisdictions to make this choice in the light of their own preferences and local circumstances, and (more theoretically) to allow citizens to move to the jurisdiction offering their preferred policy mix. In Indonesia’ case local preferences are influenced by very high levels of cultural diversity.

Implementing SPMs In the absence of technical guidelines from MOHA, SPMs vary greatly between sectors in their detail, focus on inputs versus outputs, and realism of standards. SPMs are not well understood either at national or district level and there is little evidence that they influence local budget decisions.33 In particular it is not clearly understood whether they should be based on outcome, output, or input indicators and there has been a tendency in those national ministries which have prepared SPMs to present large numbers of indicators rather than a set of key performance indicators. Some national ministries have not yet prepared SPMs.34


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In Lewis’ words, ‘‘It must be admitted that central government’s ability to develop and implement complex multisectoral plans that are based on some notion of ordered and marginal change over time is, at this stage and for the most part, nonexistent. As a result, a collaborative, consensus-based, incremental, and phased approach to developing and financing minimum standards across all sectors, while perhaps ideal, would appear to be practically unworkable.’’35 It is also unclear what (if any) action is implied by the existence of gaps between SPMs and standards currently realized in each district, or whether minimum standards are intended to be milestones or final goals.

Shortcomings in Performance Information at the District Level The value of SPMs is also limited by a lack of performance information at district level which could be used to identify gaps in each locality between the status quo and relevant minimum standards. Although data collection at district level is required under Law 32 it is not funded specifically. Since MOHA does not apply penalties for not supplying data most districts do not spend anything on data collection. This makes it difficult to base local budgets on milestones in the achievement of planning indicators. However at least for health and education it seems that significant information is available from local management information systems. This is held by the relevant SKPD and may be sent to the local Bappeda and statistical office. However, in contrast to the financial information passed up the line to the province and national MoF, performance information is not assembled in any systematic way.36 While performance information is also passed to MOHA by local governments this is not (due to bureaucratic rivalry or inertia) forwarded by MOHA to the technical ministries at the national level. They are therefore not in a position to assess the adequacy of service provision across the nation and complain about fulfilling their sector responsibilities in an informational ‘‘black box.’’37 Arguably a national performance database should be maintained (by Bappenas?) analogous to the financial database on subnational governments maintained by MoF. However, in the absence of such a database there is limited information available at the national level on the extent to which the SPMs are being achieved. In the absence of responsiveness of local governments to the SPMs there is a risk that the national government will adopt other measures, particularly increased use of conditional grants (DAK) and reversion by

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central ministries such as Health and National Education to ministry programs at the district level (e.g., through Dekon funding and co-provision arrangements). This is discussed in Annex 2.

ANNEX 2. CO-PROVISION BY NATIONAL AGENCIES Under the legal framework of decentralization national ministries are obliged to vacate areas assigned to local governments. However, several commentators have noted ambiguity in the functions assigned to local governments. While Law 22/1999 provides a positive list of responsibilities for local government, a positive list is also provided for the national level. Residual responsibilities in regard to the national list lie with local governments, but appear not to be mandatory (perhaps reflecting differences in capacity across local governments, and may be shared with the national government). This results in possible gaps and unclear accountability in regard to which agencies are responsible for achieving particular planning targets. The World Bank notes ‘‘Six years into decentralization, the assignments of functions across levels of government is far from clear due to weaknesses in the decentralization laws themselves. Clarity in assigning functions is needed to guarantee accountability at the local level. Law No. 32/2004 was passed with the aim of significantly reshaping intergovernmental administrative relations. It introduced the direct election of subnational heads and provided more clarity than the preceding Law No. 22/1999 in terms of obligatory functions. However, the government’s implementing regulation, which intends to regulate the assignment of these functions, has still not been passed by the DPR. Moreover, the central government still needs to ensure that sectoral laws promulgated by sectoral ministries do not contain conflicting interpretations of service responsibilities across levels of government.’’38 Perhaps reflecting this ambiguity of roles, co-provision by national ministries, through their own programs and through Dekon funding, has been rising.39 National ministries have also resisted the intention that the deconcentrated funding which they administer through the provinces should be transferred to the DAK, and spent as specific purpose funds through local budgets.40 Despite the far reaching nature of the decentralization, and the presumption in the law that districts undertake all functions unless they are specifically assigned to the national government, national and subnational agencies both contribute to the performance of key sectors. The World Bank notes that the share of the central government in education spending has risen from 33 percent in 2001 to 38 percent in 2005.41


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The share of districts fell from 62 percent to 57 percent over the same period. This in part reflects what is termed ‘‘bad’’ Dekon funding, that is, spending on education which in the spirit of the decentralization should flow through the district budgets (bypassing the national ministry) but is instead channeled through the national ministry’s Dekon payments to the provinces. MOH is also attempting to achieve gap filling actions at the district level by making Dekon funding flowing through to districts conditional on reporting the way in which the funds are spent (i.e., on which aspects of health). These developments risk duplication of activities between central and local governments and resulting inefficiency. Moreover, this can also be seen as a tendency to creeping recentralization which undermines the original intention of decentralization. Ideally resources available for achieving a particular objective such as an SPM should be managed in a coordinated way, so that gaps in the total available from all sources can be identified, along with overresourcing when all sources are taken into account. The creation of separate program for each major objective which accounts for total resourcing of that objective is the normal approach. In the case of Indonesia’s decentralization this would imply a common program structure which embraces national and subnational levels. All available spending on a program would be reported in one place.42 The original regulation on district budgeting did in fact prescribe a common program and activity structure to be used by all districts. However, this was subsequently judged to be inconsistent with the intention that district spending respond to local priorities and it has been dropped from the recent revision of the district budget regulation. While SPMs exist it is unclear how much resourcing is provided. A need for additional resourcing for a particular standard would therefore be apparent only from ex post evidence of lack of progress in filling gaps against the standard, rather than ex ante programming of an adequate level of resourcing from all sources.

ANNEX 3. LOCAL PLANNING AND BUDGETING PREPARATION PROCEDURES This annex provides background to the local planning and budgeting processes outlined in Fig. 1 in the text. The information is based on regulations for local planning and budgeting.

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It should be noted that while the content of each district budget is approved at the provincial level there is no central supervision of local planning and budgeting processes, and it appears that there is considerable diversity in the practices of different local governments.

A. Planning RPJMD This is the local government’s 5-year strategic plan which includes a statement of vision and mission of the local government. The RPJMD is enacted by the local council following the election of the mayor, implying accountability for implementation of the platform on which he/she was elected, although the plans generally do not contain outputs or outcomes. The RPJMD is intended to be based on priorities in the national 5-year development plan, but interpreted against local needs. Coordination between central government and regions involves a meeting organized by Bappenas (the national planning agency) and attended by sector ministries, and provincial and local planning agencies. However, there appears to be no mechanism for ensuring that national priorities are reflected in the local plan. Nor are there formal procedures for provinces to coordinate district plans to take account of ‘‘spillovers’’ between regions or potential economies of scale through coordination of plans, although regional governments have formal responsibility for coordination in this area. Renstra-SKPD This is the 3-year strategic plan prepared by each local work unit. It contains the vision and mission for the work unit and the sector targets which it hopes to achieve (based on the RPJMD). The Renstra is updated in the early stages of each budget preparation cycle, although in many cases the contents are of a general nature. Renja-SKPD This is the annual plan of each local work unit, based on its Renstra. This is a list of priorities to be funded and is the closest point of linkage between planning and budgeting, but in the budget. However, the Renja currently prepared by each local service unit does not support a policy contestability process in preparing the RKPD because it only includes district planning priorities and does not include the cost and impact of possible measures to implement these priorities (this will however occur under Element 2 of the


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new regulation, which proposes that each local work unit propose a change package). RKPD This is the annual work plan of each local government, based on the Renjas prepared by its local work units, the RPJMD, and the projected resources available to the local government for the coming budget year. In the past the RKPD has taken on the focus of a development budget, focusing on projects in particular. However, Regulation 105/2000 stipulates a move to performance budgeting, in which the distinction between capital and recurrent spending is less important. While the ‘‘RKPD is prepared to ensure interlinkage and consistency between planning, budgeting, implementation, and supervision’’ (Permen 13, Article 82(1)), currently there are few links with the annual budget. However, the draft regulation for integrating planning and budgeting (which is the subject of this paper) proposes a new procedure for preparing the RKPD involving the identification of change packages by each local work unit. Proposals approved by the local budget committee will then be reflected in the temporary ceiling of the work unit (see the PPAS below), which then proceeds to prepare its budget request in the normal input focused way (see RKA-SKPD below).

B. Budgeting KUA and PPAS Whereas the previous steps relate to district planning, the KUA is the initial stage in preparing the district budget. The KUA contains the local budget resourcing framework, strategies, and priorities for consideration by the local legislative council (DPRD). The local government and the local legislative council jointly draw up the General Budget Directions and Policies, guided by the RPJM, Renstras, and other planning documents, the views of the public through the Musrenbang process, annual performance reports for previous years, main thoughts of the local legislative council, and the Local Government Fundamental Financial Policies set annually by the Minister of Home Affairs. The latter makes a formal connection between national budgeting priorities and those of the district. The KUA contains the budget policies and the PPAS a temporary ceiling for each local work unit (also approved by the local council). On the basis of the temporary ceiling each local work unit prepares its detailed budget

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request. The ceilings should in principle accommodate the achievement of SPMs by the relevant work unit, but there is little evidence that this occurs. RKA-SKPD This is the draft budget prepared by each local work unit. It is prepared within the temporary ceiling advised in the PPAS and uses standard unit costs and outputs for each activity of the work unit. The RKA-SKPD is prepared by each work unit for the new budget year and the following year (i.e., it is prepared in a limited medium term expenditure framework), although there is no guidance on whether the out year estimates should (or should not) contain a new policy content. Little attention is paid to preparation of out year estimates by work units and the out year figures do not appear to be used by the local budget committee as a starting point for preparation of the t+2 budget. It is also stated in Regulation 13/2006 that the RKA-SKPD be prepared using performance budgeting principles: ‘‘The performance based budgeting approach as referred to in Article 90 paragraph (2) shall be carried out by taking in the interlinkage between financing and expected outcome from the activity and the expected results and benefit, including efficiency in achieving the said results and outcomes’’ (Article 91(4)). However it is not clear how the interlinkage between financing and expected outcomes can be established and this aspect is currently limited to a statement by the work unit of the objective of each program for which it presents a budget request. APBD This is the district budget, which according to Regulation 105/2000 (Article 8) is to be prepared using a performance approach (i.e., every planned expenditure allocation must be related to the specific level of performance expected to be achieved). In reality the budget is input rather than performance based. The budget committee reviews revenue estimates prior to formulating the expenditure budget. The proposed budget is then reviewed by the mayor and transmitted to the local council (DPRD) for approval as the budget law. Since information on transfers from the central government (around 90 percent of revenues on average) is available only late in the calendar year this can involve a two-stage process, in which expenditure estimates are finalized only when information on transfers is received from the central government. The APBD is based on programs and activities (combining routine and development budgets) but is split between direct and indirect expenditures


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(only the former is directly affected by the implementation level of the program or activity).

APPENDIX. ACRONYMS APBD Badan BAKD BANGDA Bappeda Bappenas BPK DAK DAU DPOD DPRD FE GOI IFMIS KUA MDGs MoF MOHA MTEF Musrenbang PBB PEFA PER Permen PI PPAS Renja Renja-KL Renja-SKPD Renstra RKA-SKPD RKPD Rp RPJMD SKPD SPM

Regional budget Agency Budgeting department of MOHA Development and planning department of MOHA Regional Development Planning Board National Development Planning Board Supreme Audit Agency Specific Allocation Fund General Allocation Fund Council for the Deliberation of Regional Autonomy Regional legislature Forward estimate Government of Indonesia Integrated financial management information system Policy stage of annual budget preparation Millennium Development Goals Ministry of Finance Ministry of Home Affairs Medium-term expenditure framework Public consultation on development planning Performance-based budgeting Public Expenditure and Financial Accountability public expenditure review Government regulation Performance indicator Ceiling setting stage of annual budget preparation Annual work plan Work plan of a national ministry Work plan of a regional spending unit Strategic plan Annual budget for spending unit Regional Government annual work plan Indonesian Rupiah Regional government strategic plan Regional level work units Minimum service standards set by the national government

CHAPTER 10 THE CAUSAL DYNAMIC EFFECTS OF A PERFORMANCE-BASED BUDGET ON THAI PUBLIC SPENDING: A REEXAMINATION Arwiphawee Srithongrung INTRODUCTION In the United States, the 1993 Government Performance and Result Act (GPRA) has increased public demand for governments not only to produce and deliver public goods and services, but also to demonstrate program effectiveness, which is the ultimate goal of a public program’s existence, mission, and spending. This public management approach parallels the results-oriented management, which aims to strengthen organizational effectiveness and emphasize the need to integrate all major activities and functions, an activity that will direct them toward advancing organizationwide strategic goals or fundamental policy agendas (Kettl, 1997). Managers use program outputs and outcomes as implementation benchmarks to identify implementation means or directions (Kettl, 1997). By reporting performance measurement results to the public and policy makers, public managers are held accountable for the tax-dollars spent to produce and deliver public services in the most efficient and effective way (Aristigueta, 2007). Performance measurement results, especially those related to The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 247–276 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018012

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outcome achievement, are partially useful in budget allocation from the perspective that the tax-dollars spent are tied to desirable outcomes rather than to program input costs that may or may not correspond with public desires (DuPont-Morales & Harris, 1994). Because of the benefits of results-oriented management mentioned above, the new budget reform, widely known as performance-based budgeting (PBB), is expected to (1) enhance a public manager’s managerial capacity to implement public programs efficiently and effectively at the micromanagement level (NPRG, 1999), and (2) to enhance public policy makers’ planning capacity to accomplish a country’s long-term plan by aligning budget allocations for various programs with their targeted outcomes and implementation progress toward their goals at the macromanagement level (Sorber, 1993). The latter assumption, especially, is based on the standard practice of results-oriented management that progress toward programs’ output efficiency and outcome effectiveness must be reported (NPR, 1997) and the next year’s targeted outcomes must be set forward (NPR, 1997) and tied rationally with the levels of budget requests (DuPont-Morales & Harris, 1994). To test the above assumptions, a previous study (Srithongrung, 2009), ‘‘The effects of results-oriented budgeting on government spending patterns in Thailand’’, investigated immediate and permanently lagged effects (within a 5-year period) of a PBB on Thai public spending in each of the five service functions (i.e., national defense, education, economic development, welfare, and general administration), controlling for socioeconomic factors and citizens’ tastes and preferences. Using time-series data from 1965 to 2005 on Thai government spending, the previous study found that compared to a line-item and program budgets, the new PBB budget significantly enhances public policy makers’ planning capacity in two service functions, national defense and general administration, by shifting resources permanently between functions and cutting spending on the function (i.e., national defense) that is irrelevant to the country’s long-term master plan and strategic plan. These results confirm the assumption that a PBB can help enhance policy makers’ planning capacity in some public service functions at the macromanagement level. Although the above empirical evidence of PBB’s benefits in public budgeting and management literature may help clarify whether the new reform changes budget allocation decisions, it is not free from empirical flaws. The first limitation is that political variables were omitted, that is, the prime minister’s ideology and the degree of fragmentation in the house and cabinet in the testing model. These variables are important in budget

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decision making, given that annual appropriation is a result not only of technical recommendations proposed by budget analysts in the central budget office in the budget preparation phase, but also political decisions made by policy makers in the legislative phase. The second flaw is that unit root (or persistent trends) in time-series data were used in the previous study, and, as a result, the regression errors may not be distributed normally (Stock & Watson, 2007). Both omitted-variable and unit-root problems may result in biased and inconsistent coefficients for the effects of budget reform, PBB, on public spending. The purpose of this chapter, thus, is to reexamine immediate and lagged effects of PBB on Thai government spending, relative to those of the other budget types – line-item and program – after the two empirical flaws are corrected. To correct the first flaw in the previous study, two political variables are incorporated into the original testing model to control for government ideology and political fragmentation in the house and cabinet. To correct the unit root flaw, this study uses the first difference values of public spending (which is equivalent to the annual growth rate of the public spending level) instead of the percentage of functional spending to total expenditure in each fiscal year to control for unit roots in time-series data.

BACKGROUND According to Schick (1966), there are three types of budget formats in practice. The first is a line-item budget in which budget requests list public service inputs, personnel costs, equipment, and materials used by each department. This budget type is beneficial in that it increases fiscal accountability in the sense that the budget can be scrutinized at the microlevel, for example, what inputs are used in the public service process? How much is the material cost per unit? And how many units were purchased? The disadvantage of this budget type is that the line-item list conceals programs and their goals that each budget requesting organization is trying to accomplish. Thus, this budget-type trades off managerial effectiveness and the budget planning function with fiscal accountability and the budget control function, respectively. The second type is a performance budget, in which the activities of a budget requesting department are reported along with activity costs the department plans to incur in the next fiscal year. The advantage of this budget is that it can be used as a management blueprint for public managers in implementing programs and detecting inefficiency by comparing

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performance benchmarks (e.g., numbers of street miles cleaned per days) with actual activities and outputs. In other words, this budget enhances managerial capacity. The disadvantage is that this budget type focuses on a program or department’s internal management goals rather than jurisdiction-wide goals measured at the macrolevel. This is because this budget type does not compare budget requests across departments or service functions. And as a result, inefficient allocation such as spending on duplicated or unnecessary programs (relative to actual needs) tend to occur. Thus, this budget-type trades off macromanagement planning functions with micromanagement accountability function. The last budget type is a program budget, for example, Planning Programming Budgeting System (PPBS) and Zero-based Budget (ZBB), in which total spending is reported in budget requests according to program goals each public department plans to accomplish. At the macromanagement level, that is, the central budget office, departments’ programs, objectives, and planned spending are sorted through jurisdiction-wide public service goals and functions, for example, education, economic development, defense across departments. This budget type, thus, enhances spending effectiveness and efficiency in that budget requests under the same program goal are compared across departments, ranked, and funded based on their benefits. This budget trades off a micromanagement budget function, that is, fiscal and managerial accountabilities, with a macromanagement budget planning function. Does a performance-based budget (PBB) differ from other budget types described above in influencing public spending levels across public service functions? In literature, the answer to this question tends to be theoreticallybased rather than empiricallybased. For example, Mikesell (2006) contends that PBB differs from line-item and performance budgets in that PBB ties budget spending to program outcomes, while the two other budget types do not. As a result, spending is aligned with departments’ program goals. This practice encourages planning at the program and department levels but not at the jurisdiction-wide level. On the other hand, PBB differs from a program budget in that it doesn’t enhance efficient allocation in the way that spending is compared across agencies or departments (Mikesell, 2006); as a result, PBB does not enhance the budget planning function at the macromanagement level. Simply put, PBB is one step ahead of a traditional performance budget by measuring agencies’ outcomes in a meaningful relationship to those of top management’s priorities, but one step behind a program budget as it does not eliminate duplicating programs or rank similar programs across agencies.


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On the opposite side, some literature argues that PBB does not differ from performance or program budget types. This is because PBB is infeasible; using PBB results in unplanned spending following last year’s budget instead of planned spending following a community’s master plan. This is a consequence just like those of other budget types, given that budget and performance analysis are time-consuming and technically infeasible. Specifically, critiques of a performance-based budget include: the difficulties in measuring outputs and outcomes; difficulties in cost accounting in which direct and indirect costs are counted differently across programs even though the program goals are the same; and the lack of valid and reliable linkages between agencies’ performance measurement and resource allocation decisions1 (Kettl, 1997; Kettunen & Kriz, 2006; Mullen, 2006; Dixon, 2005). The most sensible arguments against the view that PBB is beneficial in linking public-service outcomes with spending levels, the characteristics that makes PBB different than other budget types, is outlined as follows. Outcome measurement is problematic given that outcomes do not result directly from programs’ processes, but instead result from program outputs and external factors in society (Joyce, 1993; Grizzle, 2001; Kettl, 1997). Output measurement is more valid, but it does not provide an informed decision that facilitates the allocation process (Kettl, 1997). From this perspective, Joyce (1993) summarizes that performance measures have ‘‘limited ability to influence resource allocation but benefit managerial and financial reporting’’ (p. 537). These technical problems may prevent governments from receiving the full benefits of PBB’s planning function, which aims to enhance allocation efficiency across service functions, a situation that makes PBB different than other budget types. The central purpose of this study, thus, is to provide empirical evidence to understand whether PBB differs from other budget types in influencing budget spending levels across service functions. Thailand adopted a performance-based budget in the late 1990s. The unique characteristic of the performance-based budget in Thailand is that it focuses on strategic management to achieve the full benefits of performance measurement data – both in terms of holding public agencies accountable and of aiding the executive’s decisions in resource allocation, in which the overall policy priorities are identified officially and tied to the expected outcomes of the agencies’ budget requests (Bureau of Budget, Strategic Performance-based Budget Presentation to Bhutan Government, June 10, 2007, Bangkok, Thailand). Based on interview data with Thailand Bureau of Budget (BOB) planning officials in the summer of 2007 and 2008, performance measurement had not been used officially to aid the

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decision-making process. However, according to the planning officials, the use of strategic budget planning – in response to the National Master Plan – has been used since 2001. The strategic performance-based budget was launched officially in 2001 with full knowledge of PPBS failures and incremental budget practices (in terms of supporting strategic resource allocation). From 2001 to 2007, the Thai budget has been under the PBB reform’s framework, in which resource allocation has been tied to strategic plans and identified policy priorities (Thailand, Bureau of Budget, Strategic Performance-based Budget Presentation to Bhutan Government, June 10, 2007, Bangkok, Thailand, Interview with Kulapaijit, 2008). Historically, when the democratic regime was introduced in 1933, budget preparation was conducted by the BOB through technical assistance from the US government. By 1958, BOB was reorganized as an executive department to review, analyze, and consolidate agencies’ requests. The fundamental principle of budget preparation in Thailand’s budget institutions throughout history is that the budget should be the systematic tool to allocate resources in a way that can maximize societal welfare to citizens in the country (Jitsuchon & Kingkeaw, 2004).2 Judging from the message in the budget documents, this view has been used as the major justification for various budget reforms throughout the modern period, from 1959 to 2007. National public policies throughout the modern era (Kaosa-ard, 1998) in Thailand are manifested in the National Economic and Social Development Plan (NESDP) set by the National Economic and Social Development Board (NESDB). From 1961 to 2006, there were nine versions of the NESDP; each version is used for a 5-year period and approved by the Parliament. Each version comprised major goals, targeted outcomes, previous development outcome reports and analyses, for example, economic growth rate, literacy rate, and broad strategic plans for the next 5-year period. From version one to nine, the major goal has been to enhance the country’s economic performance and standards of living through better socioeconomic environments. These major goals remain unchanged throughout the nine versions of the plan. Economic growth, income gap reduction, and better living standards are written clearly as a fundamental purpose in the plan (see Appendix A for a summary of the major content areas in the nine versions). The differences in the nine versions lie in the detailed execution plans, which seem to be flawed depending on the appointed National Social and Economic Development Board (NSEDB) members and social problems in the year in which the plan was written.3 The National Plan is used as a reference for the budgetary process, as mentioned in every budget document in the period 1961–2008. As written in the


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narrative of the annual budget document’s summary schedules, the broad goal identified by NSEDP are incorporated in setting spending priorities. These policy priorities then are transmitted to the ministry heads through budget instructions; and subsequently, each ministry develops its own plan in accordance with the National Plan (Veerakul, 2005). Government projects are approved by the BOB if they are consistent with the National Plan (Personal interview with Budget Planning Officers, 2007 and 2008). In practice, as Kaosa-ard (1998) assesses, the National Plan does not set priorities or strategic planning based on cost–benefit analysis or take annual budget constraints into consideration. This is related to the fact mentioned above that the National Master Plan addresses remitting execution plans to accomplish the same traditional goals – socioeconomic development. Further, the plan is too broad to be reduced to an operational level without a central coordinator, such as the BOB. As a result, all ministers tend to include as many ideas and projects as possible, assuming that the proposed projects will be considered responsive to the National Plan; thus, they hope to receive a reasonable share in the national annual budget (Kaosa-ard, 1998). This situation reflects the main failure of the PPBS during the period of 1982–1997. In the democratic period (1959–2008), the Thai budget experienced three reforms: the line-item budget, the planning-programming budget system (PPBS), and the strategic performance-based budget (PBB). The line-item budget was used during the period 1959–1981. The annual budget documents in this period report service inputs by departments under the views that the appropriation law should be an effective tool to control agencies’ spending. Inspired by the disadvantages of the line-item budget – for example, a lack of agency flexibility and an inability to aid the country’s economic-oriented resource allocation – the Thai government adopted the PPBS in 1982 with the main goal of using the new budget to rank functional appropriation in a way that enhances the country’s traditional goal of social and economic development (Jitsuchon & Kingkeaw, 2004). From the Thai government experience, one can see that, in theory, the PPBS is supposed to link resource allocations with the country’s overall goal. However, in practice, one finds that the agencies’ missions and service goals are not well-coordinated with service strategies, are redundant, and lack meaningful connection across departments (Jitsuchon & Kingkeaw, 2004). This situation results in an incremental resource allocation process in which the decisions are fragmented and rely mainly on negotiations between the parliament and ministry heads appointed by the parliament (Jitsuchon & Kingkeaw, 2004). In 1997, PBB was implemented as a pilot project within two agencies.4 In 2001, PBB was adopted government-wide through the public law

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requirement that all ministries plan and submit their budgets according to PBB frameworks (Veerakul, 2005). The reform demands the BOB to plan and identify agencies’ goals that are responsive to the National Master Plan. The NSEDP of 1997 calls for analysis, consolidation, and preparation of the executive budget according to its ranked policy priorities. Due to the budget reform in this period, the BOB has restructured its budget preparation and evaluation process continuously since 1997. Under the performance-based budget starting in 2001, the process of linking the National Master Plan with the resource allocation strategy is summarized as follows. The country’s overall strategic goal, which corresponds to the national economic and social development plan, is used as a common guide by every ministry to identify its individual strategic plans (Jitsuchon & Kingkeaw, 2004). At the planning level, the Public Service Agreement (PSA), which identifies key indicators to measure the ministry’s budget performance (in terms of output or outcome), is regarded as a performance contract between the prime minister and individual ministries. Then, the ministries’ PSAs are translated into a Service Delivery Agreement (SDA) for each agency within each individual ministry to further guide program planning, budgeting, and operation. The SDA, which contains key indicators to measure the agencies’ budget performances, indicates how each agency contributes to the ministry’s strategic goal accomplishment. At the technical level, agencies plan their programs and budgets according to their ministries’ strategic goals and propose a budget according to cost analysis and program evaluation. The BOB is responsible for evaluating agencies’ performance by comparing targeted with actual outcomes identified by the indicators in PSA and SDA. The BOB’s performance measurement results are used to: (1) allocate resources through various ministries and agencies, and (2) motivate agencies to accomplish targeted outcomes (Interview with Kulalpaijit, 2008; Na Songkla, 2007). According to the Kaosa-ard study of 1998, the strategic performancebased budget is expected to reduce fragmentation in the decision-making process, especially at the legislative consideration stage. The fragmentation is due to ‘‘the country’s political system in which the ministers are largely parliamentarians from various provinces who think locally rather than nationally’’ (Kaosa-ard, 1998, p. 6, 1992). In reality, empirical results indicate that PBB cut the national defense budget both immediately and 5 years after the decision making, immediately cut public safety, and increased administration spending in the lagged period (Srithongrung, 2009). Meanwhile, the PBB has not affected education, economic development, and welfare spending in a consistent pattern (Srithongrung, 2009).


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Discussing results with budget analysts in Thailand BOB indicated that PBB is different from other budget types in that PBB cut overspending that resulted from fragmentation in the cabinet and lower-house chamber, regardless of national policy priorities, and controllable through PSA contracts conducted under the PBB plan (Interview with Kullapaijit, Bureau of Budget, 2008). Meanwhile, the line-item budget fails to do so in the same function, national defense. These results support the notion that PBB is different from other budget types in that it immediately and permanently enhances the planning and management functions in one specific spending area, national defense, compared to the line-item budget. Andrew (2006) argues that it is premature to expect that PBB adoption in Thailand will reduce political fragmentation and enhance the country’s management planning, given that Thailand is not ready for PBB in the aspect that the country’s basic practices in financial reports and audits are performed poorly. According to Andrew (2006), the poor performance in reporting and auditing systems hinders performance monitoring and transparency, which, in turn, yield important information in allocating the budget in the following fiscal years. This postulation also is supported by the interview information that the Thailand BOB had not accomplished a systematic performance measurement yet in the 2006–2007 fiscal year and that Thailand’s corruption index score reportedly is relatively high among East Asian countries (Kaufmann, Kraay, & Mastruzzi, 2008). The next section presents empirical approaches and discusses testing data.

METHODOLOGY AND DATA Like the previous study (Srithongrung, 2009), to examine the dynamic effects of budget reform, PBB, on Thai government spending, this study adopts the testing model used by Tinakorn & Sussangkarn (1996), who found that Thai government spending is not optimal according to the 28 countries empirical benchmark. For Thailand, there is overspending on national defense, underspending on education, and severe underspending on health and social welfare compared to the empirical benchmarks (Tinakorn & Sussangkarn, 1996). Tinakorn & Sussangkarn’s (1996) model is constructed based on Wagner’s Law, which asserts that a country’s income and socioeconomic characteristics that reflect tastes and preferences of the population determine the public spending level. Unlike the previous study, this chapter incorporates political variables that were omitted in the

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previous study’s testing model and correct for unit roots in public spending time-series data, which may cause seriously biased coefficients in estimation. In a similar budget study, Reddick (2003) used pooled data of the 50 states’ government budgets in the period 1989–1996 to examine whether annual public spending levels in each function of a state is influenced similarly by the last year’s budget or influenced linearly by program benefits present in a budget reform, that is, a zero-based budget, used in that period. The last-year budget theory, or incremental budget, explains that in practice, the current budget is determined by the previous year’s spending level plus a marginal increase or decrease corresponding to marginal changes in total government revenue or personal income. Such a spending decision is technically feasible given that it does not require time or resources to prepare a budget recommendation other than the last year’s budget document. Reddick’s (2003) testing model is specified such that the log of per capita public spending is a function of the last-year log of per capita public spending (to test incremental budget hypothesis), log of per capita personal income, dummy variable for program-budget format, and government ideologies, namely fiscal conservativeness versus liberality. The last variable is necessary for the model, given that public spending is determined not only by technical recommendations from budget analysts in the budget preparation phase but also by partisan ideology the chief executive officer brings to the legislative process. Reddick (2003) found that the program budget type does not influence the public spending level significantly, while last-year budget and partisan ideology significantly influence the budget level. In another study, Chambers (2008) argues that in Thailand, partisan ideology does not influence policy directions, including public spending levels, given that Thai politicians seek financial returns, prestige, and positions rather than constituencies’ public interests. This observation is inconsistent with those of Kaosa-ard (1998) mentioned above. However, according to Chambers (2008), the number of political parties formed in government, including the lower-house chamber and cabinet, affect the policy directions and stability of Thai government. This is because there is transaction cost in public policy decisions and negotiation due to information asymmetry and uncertainties. Such transaction cost is larger when the degree of government fragmentation (measured by numbers of political parties in the house and cabinet) in a government institution is higher since all parties demonstrate opportunistic behaviors in consuming the budget from a common national pool (North, 1990; Williamson, 1985, as cited by Chambers, 2008). For these reasons, the political variables, including the prime minister’s ideology (measured by a dummy variable

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indicating if the prime minister is civilian or military) and political fragmentation (measured by the number of parties in the lower-house chamber and cabinet) are incorporated into the basic testing model previously specified and used by Tinakorn & Sussangkarn (1996) to control for political factors in the legislative decision-making phase. The testing model for this study is thus specified as follows: gt ¼ b0 þ b1 yt þ b2 f t þ b3 mt þ

j X

b4 etj þ

i¼j 0

þ

j X t¼j 0

Bj ptj þ

j X t¼j 0

bk stj þ

k¼2004 X

j X i¼j 0

b5 otj þ

j X

bi l tj

t¼j 0

(1)

Bh T t þ ut

t¼1966

where gt is the percent of spending according to the government’s service functions to total expenditures in the general revenue fund at time t; yt is the country’s income at time t; ft is the number of political parties in the house and cabinets in year t; mt is the background of the Prime Minister in year t (dummy variable 1 if the prime minister is from military and 0 otherwise) et1 is the vector of economic influence on total and functional spending at time t1; ot1 is the vector of social influence on total and functional spending at time t1; lt1 is the vector of the dynamic multiplier of line-item budget in the l-period; pt1 is the vector of the dynamic multiplier of PPBS in l-period; st1 is the vector of the dynamic multiplier of strategic PBB in l-period; tt1 is the vector of time trends during the period ranging from 1965 to 2005. According to previous findings, the vectors of social and economic influences in Thailand comprise:

the total population in year t, the share of agricultural value added to the total GDP in year t, number of residents per square mile in year t, percent of population age 65 and above in year t, and percent of population age 0–14 in year t.

Following the testing approach in the previous study (Srithongrung, 2009), the testing model in Eq. (1) is specified according to the distributed lag model (Stock & Watson, 2007) to test dynamic causal effects of budget reform on the public spending level. As present, in Eq. (1), the distributed lagged model is specified such that the model’s dependent variable, the public spending level, is a function of constant, a country’s current income, population tastes, and preferences measured by socioeconomic data, that is,

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economic base, school age population, aging population, budget type used by budget analysts in recommendation phase, and political variables, including prime minister’s ideology and number of political parties in the lower-house chamber and cabinet. As the model’s variable of interest, the budget type used in the current and previous years is incorporated in the testing model as the model’s dynamic multipliers of each of the three budget types – line-item, PPBS, and PBB – to capture both the immediate and lagged effect of these budget-type variables on the public spending level. For example, the current year’s budget format is used to capture the immediate effect of the budget type on the spending level over a year in which the budget type is adopted officially; the previous 1-year budget type is used to capture the 1-year lagged effect of budget type on spending level 1 year after the budget type was adopted officially; the previous 2-year budget type is used to capture the 2-year lagged effect of the budget type on the spending level 2 years after the budget was adopted officially, and so on. In Eq. (1) presented above, these dynamic multipliers are organized in the vector of dynamic multipliers of line-item budget, PPBS, and PBB in the l-period. In the real testing, one budget type, PPBS, was omitted to avoid perfect multicollineraity in regression. How many lags should be incorporated in the distributed lag model? Following the previous study, the appropriate lag length is determined by Akaike Information Criteria (AIC) statistics. As presented in Table 1, the results indicate that the dynamic effects of the budget type occur within a maximum 6-year period. In other words, the budget type immediately affects the spending level decision in the same year the budget is decided and has a similar fluctuating effect each year. At time tþ6, the level of functional spending reverted back to its initial level – that is, in year seven, the functional spending has reverted back to the spending level at the time t1 (Wooldridge, 2006, p. 345). Thus, five lags of budget type were incorporated in the distributed lag model. To use the ordinary least square (OLS) method to estimate the dynamic effects of budget type on public spending in various service functions, four assumptions should be noted (Stock & Watson, 2007, p. 601). The first assumption is that all independent variables including the lagged budget types must be determined exogenously. Per this assumption, since the budget type is adopted before the recommendation and legislative phases, the budget type is not determined by the model dependent variable spending level in the same year. Furthermore, other independent variables in this model are specified such that they are 1-year lagged from the dependent variable. These specifications combined, help control for the simultaneous effect of the dependent variable on independent variables, thus avoiding

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Table 1. Lags 0 1 2 3 4 5

Akaike Information Criteriaa (13 Lags were Tested)b. Akaike 1.645 1.669 1.615 1.563 1.476 1.366

Source: Srithongrung (2009). a AIC test was performed by regressing functional spending against 13 lagged of budget formats in 13 separate regressions. The ratio of the sum of square residuals to total time period and a fraction of time period multiplied by numbers of coefficient parameters were summed to derive AIC statistics for each model with specific maximum lag order. The smallest AIC value indicated the most appropriate lag order since this value shows the smallest standard errors at the specified maximum lag compared to the increasing numbers of coefficient parameters given in each maximum lag model (see Stock & Watson, 2007, p. 553 for AIC formula). b Thirteen lags were incorporated in the AIC test since the time-series data are relatively short, a 40-year period, and since the performance-based budget was implemented for only 7 years in the series starting in 1997. The AIC statistics shown in the table indicate that the regressors, which are the three budget formats, influenced decision making for a maximum of 5 years forward. Thus, the j in Eq. (1) of the vectors l, p, and s is 5.

violating assumption number one. The second assumption is that there should be no outliers and autocorrelations in time-series data. Autocorrelations result from omitted variables in the current year’s error terms that correlate with the following years’ error terms. Outliers make estimated coefficients spurious and inconsistent, while autocorrelation makes estimated coefficients inconsistent and testing hypothesis invalid, but do not necessary yield biased coefficients. To correct these problems, Heteroskedasticity-and-AutocorrelationConsistent (HAC) was used instead of regular standard errors.5 The third assumption requires that there should be no high multicollinearity among independent variables, since high collinearity among independent variables yields unstable coefficients. Variance inflation factor (VIF) statistics were called for each of the dynamic multipliers of each budget type at the time of each model estimate. The results indicate that no models reported in the result table (Table 4) suffer from multicollinearity. VIF statistics are reported in Appendix A. The last assumption states that there should be no unit roots and cointegration in time-series data. Unit root refers to the situation in which there is a stochastic trend in time-series data that is carried forward several

260


years. Cointegration refers to the situation in which both dependent and independent variables’ data correlate coincidentally to each other due to unit roots in the serial data of both variables. Both unit roots and cointegration can cause biased coefficients and invalid hypothesis testing in model estimation. An augmented Dickey–Fuller test was conducted to test the budget spending model for six service functions (each functional spending was run separately). At a 5% significance level, the null hypothesis of having unit root in time-series data is rejected when ADF statistics of each individual time-series data (except for model residuals) is less than 2.86 (Stock & Watson, 2007, p. 563). At a 5% significance level, the null hypothesis of no cointegration between dependent and independent variables in estimating models is rejected when ADF statistics of model’s residuals is less than 2.86 (Stock & Watson, 2007, p. 563). Table 2 presents the results for unit root in the dependent and independent variables and models’ cointegration tests. As shown in Table 2, ADF statistics indicates that five of the six models’ dependent variables, that is, percent of defense spending, percent of education spending, percent of welfare spending, percent of safety spending, and percent of general management spending to total expenditure have unit roots. Only one dependent variable, percent of economic development spending to total expenditure, does not have a unit root. ADF statistics for model residuals indicates that no models suffered from cointegration. As presented in the last two rows of the table, to summarize, all models’ dependent variables, except for economic development spending, have unit roots and no public spending models suffered from cointegration. To cope with unit roots problem, each time-series data was transformed into a first-ordered difference to purge stochastic trends that are persistent in time-series data (Stock & Watson, 2007; Kennedy, 2006). This data transformation results in a model dependent variable that measures annual change in public spending level, rather than merely the spending level each year. This data transformation is beneficial also in that the initial level of public spending (or budget size) is a unique characteristic of the country. To examine if any budget reform, including the PBB, influences the Thai government resource allocation pattern, this study uses functional spending in the seven service areas (one function, ‘‘other spending,’’ is omitted) reported in the Thai budget document from 1965 to 2005 as the unit of analysis. The model is specified for each functional spending area according to the previous model (Tinakorn & Sussangkarn, 1996). Annual expenditure data by service functions were derived from the Thai budget documents from years 1960–2007. The years 1960–1964 and 2006–2007 were dropped since no Gross Domestic Data were reported by the World Bank for this

1.65

2.51 3.07 3.56

0.849

2.51 3.07 3.56

4

1.19 0.18

0.18

2.51 3.07 3.56

0.18

1.19

2.51 3.07

Percentage of general management spending to total expenditure 1.04

Percentage of safety spending to total expenditure 1.2

6

5

1.19

1.892

2.51 3.07 3.56

1.263

Percentage of welfare spending to total expenditure

ADF statistics

3.084

Percentage of economic development to total expenditure

Percentage of education spending to total expenditure 2.29

3

2

Budget types used in budget recommendation phase Line-item 1.19 1.19 1.19 PPBS Omitted to Avoid Perfect Multicollinearity PBB 0.18 0.18 0.18

2.51 3.07

0.37

Percentage of defense spending to total expenditure

1

Model

Unit Root and Co-integration Test: Augmented Dickey–Fuller Statistics.

Density % of population age 14 and less % of population age 65 and more % of agricultural production to total GDP

Socioeconomic factors Log of GDP Log of total population Log of population density

Independent variable

ADF statistics

Dependent variable

Table 2.

Causal Dynamic Effects of a Performance-Based Budget 261

Yes No

Unit root in dependent variable Co-integration in estimated model

Yes No

2.29

0.716

0.716

2.359

1.23

2

1.23

Model’s residuals

Political Variables in Legislative Phase Prime minister background (1 if military, 0 otherwise) Number of political parties in lower house

1

No No

Model 4

2.79

0.716

1.23

Yes No

Model summary

2.15

0.716

1.23

3

Table 2. (Continued )

Yes No

2.02

0.716

1.23

5

Yes No

2.03

0.716

1.23

6

262 ARWIPHAWEE SRITHONGRUNG

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Table 3.

Summary Statistics: 1965–2005. Mean

Maximum Minimum

National defense (% of total expenditure) 15.6 20.6 Education (% of total expenditure) 19.3 25.7 Economic development (% of total expenditure) 23.2 32.7 General administration (% of total expenditure) 4.2 7.6 Public Safety (% of total expenditure) 5.9 7.5 Public welfare (% of total expenditure) 13.9 35.7 Population age 0–14 (% of total population) 35.7 46 Population age 65 and over (% of total population) 4 7 Density (residents per square mile) 92.6 124.6 Average numbers of parties in house and cabinet 6.6 8.8 Total population (million) 49.1 63.6 Gross domestic product (Thai baht, Real 2000 Base, Trillion) 1,994.60 6,503.50

7.1 6.26 15.6 2.6 4.4 10.3 24.1 3 61 3.9 31.2 91.2

country during these periods. The data for political variables, numbers of parties in lower house, and whether the prime minister is military or civilian, were derived from Thai Parliament web sites. Table 3 provides summary statistics for the data used in this study.

FINDINGS AND DISCUSSION Table 4 presents the estimated dynamic effects l1, l2, l3, l4, and l5 and s1, s2, s3, s4, and s5 of the line-item and PBB budget formats on six government service functions: national defense, education, public welfare, public safety, economic development, and general administration for the current period and the 5 years following the adoption of the budget format in the current year. A 1% change in GDP results in an increase in education and publicwelfare spending of about 9.6% and 8.2%, respectively. The large magnitude of the GDP coefficients on education and welfare spending suggests that the two public service functions are relatively very sensitive to the country’s income that can rise and fall in good and bad times, respectively. This may result in spending fluctuations that, in turn, shortchange government’s capacity to follow the long-term master plan (NSEDB) in a year in which government revenue declines and a budget cutback is needed. Furthermore, the positive coefficients of log GDP on education and welfare spending indicate that education and welfare are

264

Table 4.


Dynamic Causal Effects of Budget Reforms on Functional Spending.

Model’s dependent variable (measured by first-ordered difference of % of each service function spending to total expenditure) National Education Economic defense development Constant Gross domestic product (log) Population (log)

1.448 0.925 71.5 (20.66)

Density (log) Population age 14 (% of total) Population age 65 (% to total) Share of agricultural (% of total GDP)

10.024 52.18 9.671 13.407 518.4 (86.97) 7.291 4.913

Public welfare

Public safety

6.517 1.106 8.2210.933

872.855 161.51 28.89 (397.4) (80) (44.34) 5.875 0.891 25.51

General administration 7.340 0.013 0.379 (4.247)

2.57 .243

Line-item budget (Period 0–6, where g0 is a current-year multiplier or immediate impact and l1, l2, l3, l4, and l5 are the lagged multipliers or the lagged impacts for lagged years 1–5, respectively). 0.762 0.052 0.849 0 0.110 0.257 1.686 1 0.774 0.818 4.796 0.049 0.320 1.278 (0.103) (0.318) (.998) (0.224) (0.081) (0.026) 2 0.552 1.171 7.649 2.010 0.793 0.077 8.714 0.183 0.331 0.203 3 0.020 0.958 4 0.175 0.129 9.306 0.238 0.283 0.138 5 0.218 0.516 7.842 1.179 0.119 0.057 Performance-based budget (Period 0–6, where g0 is a current year multiplier or immediate impact and s1, s2, s3, s4, and s5 are the lagged multipliers for lagged years 1–5, respectively). 0.075 0 0.198 0.556 2.143 0.246 0.033 1 0.097 0.192 3.106 0.153 0.014 0.126 2 0.099 7.026 2.583 5.4580.173 0.150 3 0.007 4.642 2.519 5.626 .360 0.048 4 0.299 0.036 3.345 0.935 0.097 0.006 0.415 3.383 0.6570.022 0.005 5 0.157 Political variables Numbers of 0.134 parties in house

0.098

0.402

0.397

0.165

0.171

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Table 4. (Continued ) Model’s dependent variable (measured by first-ordered difference of % of each service function spending to total expenditure) National Education Economic defense development Prime minister 1.304 ideology (1 if military, 0 otherwise) 0.337 Adjusted R2 Observation 40

Public welfare

Public safety

General administration

2.035

1.99

2.017 0.385

0.120

0.955

0.376

0.942

0.137

0.175

Heteroskedasticity-and-autocorrelation-consistent (HAC) m ¼ 4 Robust standard error calculations with Newey–West, 4 lags Notes: (1) All linear-regression models were estimated using an OLS model with annual data from 1965 to 2005 with five lags. Lag length was determined by the Akaike Information Criteria (AIC). The dependent variable in each model includes annual percentage change of national defense, education, economic development, welfare, safety, and general administration to total expenditure for model 1–6, respectively. This is transformed data by using first-ordered difference to eliminate unit roots in time series data. Dummy variables for time trends entered each regression model. (2) Newey–West HAC standard errors computed using truncation number given in the second to last row and are reported in parentheses. indicates statistical significance at 0.10 level. indicates statistical significance at 0.05 level. indicates statistical significance at 0.01 level. One dummy budget reform–PPBS was left out in order to avoid perfect multicollinearity.

normal goods, that is, the richer the country becomes, the more it spends on education and public welfare. A large population means a significant increase in all functional spending, except public safety and general administration. A 10% increase in the country’s total population results in a 7.2% increase in national defense spending, with everything else equal. A 10% increase in the country’s population results in 52%, 87%, and 16.2% increases in educational, economic development, and public welfare spending, respectively, when each of these variables and the other variables in the model are controlled. The relatively large effect of population size compared to that of GDP indicates that the country’s spending decision is likely to be demand driven, rather than revenue driven. The total population’s positive effect on the four functions implies that there is a competing demand for different spending choices in those functions as the number of citizens increases. A 10% increase in density per square mile is associated with a 2.6% increase in economic development and 0.6% decrease in public welfare

266


spending, while other variables in the model remain constant. These results indicate that urban areas tend to receive a greater portion of the economic development budget when compared to more rural areas. This situation may lead to uneven economic development when the majority of the population moves into the capital city and other urban areas. Unfortunately, this seems to be the case in Thailand. The negative effect of density on public welfare spending indicates that the Thai government tends to focus on health and human services in the rural rather than urban areas, results that are consistent with the NSDEB and budget plans. The dynamic coefficients of the line-item budget and the PBB presented in Table 4 respond to the study question: does a budget type make any difference on spending levels across functions, and how? In general, the significance of the dynamic multipliers in the results for the line-item and the PBB models show that these two budget types significantly affect spending levels across functions compared to the PPBS variable, which is omitted as the base case from the regression. As shown in Table 4, a line-item budget does not increase national defense, education, and public safety spending immediately, but it does increase economic development, welfare, and general administration immediately over the year in which the line-item format was adopted for about 1.7%, 1.8%, and 1.9%, respectively. As shown in Table 4, PBB does not immediately affect all functional spending over the year that the decision making was made, except education and economic development. Interestingly, PBB increases education spending immediately over the year in which the budget format was adopted for about 0.6%, while cutting economic development spending immediately in the same year for about 2%. These results suggest that PBB may be partially effective in tailoring public spending decisions toward the National Master Plan (which focuses on human development). Furthermore, PBB may be effective in cutting spending that might be inefficient and ineffective, given that economic development, such as infrastructure spending and business development, in this country tends to be allocated to urban areas where spending need is secondary instead of primary compared to rural areas. For dynamically lagged effects, neither a line-item budget nor PBB have a significant pattern in influencing decision making on national defense spending in years one through five after this budget type was adopted. As shown in column 2 of Table 4, national defense spending is influenced by the prime minister’s ideology rather than budget recommendation and budget types yielded from the budget formulation phase. That is, when the prime minister is from the military, defense spending increases about 1.3% compared to when the prime minister is a civilian. Government


267

fragmentation in the lower house and cabinet does not affect national spending. Thus, neither technical process, that is, PBB and line-item budget types nor democratic process, that is, house votes, affect this country’s defense spending; only a military prime minister influences defense spending. As shown in column 3 of Table 4, line-item and PBB budget types have sporadic effects on education spending throughout the 5-year period after which each of the two budget types is adopted. In addition, such inconsistent effects exhibit negative and positive signs alternately from year to year. These results indicate that PBB is not unique compared to other budget types in influencing decision making in education over the 5-year period after which this budget is adopted. In other words, PBB does not have a significant lagged effect on the country’s educational spending. Also, the government voting system in the lower-house chamber and cabinet does not have a significant effect on the country’s education spending. Interestingly, a military prime minister increases educational spending by about 2% per year. As shown in column 4 of Table 4, a line-item budget significantly increases the economic development budget every year within the 5-year period after it was adopted. Meanwhile, PBB significantly cuts an economic development budget every year within the 5 years after adoption. This clear and consistent pattern that PBB decreases while line-item increases economic development spending in the 5-year period after budget types are adopted implies that PBB differs significantly from a line-item budget, especially in terms of balancing the country’s available resources and its economic development needs. Neither government fragmentation nor the prime minister’s ideology affects the country’s economic development spending. As shown in column 5 of Table 4, a line-item budget does not have significant effect on annual public welfare spending throughout the 5-year period after which the budget was adopted. In contrast, PBB significantly increases welfare spending in year two and decreases this functional spending in years three, four, and five after the budget was adopted. This suggests that compared to a line-item budget, PBB has a significant influence on the country’s welfare spending decision-making process that persists for about 5 years after the budget style was used, even though there is no clear pattern whether PBB increases or curtails welfare spending. The government voting system does not influence this functional spending decision since the coefficient of the number of political parties in the lower-house chamber and cabinet is not significant. However, the prime minister’s military ideology does increase spending by 2% per year compared to civilian prime ministers. The results shown in column 6 of Table 4 indicate that line-item and PBB budgets significantly influence decision making in public safety programs for

268


about 4 and 3 years after the two budget types were adopted, respectively. From column 6, there is a clear pattern that PBB tends to cut safety spending consecutively 3 years after it was adopted. Again, government voting does not involve public safety spending significantly, while having a military prime minister slightly increases safety spending by about 0.3%. As shown in the last column of Table 4, there is no clear direction in the significant and lagged effects of line-item and PBB budgets on general administration spending in the 5-year period after a line-item or PBB budget was adopted. However, the empirical evidence in this column suggests that the effects of both budget types persist for about 3–4 years in the general administration spending decision-making process. Interestingly, government fragmentation significantly increases general administration, while the prime minister’s background or military ideology does not influence it. Table 5 presents the permanent effect of line-item and PBB budget types over the 6-year period. As shown, the line-item budget has permanent and positive effects on economic development spending throughout the 6-year Table 5.

Summary of Linear Combination of Coefficients (Lags 0–5). Coefficient

HAC standard error

t-Stat

National defense Line-item budget Performance-based budget

1.211 0.332

0.637 0.1

1.9 3.289

Education Line-item budget Performance-based budget

0.201 0.209

1.027 0.237

0.196 0.879

Economic development Line-item budget Performance-based budget

12.331 5.554

3.067 0.742

4.02 7.477

Public welfare Line-item budget Performance-based budget

2.700 0.283

1.21 0.407

2.219 0.696

Public safety Line-item budget Performance-based budget

0.432 0.082

0.327 0.088

1.32 0.935

General administration Line-item budget Performance-based budget

0.469 0.018

0.579 0.2

0.809 0.091

Statistical significance at 0.05 level. Statistical significance at 0.001 level.


269

period, while having permanent and negative effect on welfare spending. Importantly, PBB permanently cut the budget on national defense and economic development within the 6-year period. PBB’s cutting effects on national defense and economic development are statistically strong, given that the significance level of these coefficients is at 0.01. PBB’s adoption in the current budget year results in 0.33% and 5.5% decreases, respectively, in defense- and economic-development spending, cumulatively over the 6-year period. This empirical evidence strongly supports the assumption in PBB literature that PBB tends to increase public managers’ accountability and spending efficiency in the long run, given that national defense spending is not a primary activity identified in the National Master Plan and that economic development spending tends to be allocated in the wrong place. As presented in this table, neither a line-item budget nor PBB have a permanent effect on education, public safety, and general administration spending within the 6-year period.

CONCLUSIONS This chapter reexamines the effects of budget formats on government spending in Thailand across functions including defense, education, economic development, welfare, safety, and general administration during the period from 1965 to 2005. The main research questions include whether PBB has an immediate and lagged effect on public spending in the six public service functions. If so, what is the pattern of PBB effects on government spending compared to that of other budget types, namely line-item and program budget? Like the previous study (Srithongrung, 2009), the testing model is specified based on Wagner’s Law indicating that public spending is a function of a country’s income and population, as well as citizens’ tastes and preferences measured through socioeconomic factors such as the country’s economic base and school-age population. Immediate and lagged effects of each budget type on public spending can be captured through the coefficients of dynamic multipliers of the budget type variable in the testing model. Unlike the previous study, this study incorporates political variables, government fragmentation in the lower house and cabinet, and the prime minister’s military or civilian background to understand the decision making in public budgeting in the legislative phase. Finally, the study differs from the previous one in that its time-series data do not have a unit root or stochastic trend, causing estimate results to be biased and inconsistent. To correct this problem, the time-series data were transformed into

270


first-ordered difference form, resulting in an annual percentage change of functional spending, rather than simply annual spending. The finding indicates that, unlike the previous study, when unit roots in time-series data and omitted political variables are controlled for, PBB does not have a clear pattern of dynamically lagged effects on national defense, education, welfare, and general administration over the 5-year period after which PBB was adopted officially. Interestingly, public spending on these functions is positively and strongly affected by the prime minister’s background. That is, a military prime minister tends to increase the budget for these spending functions immediately by about 0.3–2% per year. Furthermore, unlike previous findings, PBB tends to increase educational spending and cut economic development spending immediately over the year in which PBB was adopted. This finding adds empirical evidence to literature that PBB may help decision makers link spending outcome with budget appropriation, given that public education in Thailand has been severely underfunded throughout its 40-year period (Tinakorn & Sussangkarn, 1996) and that economic development spending in the country tends to be allocated in urban instead of rural areas, where needs are greatest. Finally, PBB tends to cut national defense, economic development, and welfare budgets permanently compared to line-item and program budgets within the 6-year time frame, as shown in Table 5. Overall, these findings suggest three points. First, PBB may be effective in such spending functions as education and economic development in the sense that it aligns public spending in the two functions with the country’s master plan and strategic budget plan over the year in which PBB is officially adopted. Second, PBB, however, does not have persistent effects on the country’s national defense and education; both spending types seem to be under the influence of a military prime minister’s decisions and other socioeconomic factors, such as population and income levels, rather than technical budget analysis. Last, in the long run, PBB may not help the decision makers in budget planning to increase educational spending, which the country needs the most. But, in the long run, PBB may help cut national defense spending slightly (about 0.3%) over the 3-year period. It should be noted that national defense is found to be overfunded for a long period (Tinakorn & Sussangkarn, 1996). The limitation of this study is that it might be premature to investigate the effects of PBB at this time, given that this budget type had been implemented for less than 10 years when this study was conducted. Thus, the results of this study are limited by relatively short time-series data. Future studies should reexamine the effect of PBB in a longer time frame


271

and investigate qualitatively how and why PBB is effective only in some specific functions, such as education and economic development. Finally, the impacts of PBB on spending should be compared across countries.

NOTES 1. For example, if the agencies’ performance is worse, should they be granted a greater or smaller budget, given that the poor performance may be due to either an overwhelming workload or the agencies’ unproductive operation? 2. This fundamental value reflects the core ideology of the budget function viewed through the countries’ economic technocrats and elected officials – that the budget should be the main blueprint in planning the country’s economy and society through allocation efficiency derived from rational approaches such as cost–benefit analysis and management analysis. 3. For example, the first version of the plan focuses on economic development and education in the central regions, while the second version designates the same activities as well as income equity in rural areas. The executing plans were to address socioconomic problems at hand, rather than being multiyearly continuous plans working toward the major goals. The appointed board members in NSEDB were changed in every version and citizen inputs were used limitedly in composing the plans. This fact likely affected the action plans (Thailand Social and Economic Development, Version 10, 2007–2011, p. 236). 4. In 1997, Thailand faced a fiscal and economic crisis in which the Thai baht was depreciated in the world capital market. As a result, the country’s reserve funds declined and the revenue bases eroded dramatically due to private businesses’ bankruptcies. Historically, Thailand’s fiscal policy is conservative, as it focuses on saving rather than using deficit finances during poor economic periods. However, this practice brought in an overwhelming supply of money from foreign investors and eventually led the country into a fiscal crisis when foreign debts were high and beyond the private sectors’ capacity (Veerakul, 2005). This crisis catalyzed the new budget reform, which is expected to produce fiscal policies (tax and spending levels) that can revitalize the economy after the crisis (Veerakul, 2005). 5. Unreliable errors can result in inconsistent prediction and forecast activity, resulting in an inefficient OLS test, but hypothesis testing still is valid for the purpose of testing a causal relationship between the independent and dependent variables as long as there is no correlation between the independent variables and the errors terms (Wooldridge, 2006). When heteroskedasticity and autocorrelation are taken into account, the standard errors are higher, resulting in a lower chance to commit Type I errors, that is, rejecting the true null hypothesis, which is important for internal validity in hypothesis testing.

REFERENCES Academic Department of Skybook Publishing Company. (2008). Thailand’s socio-economic development plans. Bangkok, Thailand: Skybook Publishing Co. Ltd.

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Andrew, M. (2006). Beyond best practice and ‘‘basics first’’ in adopting performance budgeting reform. Public Administration and Development, 26, 147–161. Aristigueta, M. P. (2007). Toward a performing public sector: The roles of context, untilization, and networks. Public Performance and Management Review, 30(4), 463–468. Chambers, P. (2008). Factions, parties and the durability of parliaments, coalitions and cabinets: The case of Thailand (1979–2001). Party Politics, 14(3), 299–323. Dixon, G. (2005). Thailand’s quest for results-focused budgeting. International Journal of Public Administration, 28, 355–370. DuPont-Morales, M. A., & Harris, J. E. (1994). Strengthening accountability: Incorporating strategic planning and performance measurement into budgeting. Public Productivity and Management Review, 17(3), 139–231. Grizzle, G. (2001). Linking performance to funding decisions: What is the budgeter’s role? In: G. J. Miller, B. W. Hildreth & J. Rabin (Eds), Performance-based budget: An ASPA classic (pp. 245–260). Boulder, CO: Westview Press. Jitsuchon, S., & Kingkeaw, R. (2004). The development of a fiscal model to determine the appropriate budget allocation. Thailand Development Research Institution (TDRI) Quarterly Review, 11(2), 3–9. Joyce, P. (1993). Using performance measures for federal budgeting: Proposals and prospects. Public Budgeting and Finance, 13(4), 3–17. Kaosa-ard, M. (1998). Economic development and institutional failures in Thailand. Thailand Development Research Institution (TDRI) Quarterly Review, 13(1), 3–11. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2008). Governance matters VII: Governance indicators for 1996–2007. The World Bank. Retrieved from http://info.worldbank.org/ governance/wgi/mc_chart.asp, dated October 6, 2008. Kennedy, P. (2006). A guide to econometrics (5th ed.). Cambridge, MA: The MIT Press. Kettl, D. (1997). The global revolution in public management: Driving themes, missing links. Journal of Policy Analysis and Management, 16(3), 446–462. Kettunen, P., & Kriz, K. (2006). Logic modeling and the theory of performance measurement. Unpublished paper (cited by the author’s permission). Mikesell, J. L. (2006). Fiscal administration: Analysis and applications in the public sector (7th ed.). Thompson: Wadsworth. Mullen, P. (2006). Performance-based budgeting: The contribution of the program assessment rating tool. Public Budgeting and Finance, 26(4), 79–88. National Performance Review (NPR). (1997). Benchmarking study report. Retrieved May 8th, 2009 from www.govinfo.library.unt.edu National Partnership for Reinventing Government (NPRG). (1999). Balancing measures: Best practices in performance management. Retrieved May 10, 2009 from http://rainier.wa.us/ Subjects/Management/performancemeasurement.aspx Reddick, C. (2003). Testing rival theories of budgetary decision-making in the US States. Financial Accountability & Management, 19(4), 315–339. Schick, A. (1966). The road to PPB: The stages of budget reform. In: J. M. Shafritz & A. C. Hyde (Eds), Classics of public administration, 1997 (4th ed., pp. 220–236). Orlando, FL: Harcourt Brace & Company. Sorber, B. (1993). Performance measurement in the central government department of Netherlands. Public Productivity and Management Review, 17(1), 59–67. Srithongrung, A. (2009). The effects of results-oriented budgeting on government spending patterns in Thailand. International Public Management Review, 10(1), 59–89.


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Stock, J., & Watson, M. (2007). Introduction to Econometrics (2nd ed.). Boston, MA: AddisonWesley. Tinakorn, P., & Sussangkarn, C. (1996). Study of the Thai Government budget allocation: An international comparison. Thailand Development Research Institution (TDRI) Quarterly Review, 11(2), 3–9. Veerakul, K. (2005). Cost calculation in strategic budgeting system. Thailand Bureau of Budget Internal Study Report. Available in print at Thailand Bureau of Budget Library. Wooldridge, J. (2006). Introductory econometrics. Mason, OH: Thomson South-Western.

APPENDIX A. SUMMARY OF NSEDPS (Excerpted from Thailand’s Socio-Economic Development Plans, 2008)

Plan 1: 1961–1966 The plan has a single goal, to increase the country’s economic growth rate. The policy priorities were identified by foreign and Thai experts at the top management level. Action plans are supply-side economic development in which public infrastructure and incentives are used to attract foreign investment.

Plan 2: 1967–1971 The plan still has a single goal, to increase the country’s economic growth rate, but it is more specific by focusing on rural areas. The policy priorities were identified by foreign and Thai experts at the top management level. Action plans are supply-side economic development in which public infrastructure and incentives are used to attract foreign investment.

Plan 3: 1972–1976 The plan still has a single goal, to increase the country’s economic growth rate, but is focused more narrowly on reducing income gaps throughout the country. The action plans range from increasing economic stability through conservative government finance to increasing national saving and reducing population growth rates.

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Plan 4: 1977–1981 The plan still focuses on enhancing the economic growth rate. Action plans include industrial and agricultural development, brown-field development, natural resource conservation, income distribution, foreign trade, and reducing national trade deficits.

Plan 5: 1982–1986 The plan focuses on economic growth and stabilization. This plan designates that PPBS must be prepared for budget allocation, public service production, and delivery, especially for the rural development and eastern seaboard industrialization programs. The plan still is decided at the top management level where the technical experts are foreigners and Thai elites.

Plan 6: 1987–1991 The plan has multiple goals in social and economic development. Action plans include sciences and technology development, workforce literacy, conservative public finance to increase national saving, and stateenterprises’ structural development. In addition to Thai and foreign experts and Thai elites, media representatives and private sector chief executive officers were involved in writing the plan. Plan 7: 1992–1996 The plan focuses on a sustainable economy and social quality. The action plans include expanding the economy, income distribution, human development, better quality of life, and better environments. Plan 8: 1997–2001 The plan focuses on enhancing the economy and quality of life through such actions as increasing education standards and accessibilities throughout the country, creating sustainable environments, and preserving the country’s natural resources. This plan officially designates that such actions must be


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considered seriously and adapted by ministers and public sector employees. In addition to foreign and Thai experts, private sector leaders, media representatives, and representatives from various professions were involved in writing the plan (direct input from citizens was not solicited). Service contracts between top management level, Thai Bureau of Budget (BOB), and ministries, as well as the department heads and agencies called Public Service Agreement (PSA) and Service Delivery Agreement (SDA) were implemented in some selected ministries and departments as a pilot project for new budget reform. Plan 9: 2002–2006 The plan resembles the previous plan, reasoning that the country’s policy priorities should be continuous. During this period, strategic goals were set in budget documents and were translated into departments’ goals. Service contracts between top management level, Thailand BOB, and ministries, as well as the department heads and agencies called PSA and SDA were implemented across departments.

0 1 2 3 4 5

Model

1.016 1.037 3.363 1.094 1.103 1.931

1.201 1.106 3.836 1.217 1.263 2.182

0.091

0.552

0.292

1.534 1.492 1.449 1.498 1.583 1.564 1.414

1.056 1.07 3.811 1.121 1.143 1.933

0.515

7.6 8.6 7.089 5.492 3.78 1.945 0.89

1.638 3.938 1.721 1.744 2.113 2.1

Notes: (1) VIF statistics larger than 4.00 indicates high multicollinearity. As shown in the table, all models, except model 6, do not have multicollineraity problems. (2) Autocorrelation statistics is F-statistics whose null hypothesis is that there is no autocorrelation in the model. As shown in the last two rows of this table, all models whose dependent variables are first-ordered difference of percentage spending of each of the five functions to total expenditure do not have autocorrelation problems.

1.542 1.492 1.452 1.527 1.644 1.676 2.61

1.129 1.262 4.561 1.496 1.513 2.131

1.771 1.504 1.456 1.499 1.583 1.565 0.837

1.086 1.158 4.624 1.162 1.146 1.934

1 2 3 4 5 6 Percentage of Percentage of general Percentage of Percentage of Percentage of Percentage of welfare spending safety spending management spending economic education defense spending to total expenditure to total to total spending to total development to to total expenditure expenditure total expenditure expenditure expenditure

PPBS Omitted to avoid perfect multicollinearity PBB lag 0 1.561 1.546 PBB lag 1 1.404 1.543 PBB lag 2 1.222 1.47 PBB lag 3 1.274 1.523 PBB lag 4 1.252 1.632 PBB lag 5 1.187 1.564 Autocorrelation 0.884 0.773 statistics (5 lags) Autocorrelation 0.52 0.589 P-value (5 lags)

VIF statistics Line-item lag Line-item lag Line-item lag Line-item lag Line-item lag Line-item lag

Dependent variable

APPENDIX B. MULTICOLLINEARITY AND AUTOCORRELATION TEST 276 ARWIPHAWEE SRITHONGRUNG

PART III PUBLIC MANAGEMENT REFORMS WITH EMPHASIS ON PERFORMANCE AND RESULTS

CHAPTER 11 MANAGING PERFORMANCE IN A CONTEXT OF POLITICAL CLIENTELISM: THE CASE OF THAILAND Suchitra Punyaratabandhu and Daniel H. Unger INTRODUCTION In this chapter, we describe the formal features of recent reforms in Thailand’s public administration. While it remains premature to attempt definitive assessments of the impact of those reforms, we deduce grounds for concern. In particular, we suggest that successful public management reforms must rest on a reasonable degree of congruence between the reforms’ implicit assumptions on the one hand and Thai political and social conditions on the other. And we suggest that such a match is not evident in the case of Thailand’s most recent administrative reforms. The Siamese state achieved a century ago a degree of effective control over the territory and population of contemporary Thailand. It performed the core functions of the night watchman state, at least as seen from the perspective of the very small elite that controlled it. Building on late 19th century administrative reforms designed to consolidate centralized control over the territory of Siam, the Thai state preserved Thailand’s political independence, and across the territory of Siam approximated a uniform and The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 279–306 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018013

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standardized set of administrative practices. A reasonably professionalized civil service emerged with merit-based systems of hiring and promotion. Further bureaucratic and economic reforms in the middle of the 20th century enabled sustained and rapid economic diversification and expansion. With only modest state investment (largely in primary education and transport infrastructure), economic growth was based on natural resource abundance, including large and rich expanses of agricultural land. Demands from Thai citizens for more services beyond those necessary to sustain the rural-based market economy were slow to emerge. Foreign exchange earnings were based largely on the export of unprocessed primary commodities. Both farmers and business people were politically weak. Business firms were to a degree self-organizing, creating the commercial and financial institutions needed to service economic activities. By the early 1970s, however, Thais were beginning to press the state for more services. The economy and its exports grew more complex and diversified as business became politically far more powerful. At the same time, the economy’s long-term macroeconomic stability came partly unstuck. By the 1980s, the economy began to shift decisively toward manufactured exports, and businesses were able to press the state for regulatory changes to enable the economy’s diversification and structural shifts. Whatever the shortcomings of Thailand’s bureaucracy, it did not impede a remarkable record of sustained growth. Only four countries in the world with larger populations (China, Indonesia, Brazil, Japan) also managed the feat of average real annual economic growth of 7% or more over a 25-year period (Commission on Growth and Development, 2008, p. 19). Earlier administrative reforms had taken root in Thailand only to a limited extent. Practices based on the impartial rule of law were not necessarily the rule. Impersonal (Weberian) procedures were not widely embraced. Many forms of corruption remained widespread. Hence, by the 1970s, recurrent administrative reform campaigns had become a feature of Thailand’s political landscape. Few governments were in power long enough, however, to move from reform pronouncements to actual implementation of new policies, so that the impact of these administrative reform plans was therefore limited. Moreover, it is difficult, if not impossible, to determine whether or not there was sufficient political will to implement such reforms, had governments stayed longer in office. A distinctive feature of public sector reform in Thailand in the last decade has been the promotion of principles of good governance. This policy initiative was, arguably, less the result of endogenous demand than of loan conditionality imposed by the International Monetary Fund in the

Managing Performance in a Context of Political Clientelism

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aftermath of the economic crisis of 1997. New public agencies were created to promote good governance and to oversee management reform in compliance with principles of good governance. In 1998, the King Prajadhipok Institute, a juristic body under the supervision of Parliament, was created. A stated objective of the institute is to present ‘‘models of good governance in practice to target groups around the country’’ (http://el.kpi.ac.th/kpien). Thailand elected a new government led by Thaksin Shinawatra early in 2001, and Thaksin continued the administrative reform policies. In 2002, an Office of the Public Sector Development Commission (OPDC) was set up, with the aim of promoting effective performance of government agencies consistent with public sector development policies and principles of good governance. The Thai government made a further policy commitment to good governance, promulgating a Royal Decree on Good Governance in 2003. Since 2004, a result- and performance-oriented framework has been in use to measure progress against plans. Government departments’ plans are required to align with ministerial strategies, which in turn are aligned with national strategies. Line item budgeting has been replaced by strategic-planbased budgets. Key performance indicators have been identified for all activities undertaken by public sector agencies. The government has initiated a performance appraisal system based on the balanced scorecard. Rewards in the form of bonuses are given to departments on the basis of performance as measured by key performance indicators. In short, the government has adopted the panoply of policies and measures associated with the new public administration paradigm.

WALKING THE WALK? It certainly is premature to gauge with much confidence the results of Thailand’s management reforms (though we address this task briefly in our conclusion). It seems likely that among the problems associated with these reforms were the ambition, scope, and complexity of the reforms. With political capital and initiative consequently diluted by its wholesale application across the government, some of these reforms may have tended to become hand-waving exercises. There are also, however, grounds for worry about the degree of fit between the norms implicit in the performance management paradigm and those that pervade Thailand’s administrative, political, and social institutions. Scholars in public administration have noted that in order for management reforms to be effective, account has to be taken of social and

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organizational conditions (Schedler & Proeller, 2007; Barzeley, 2006, p. 8). Certain environments – social, cultural, and political – are presumably more conducive to the success of management reform efforts than others. To some extent, reforms require a hospitable context if they are to be effective. Specifically, transparent, performance based monitoring, with its implications for government accountability, does not seem to be rooted logically or historically in systems of political clientelism. In clientelistic political systems, the key incentive structures confronting politicians militate against transparency or accountability. We do not argue here that contextual factors necessarily are causally prior to narrower institutional influences, but simply we analyze the latter while ignoring the former at considerable peril. Thailand has been described as a clientelist system. Neher and Bowornwathana’s contention of two decades prior that Thai ‘‘politics y is still based on nearly the same clientelist rules as have prevailed in traditional Thai society’’ is not yet hopelessly dated (1986, p. 17). Many features of the traditional society remain solidly entrenched, especially in rural areas and among low income, less educated urban groups. Indeed, the political economist Anek Laothammathas (1995) proposed a framework of ‘‘Two Thailands’’ (song nakara) for analysis of Thai politics and society. The first Thailand is predominantly rural and agricultural. Its ways are the traditional ways, and its politics is based on clientelism. The second Thailand is primarily urban and middle class, with a tendency to espouse Western standards and norms, although still reflecting traditional hierarchical norms. Politics, perhaps increasingly in recent years, provides an arena for a clash of the two cultures.1 Accountability, transparency, participation, rule of law – when packaged together in the good governance paradigm – tend to assume the existence of a democratic, egalitarian, pluralistic, and participatory society. Thai traditional culture, by contrast, emphasizes hierarchical relationships and patron–client ties. Hierarchy in social relations means that persons higher up in the hierarchy are ascribed certain authoritative powers and wisdom, and are deferred to by those lower down in the scale. Patron–client linkages imply an exchange relationship: a patron has the duty to protect and promote the welfare of his clients; a client returns the favor by obeying and carrying out the wishes of his patron (Samakarn, 2004). Largely absent from this picture until more recently are the horizontal bonds of solidarity underpinning a vibrant civil society. Hence, critical interlocutors vital for holding state authorities accountable tend to be rather weak. Charoenwongsawad (2004, pp. 30–31) has identified three core values underlying patron–client ties: putting the interests of one’s own group above


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all other interests; making reciprocity and mutual interdependence the basis for patron–client relationships (e.g., superior and subordinate, politicians and public officials, public officials and citizens); and placing a high value on gratitude and loyalty (‘‘katanyu’’ which is akin to filial piety, except in this case it extends to piety shown by clients to their patrons), including the return of past kindnesses and favors. Such values run contrary to ‘‘a logic of governance rooted in the rule of law’’ (Heinrich, Hill, & Lynn, 2004, p. 10) and fly in the face of the universalistic principles upon which all modern bureaucracy is supposed to be based. Thus, in the traditional culture, public/ private distinctions carry little weight. A holder of public office, in the role either of patron or of client, would pay scant attention to norms of transparency or rule of law. Hence, for reasons of political advantage (politicians prefer to be able to target benefits precisely to maximize the political support they buy) as well as reflecting dominant norms (it is expected that powerful people help those who come into contact with them), those responsible for creating and implementing policies in Thailand often prefer to maximize their discretion even where specific acts of corruption are not involved. Political clientelism in Thailand is not only confined to national politics. Current decentralization policies, mandated by the 1997 and 2007 constitutions, have had the unintended effect of restructuring clientelism. Functions previously the jurisdiction of the central and provincial administration are being turned over gradually to local governments down to the tambon level: building infrastructure, including road construction, waterworks, city planning, and building regulations; local education and health; and, in the not so distant future, law and order. This has been accompanied by large fiscal transfers from the central government to local governments. Local governments, to an unprecedented extent, now possess the power of the purse. And leaders of these new governments gain offices through competitive elections. Local offices are eagerly sought, as evidenced by former members of the national parliament, including senators, now standing for local office. Inevitably, links between political networks at national and local levels are growing stronger (Nelson, 2007, pp. 128–129.) The central question we ask in this chapter is, if the description of Thailand as a clientelist system is indeed correct, what are the implications for performance management outcomes? Do performance standards reduce corruption? Or does corruption persist despite performance standards? What about rule of law, so integral to the concept of good governance? Rule of law requires adherence to universalistic principles, as indeed does performance management, while the logic of clientelism implies application

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of particularistic criteria. Most fundamentally, if not enough Thais ‘‘buy into’’ the worldview associated with the performance management model, are the reforms likely to be effective? Or will the reforms, instead, tend to be surface exercises in hand waving with limited substantive impact? The first section of our chapter below reviews the concept of political clientelism and identifies key propositions relating to performance management. In the second part, we provide an overview of Thailand’s administrative reform and performance management initiatives in the 1997–2007 decade. We critique these initiatives in the third section. The final part reviews a number of comparative indicators of the quality of governance in Thailand today. It also takes up questions about the fit between norms associated with performance management and those dominant in Thai social institutions. And it considers briefly the question: If not performance management, what sorts of reforms of Thailand’s public administration might be effective?

POLITICAL CLIENTELISM The ways in which formal institutions such as budget committees or human resource management offices or parliaments operate and interact are apt to vary systematically depending on the environments in which they are embedded. Barbara Geddes (1991), for example, pointing to institutional or structural factors, argued that the reform incentives confronting politicians tend to vary with the degree to which electoral competition produced regular rotation among parties in power. Politicians confront a dilemma in deciding whether or not to implement administrative reforms that curb their abilities to direct state resources to particular client groups. Such a step is not likely to serve their political interests unless they anticipate losing political power, in which case they have an incentive to saddle their political opponents with the same restraints. Geddes’ analysis is based on an assumption of at least semi-institutionalized political party systems. In the example above, party interests play the central analytic role (even individual politicians, after all, have to work within party institutions if they are to achieve their particular goals). In less institutionalized party systems, however, the incentives confronting politicians could differ. Their individual interests and those of party leaders would not necessarily align, except briefly. Indeed, in the Thai case (though this may be changing), factions, or even individual politicians, may be more


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appropriate units of analysis (due to party switching in the past) than are political parties. We argue that not only political institutions and the structure of political competition, but also widely held values and broadly distributed behaviors, condition politicians’ commitment to programs of administrative reform and the ways in which they implement reforms. Changing deeply rooted systems with their interdependent, mutually constitutive parts is not easy. We know as an empirical matter that it happens, but do not know a great deal about when or under what circumstances it can happen relatively more rapidly or successfully. Too often, students of public administration in Thailand fail to acknowledge the degree to which formal institutions are parasitic upon informal ones and work only ‘‘because they are embedded in implicit and informally shared expectations’’ (Helmke & Levitsky, 2006, pp. 1–2). For example, reform advocates in the Thai context often fail to address the collective goods properties and the relative scarcity of highquality information. This scarcity disproportionately punishes asset-poor citizens who are less likely to have the means to ferret out information. Donatella della Porta (2000, pp. 22–25) describes some of the ways that lowquality administration, or administrative paralysis, can tend to turn rights into favors. In the process, a ‘‘cryptocracy’’ may be created in which hidden and protected information constitutes a key and valued resource to which the poor in particular have limited access. The ways in which conditions of political clientelism shape politicians’ motivations and behaviors contrast with the expectations of politicians that are implicit in much of the literature on the new public administration. The new public administration model implicitly assumes that we can make politics exogenous to our models. Laws and the politics that produce them, in this stylized version, establish the framework within which administration happens. The ‘‘responsible party government’’ model in which citizens make choices based on competing party policy programs (usually as summarized by party labels and ideologies) encourages politicians to expect voters to hold them accountable, and for voters to do so through retrospective ‘‘sociotropic’’ voting (Stokes, 2006, p. 126). In Thailand, however, as well as other clientelist polities, politics are particularly prone to come into play after the administrative framework has been set and, indeed, after laws have been passed. As a result, the assumption that for at least some purposes we can make politics exogenous to our analysis is mistaken. Most of the politics is in law implementation, not lawmaking. In clientelist political systems, citizens sell their votes or trade them for particular goods and services. Politicians not only target benefits on particular groups, but make the

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delivery of those goods contingent on citizens keeping their side of the deal (Kitschelt & Wilkinson, 2007, pp. 1–2, 10). In clientelist contexts, politicians have incentives to maximize their discretion in how they target policies, with few specific rules guiding the distribution of benefits (Kitschelt & Wilkinson, 2007, p. 12). The result is that politicians need not fear being judged at the polls on the basis of their stewardship of the national economy, their implementation of administrative reform, or any other collective goods (Lyne, 2008, p. 167). Political clientelism invokes ‘‘the principle of ‘take there, give here’ ’’ (Roniger, 2004, p. 353). It links citizens to the state on a contingent basis (subject to a quid pro quo) and directly to politicians. Typically political clientelism involves promises of favorable policy implementation rather than policy pledges. It tends not to feature lawmaking and great struggles in parliament to enact landmark legislation. Rather, it involves quiet efforts to nudge the ways in which existing policies are applied so that they can benefit favored constituents. And, as noted above, clientelistic politics tends to vitiate democratic accountability. Opportunities to craft clientelistic links tend to be rich in the areas of business and market regulation, the awarding of specific market advantages, and procurement and operating contracts for government infrastructure (Kitschelt & Wilkinson, 2007, p. 36). The direct management of public enterprise under the auspices of agencies headed by elected politicians opens the door wide to the construction of clientelistic patronage networks. A thus ‘‘politicized’’ economic governance structure feeds directly into the partisan circuits of clientelistic principal–agent relations. Where clientelist arrangements pervade political and administrative systems, the motivations of officials responsible for implementing policy reforms may well be compromised. In addition to wanting to maximize their discretion in order to be able to target benefits in ways that sustain their support coalitions, politicians may simply be reflecting dominant normative practices when they struggle to retain discretion in allocating scarcity. They are expected to (they ‘‘ought to’’) allocate those goods to those most deserving (their allies and supporters). The quality of being ‘‘most deserving’’ is not likely to stand up to a test of ‘‘intersubjective agreement’’ and is not impersonally determined, but may all the same be normatively binding. Where these conditions obtain, the fate of performance management reforms is apt to suffer if reform architects do not make appropriate allowances for those conditions. Thailand’s current performance management reforms promoting good governance and policy transparency may fail


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unless they take account of the incentives facing politicians charged with implementing reforms in patronage-based systems.

ADMINISTRATIVE REFORM 1997–2007 Thai administrative reform and implementation of a results-based management system (RBM) within the framework of good governance arose as a direct consequence of loan conditionality imposed by the International Monetary Fund and Asian Development Bank in the aftermath of the financial crisis of 1997. The RBM, implemented since 1999 in accordance with the New Public Management paradigm, is part of Thailand’s Administrative Renewal Project (ARP), which receives generous funding assistance from the Economic Management Assistance Project of the World Bank. The objective of ARP is for government agencies to develop goals and performance indicators that are cost-effective and measurable, with clear and transparent procedures for achieving those goals. The concept of good governance was given substance when the Thai cabinet approved an administrative reform plan in May 1999. While the influence of international financial institutions in Thailand waned after Prime Minister Thaksin Shinawatra came to power in 2001, the new government maintained its predecessor’s policies regarding performance management reforms. While it is not clear when new ideas took root in Thaksin’s mind, at some point he recognized that he wanted to push a new political paradigm in Thailand, in which the centralization of power and electorally based political dominance would be the key elements. Under this model, clientelism would be of declining political importance (though not corruption, which would be pursued primarily by other policy means). Thailand’s clientelist system operated through decentralized networks of local brokers loosely associated in political factions, parties, and networks. Under Thaksin, single party dominance featuring less mediated (more direct) linkages between voters and the executive became possible. And Thaksin, who came to think that he might hold the premiership for a couple of decades as had Prime Ministers Mahathir Mohamed in Malaysia and Lee Kwan Yew in Singapore, and who once described himself as a ‘‘Genghis Khan’’ type of manager, was not shy about pushing for reforms in Thailand’s administration, thereby facilitating centralized control. In many contexts, it is easy to conclude that earlier administrative reform initiatives never had a chance of success as they enjoyed high level political backing only briefly, if at all. This argument is harder to make during the

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Thaksin governments (2001–2006), where Prime Minister Thaksin seemed to be committed to the goal of a more effective state administrative apparatus, particularly one able to support the country’s business sector. In addition, Prime Minister Thaksin was perhaps the first Thai political leader in half a century who was able to assert political control over the bureaucracy. Hence, the shortcomings of Thailand’s most recent administrative reforms should be assessed with these political factors in mind. Two key documents set forth public sector reform strategies and measures: the 1997–2001 Master Plan for Public Sector Reform and the 2003–2007 Strategies for Thai Public Sector Development. Both specify strategies for RBM.

MASTER PLAN FOR PUBLIC SECTOR REFORM (1997–2001) The committee on public sector reform, established during the tenure of Prime Minister Chuan Leekpai, drew up the Master Plan for Public Sector Reform 1997–2001. The objective of the plan was to reform the public sector in Thailand by focusing on five major elements: roles, tasks, and procedures of public agencies; the budgetary system, with focus on results and outcomes; the personnel administration system; the legal system; and bureaucratic culture and values. Key measures specified in the plan are given in Table 1. For example, reform of the bureaucratic culture incorporated measures designed to foster effectiveness and ethical behavior and deter corruption on the part of public officials. In addition, the master plan provided for the establishment of a national committee on public sector reform tasked with promoting reform efforts. In the period 1999–2001, the Office of the Civil Service Commission (OCSC)2 was assigned the task of developing a system for evaluating the work of government agencies in order to promote a results-based approach. Initiatives included strategic planning and identification of key performance indicators to make the operations of government more transparent to the public. RBM in essence refers to administrative practices which emphasize organizational performance, based on an assessment of actual outputs and outcomes against stated objectives. Organizational performance is viewed as the joint responsibility of both administrators and staff. Administrators may use RBM as a tool to measure progress. If outcomes as assessed against


Table 1.

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Master Plan for Public Sector Reform, 1997–2001.

Strategy

Measures

Reform the roles, tasks and administrative procedures of public agencies

Revise roles and tasks of public agencies Develop strategic plans for public agencies Develop public sector data systems and technologies Develop appropriate standards in the provision of services Encourage participation by service recipients Develop methods for evaluating the work of state agencies, to promote RBMS Clearly delineate the roles and responsibilities of politicians and civil servants

Reform the budgetary system to focus on results and outcomes

Improve the budgetary system to focus on results and outcomes of pilot agencies Develop a system for evaluating work plans and reporting methods, both from a financial standpoint and operational results Develop a system for decentralizing power in budgetary matters for pilot agencies Expand coverage of available budgets Improve public sector accounting procedures to meet international standards Develop a system to forecast estimated budgets for pilot agencies Decentralize power, budget preparation and management to local governments Develop communications technology for macro level fiscal management Review and revise laws pertaining to budgetary matters Review public sector procurement procedures Expand the results of improvements to systems involving budgets, finances, and supplies.

Reform the personnel administration system

Develop effective and appropriate employment procedures Reform the position classification system and payscales Develop performance indicators Develop a system of high-level administrators (SES) Reduce the number of public sector personnel Make improvements regarding the appointment and development of public sector officers Improve discipline Revise procedures for public sector employees to quit government service

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Table 1. (Continued ) Strategy

Measures Review the powers and responsibilities of central personnel agencies

Reform the legal system

Make suitable changes to the law to fit in with the administrative system Develop more effective law-making procedures Conduct surveys and improve rules and regulations that are obstacles to the provision of public services

Reform culture and value systems

Inculcate values that foster creativity and ethical behavior in public officials Change the outlook of public officials toward work procedures, for the benefit of the general public and society Conduct campaigns and promote values that foster creativity and ethical behavior among public officials Improve procedures for rewarding and punishing public officials Construct a database on corruption Conduct campaigns to reduce dishonesty and illegal activities in the public sector Develop protective measures for persons providing information that is useful to state agencies

Source: Adapted from Office of the Committee on Administrative Reform, Office of the Civil Service Commission (1997).

stated goals are unsatisfactory, administrators have the opportunity to revise their strategies in a timely manner. In search of innovative ideas and models (best practices) for implementing bureaucratic reform, the then secretary general of OCSC personally undertook study tours of many countries, including Britain, the United States, and Australia. A full delegation headed by the secretary general also visited New Zealand. The conclusion was reached that the New Zealand model yielded the most tangible results. With respect to performance evaluation, the OCSC decided to adopt the framework of the balanced scorecard (Kaplan & Norton, 2001), and hired the consultant firm Arthur Andersen to make suitable adaptations. The modified version of the balanced scorecard was intended to serve as a framework for establishing critical success factors and key performance indicators. The performance of public sector agencies was to be evaluated on


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four dimensions: external, internal, financial, and innovation. The external dimension evaluated the organization from the perspective of service recipients and stakeholders, both in the public and private sectors. The internal dimension evaluated post hoc organizational structure, work processes, human resources, organizational competencies, culture, and values. The financial dimension focused on the conservation of administrative resources, cost-effectiveness of budget implementation, and ability to provide services, including safeguards against dishonest and corrupt practices. The final dimension, innovation, evaluated the organization’s ability to change. Next, a pilot program was set up, with participation on a voluntary basis. RBM was first implemented in the Insurance Department, Ministry of Commerce, in November 1999. In 2001, RBM was extended to the seven remaining departments of the Ministry of Commerce. In addition to the Ministry of Commerce departments, 13 other government agencies also participated on a voluntary basis. By 2003, a total of 48 departments – or nearly half of all central government departments – had voluntarily enrolled in the pilot program. In 2004, RBM was made compulsory for all central and provincial government agencies, but it was not extended to local governments. Administrators of government agencies participating in the pilot program, in conjunction with the OCSC, identified critical success factors and key performance indicators on all four dimensions, in the context of the agency’s specific functions. This was achieved through a consultative, participatory procedure whereby the OCSC provided technical support services to each government agency. The consultative process took about nine months. Each government agency was allowed to specify its own critical success factors (i.e., factors deemed critical to successful and effective performance) and its own key performance indicators. For obvious reasons, this procedure gave agencies sufficient latitude to specify indicators that were realistically achievable, and to omit those that were not, thereby reducing initial bureaucratic resistance to the Balanced Scorecard.

CREATION OF THE PUBLIC SECTOR DEVELOPMENT COMMISSION AND STRATEGIES FOR THAI PUBLIC SECTOR DEVELOPMENT 2003–2007 In late 2002, the Public Sector Development Commission (PDC), headed by the prime minister or a deputy prime minister appointed by the prime

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minister, was established to replace the committee on public sector reform. The secretariat function was no longer performed by the OCSC. Instead, an OPDC was created to act as secretariat.3 An important function of the PDC is to advise the cabinet on public sector development and reform, including organizational restructuring, budgetary system, personnel system, remuneration, and moral and ethical standards, to facilitate implementation of Article 3/1 of the State Administration Act of 2002, which provides a framework for the national administration. Article 3/1 states that the national administration must function for the benefit and well-being of the people; state agencies must be efficient and results oriented; jurisdictions and resources shall be decentralized to the local level; and decision-making powers, as well as the provision of facilities to respond to the needs of the people, shall be decentralized.4 A Strategic Plan for Thai Public Sector Development 2003–2007 was drawn up to serve as a guideline for achieving the objectives of Article 3/1 of the National Administration Act. The vision embodied in the plan was to ‘‘develop the Thai national administrative system to achieve levels of excellence for national development in the globalization age, based on principles of good governance and the welfare of the people.’’ The plan had four key objectives: better service quality, ‘‘rightsizing’’ the bureaucracy, high performance standards, and democratic governance. Were these objectives incompatible with clientelism? Not really, insofar as the conferral of offices and positions was concerned. As stated in Section II, Article 52 of the 1992 Civil Service Regulations Act (and reaffirmed in the amended 2008 Act), the appointment to positions of director general (Position Classification 10) and higher, which number some 500 positions in the Thai civil service, is at the disposal of the prime minister and his cabinet. In practice, moreover, political influence over appointments has extended way below the rank of director general. The 2003–2007 Strategic Plan was the product of the newly created OPDC. OPDC staff produced a draft plan which was then posted on its Web site. Inputs were invited from the public at large. Workshops were held to secure advice from experts representing all sectors. Last but not the least, guidance was provided by PDC commissioners, in particular the noted academics Chai-Anan Samudavanij and Bowornsakdi Uwanno. The four key objectives of the plan were to be achieved through implementation of seven strategies: (1) reform of work procedures and methods; (2) reform of the national administrative structure; (3) reform of fiscal and budgetary systems; (4) reform of the human resource management and remuneration systems; (5) development of new perspectives, culture,


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and values; (6) modernization of the bureaucracy; (7) opening up the national bureaucracy to allow participation by the people. The strategies and measures designed to achieve the strategies are summarized in Table 2. The 2003–2007 Strategic Plan was in essence a refinement of the 1997–2001 Master Plan for Public Sector Reform. The basic objectives of the earlier plan were retained, but whereas the 1997–2001 Plan had outlined five major strategic areas for reform, the 2003–2007 Plan listed seven strategies. Strategies outlined in the first plan had comprised: (1) reform of the roles, tasks, and administrative procedures of public agencies; (2) reform of the budgetary system; (3) reform of the personnel administration system; (4) reform of rules and regulations; and (5) reform of bureaucratic culture and values. The second plan retained the first, second, third, and fifth strategies of the first plan, but fine-tuned the measures. The second plan added three more strategies: reform of the national administrative structure, modernizing the bureaucracy (with emphasis on e-government and information technology), and allowing people’s participation in the processes of government. In fact, the latter two strategies had already appeared as measures in the first plan, but were accorded the status of separate strategies in the second plan. And while reform of rules and regulations disappeared as a strategy in the second plan, in fact most of its measures were reassigned to other strategies, namely, reform of public agencies’ procedures and modernization of the bureaucracy. Lastly, a Royal Decree Concerning Good Governance was enacted in 2003 to facilitate implementation of the 2003–2007 Strategies for Thai Public Sector Development. The decree also served to clearly establish rules and guidelines for national administration, based on principles of good governance. The royal decree contains nine sections. Among its highpoints are clauses relating to budgeting procedures (Section 3, Article 16 called for agencies to devise four-year plans) and ‘‘independent’’ evaluations of agency services (Section 8, Article 45). Additionally, a set of regulations called ‘‘Regulations of the Office of the Prime Minister Pertaining to National Administration Plans 2004’’ was drawn up, which specify in detail the steps and timeframes of various processes.

RESULTS-BASED INITIATIVES IN 1997–2001 MASTER PLAN AND 2003–2007 STRATEGIC PLAN The 1997–2001 Master Plan for Public Sector Reform had specified three key strategies for RBM: transformation of work procedures and methods;

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Table 2.


Strategies for Thai Public Sector Development, 2003–2007.

Strategy

Measures

Reform work procedures and methods

Adapt RBM for strategic and procedural plans. Provide the public with information on organization scorecards. Establish targets for increasing efficiency, improving the quality of services, and organizational development. Modernize the system of internal controls in government agencies, for example, implementing cost effectiveness audits. Improve the work evaluation system, through negotiations and agreements concerning annual results with heads of national administrative agencies. Conduct year-end monitoring exercises and evaluations whether agreements have been implemented. Review and revise strategic plans and work plans/projects on a systematic and regular basis. Establish procedures for integrating public input into strategic planning and work plans. Amend outdated laws/regulations that constitute obstacles to effective provision of public services. Increase competition by reducing government agencies’ monopoly on public service provision. Draw up national development guidelines and provide handbooks on good national development practices.

Improve the national administrative structure

Bring order to the national administrative structure by means of an integrated matrix with regard to developing strategies and applying the strategies in ministries and departments, as well as aim for internal integration within each ministry. Review and reform organizational structures of ministries and departments, making them more suited to their allotted tasks. Effect structural improvements; develop local government administration at district and provincial levels. Review the system of personnel administration at the level of regional government.

Reform fiscal and budgetary systems

Ensure budgets are spent in accordance with Cabinet policies/ government strategies; ensure accountability for results through agreements concerning tangible outcomes, such that monitoring and evaluating can be conducted at every level. Adjust the budgetary system to link to government strategies; make public officials more responsible and results oriented. Develop integrated strategies or area development plans; allocate resources with focus on area conditions. Government agencies agree beforehand that unused budgets can be allocated to institutional development or training. Evaluate options for reviewing and swapping assets in the government sector for capital, for example, capital charges.


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Table 2. (Continued ) Strategy

Measures Prepare monthly/quarterly expenditure plans; prepare financial statements/reports for electronic funds transfer. Improve the accounting system to international standards, so capital costs can be calculated for provision of public services. Draw up regulations to permit government agencies to engage in income-generation activities.

Reform human resource management and remuneration systems

Recruit highly capable persons to the Thai bureaucracy. Consider an open system of selection, focusing on managerial capabilities, in the recruitment of high-level administrators. Adjust position classification systems and remuneration packages as appropriate for the circumstances. Develop targets, capabilities and results-based evaluations of each individual, which must be linked to incentives. Each government agency must draw up strategic human resource development plans. Improve capabilities of centers for development and transfer of government personnel; provide alternative or reserve governmental positions. Develop appropriate mechanisms to protect justice, improve discipline, the process of appeals and filing of grievances.

Develop new perspectives, culture and values

Develop self-study methods for high-level administrators; promote action learning; develop a vision and a commitment to mission; learn how to work as a team and to think systematically. Provide advice on how to develop an environment that effectively encourages the process of learning in targeted groups. Have government agencies prepare value statements and declare their justice and ethical standards, to reduce dishonesty and corrupt practices. Campaign for and measure acceptance and performance outcomes in a serious and meaningful way. Encourage participation in searching for a procedural vision, and develop a new working culture and values that are conducive to development of the bureaucratic system.

Modernize bureaucracy

Encourage self-development in public agencies to become modern organizations, capable of using IT, and modern communications in administration and public service provision. Coordinate, promote, and support electronic governmental services; serve as a full-service centre for online services. Develop standards for government agencies to become full-service centers capable of providing services electronically. Amend laws that are obstacles to effective administration; use electronic information systems; develop e-government.

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Table 2. (Continued ) Strategy Open up the national bureaucracy to allow participation by the people

Measures Promote awareness in government agencies to work in accordance with the Constitution and legal ethical principles. The national bureaucracy should have a system that enables consultations to take place, conduct surveys on people’s needs, and hold meetings where the people can voice their opinions on a regular basis. Citizens’ advisory boards should be established, in particular at working levels (departmental/provincial/district levels). Government agencies should permit private volunteers to work together with government officials. Government agencies should provide information on Web sites on their scope and procedures to ensure transparency. The extent to which the people are allowed to participate in government should be made an indicator of how good the system of national administration is.

Source: Adapted from Office of the Public Sector Development Commission (2003).

reform of the budgetary system to focus on results and outcomes; and reform of the personnel administration system. The first strategy, transformation of work procedures and methods, called for government agencies to draw up strategic plans with clear-cut work procedures, including specification of targets, products, results, critical success factors, indicators of success, and performance standards. The plans were subject to public disclosure. The strategy also called for performance evaluation of government agencies, with emphasis on RBM, in order for government agencies to compare results with funding inputs. The second strategy, reform of the budgetary system, required agencies to focus on results and outcomes, in order to ensure that budgets achieved intended results. The strategy also specified development of a system for evaluating plans and reporting results from both a performance and a financial perspective, so that adjustments could be made to the disbursement and administration of budgets. The third strategy, reformation of the personnel administration system, called for development of indicators that could be used to evaluate performance, in order to measure and compare government officials’ performance. Comparison of the 1997–2001 Master Plan and the 2003–2007 Strategic Plan reveals a continued elaboration of RBM strategies and measures. The 2003–2007 Plan established more rigorous and objective performance


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standards than the earlier plan. In line with the 2002 State Administration Act (Article 3/1) described earlier, the intent was to make the bureaucracy more open, and to empower the people by providing them with greater opportunities to participate in the process of government. With respect to RBM, the 2003–2007 Strategic Plan incorporates key strategies similar to those specified in the 1997–2001 Plan, but more clearly delineated. For example, the plan calls on government agencies to develop strategic and procedural plans that are aligned with the government’s strategic policies and goals, identify performance indicators at all levels, and disseminate its RBM results. It suggests that strategic plans should determine targets for boosting efficiency and the quality of services. It also advises that forms and procedures for making requests should be simplified. Moreover, the plan calls for regular revisions of strategic and operating plans to enable appropriate adjustments. The budgetary process also is to be changed and budget shares aligned with strategic priorities. State agencies are to be made accountable for verifiable results. The productivity of government officials shall be increased by requiring officials to establish work targets, as well as by systematic application of RBM to each individual. All of this should be linked to a system of incentives.

EVALUATION FRAMEWORK FOR RESULTS-BASED MANAGEMENT The evaluation framework for RBM is loosely based on the balanced scorecard. The earlier 2003 framework was revised to more adequately reflect the Thai context of administration. The four dimensions were retained, but were relabeled. Indicators were revised and weights assigned to each indicator. Dimension 1, assigned a total weight of 50 out of 100, assesses effectiveness with respect to accomplishing strategic goals. Dimension 2, assigned a weight of 10, measures quality of service provision. Dimension 3, assigned a weight of 10, measures efficiency of performance. Dimension 4, assigned a weight of 30, measures organizational development. As indicated by the weights shown in parentheses in Table 3, priority is given to goal attainment in terms of fulfilling budgetary objectives. The indicators and the weights assigned to them are reviewed and revised on an annual basis. The priorities allocated to the four dimensions have remained relatively stable, although in recent years there has been a tendency to increase the weight of the organizational development dimension.

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Table 3.

OPDC Framework to Evaluate Government Agency Performance FY 2006.

Dimension 1: Effectiveness with Respect to Strategic Goals Performance with respect to budgetary allocations: Indicators and weights Percent success (weighted average) (10) in achieving objectives of ministries’ strategic plans. Percent success (weighted average) (15) in achieving objectives of functional groups’ strategic plans. Percent success (weighted average) (20) in achieving objectives of departments’ strategic plans.

Dimension 2: Quality of Service Provision

Provision of quality services: Indicators and weights Percent service recipient satisfaction.(3)

Success in providing opportunities (3) for citizens to participate in bureaucratic reform. Success in implementation of (4) measures to prevent and suppress dishonest practices and malfeasance.

Success in improving administrative(5) procedures in support of provincial and local administration. Dimension 3: Performance Efficiency

Dimension 4: Organizational Development

Performance efficiency: For example, reducing Management of change and personnel time needed to perform work, budgets development: Indicators and weights managed efficiently, energy conservation. Indicators and weights Percent success (weighted average) (3) Success in knowledgment (3) of rate of capital budget management planning in support expenditure. of strategies. Success in following energy (2) Quality of government agencies’ (4) conservation measures prescribed information systems data base for government agencies. management Percent success (weighted average) (3) Success in drawing up plans and (10) in reducing the amount of time proposals for implementation of for completing tasks. change. Select one of the following two indicators

Percent budget saved.

(2)

Success in drawing up legal (3) development plans of government agencies. Percent success (weighted average) (7) of performance in line with legal development plans of government agencies.


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Table 3. (Continued ) Dimension 1: Effectiveness with Respect to Strategic Goals Success in calculating unit costs of production.

Dimension 2: Quality of Service Provision

Select one of the following three indicators Success in work performance in (3) accordance with prescribed steps in public sector management development. Success in designing a risk management system. Success in transposing organizational goals and indicators to the level of the individual.

Source: Adapted from Office of the Public Sector Development Commission (2006).

The weight assigned to each dimension is determined by the OPDC with the approval of the Commission on Public Sector Development. The performance evaluation of civil service agencies is carried out by a contractor, the Thai Rating and Information Service Corporation (TRIS). Evaluations are made on an annual basis; typically the performance results of any given fiscal year are announced within six months of the new fiscal year. The OPDC posts summaries on its Web site, and each agency is also expected to make its results public. Accessibility is therefore in principle not a problem. In practice, however, there is a great deal of variation. Some agencies create easy access to evaluation results on their Web sites, others obfuscate.

RBM IN THE CONTEXT OF CLIENTELISM The central question we asked at the beginning of this chapter was, if the description of Thailand as a clientelist system is indeed correct, what are the implications for performance management? Over the past decade, what has been the effect of national and strategic plans, complete with specification of critical success factors and key performance indicators, on service delivery, rule of law, and corruption? These initiatives include a master plan for public sector reform with five major elements and three strategies for resultsbased management; a balanced scorecard measuring performance on four

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dimensions; four key objectives being pursued through seven strategies as part of the Strategic Plan for Thai Public Sector Development; and a Royal Decree Concerning Good Governance. The array is impressive. But what has it produced? The answer to this question is perhaps that it is too early to determine the consequences pro or con. In practice, ‘‘all good things’’ do not necessarily go together. For example, former Prime Minister Thaksin arguably boosted horizontal accountability in the bureaucracy after his election in 2001 by making officials accountable to elected officials (himself). At the same time, however, Thaksin reduced both horizontal (the ability of other government institutions to monitor and sanction his actions) and vertical (the ability of voters to gain information through the media of government malfeasance) accountability mechanisms. Indeed, one of the implicit assumptions of the good governance model is a degree of (institutionally sustained) political pluralism. In Thailand, on the contrary, Thaksin was able to concentrate power in his hands to a degree not seen for at least 40 years. As a result of a diminished degree of political pluralism, Thaksin was able to penetrate, undermine, and override the institutions that were designed to monitor and regulate his exercise of powers. On the one hand, this political power was useful in curbing the bureaucracy’s tendency to displace its formal goals. On the other hand, the bureaucracy tended to become increasingly politicized and responsive to a single individual rather than institutionalizing a new set of relations with political institutions and civil society groups. We have not been able to identify usable measures of changes in the quality of service delivery. Lacking such data, we focus instead on the impact of reforms on the rule of law and corruption. Despite a decade of plans and strategies directed at administrative and management reform, emphasis on RBM notwithstanding, the administrative system certainly is as vulnerable to patronage appointments and corrupt practices as it has ever been. Politicians and their appointees to office are able both directly and indirectly to wield power over the bureaucracy. Indeed, politicians’ capacity to discipline officials, or to violate the principles of bureaucratic neutrality, is probably greater than at any time since the bureaucracy escaped from under political control in 1932. It is worth noting that politicians charged with directing and overseeing government agencies are not themselves answerable for low RBM scores. The RBM system itself suffers from several weaknesses. First, the performance evaluation system for public agencies has not been integrated with the personnel management system. Since budget and personnel systems operate independently of each other, personnel management using RBM


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criteria has been largely ignored, particularly in the evaluation of highranking officials. Politicians have a relatively free hand in the appointment and transfers of government officials, from the level of permanent secretaries of ministries and departmental heads down to officials at lower levels. Politicians have utilized the patronage system to reward their supporters and punish those who do not support them. Second, politicians can intervene in budgetary allocations and public projects (pork-barrel allocations) without regard for national priorities let alone RBM. The balanced scorecard used to evaluate RBM measures success in achieving budgetary objectives, that is, it measures outputs, not outcomes. It does not review budget allocations. The third major weakness of RBM is that although it provides measures to protect against dishonest and illegal practices in the government sector, these measures do not address problems stemming from the abuse of power by politicians. And, in any case, in practice high status individuals in Thailand tend to be immune from sanctions of almost any kind. With regard to procurement and operating contracts, for example, performance indicators fail to detect and measure clientelistic practices, such as procurement and tender specifications such that only politicians’ cronies qualify; providing insider information to cronies; and entering into purchase or employment contracts on a special basis. The Thai government’s so-called mega-projects, such as construction of Suvarnabhumi airport and accompanying infrastructure, including highways and rail links to central Bangkok, provide serendipitous opportunities for patronage and collusion. To the extent that such mega-projects are largely funded externally (Suvarnabhumi received a 150,000 million baht, or roughly 4,545 million USD, soft loan from the Japanese government), expenditures are less subject to scrutiny by the auditor general’s office or by parliament. Another example is the Klong Dan water treatment facility in Samutprakarn Province, where the location of the facility was inappropriate and there was a special relationship between the minister who authorized the project and the contractor who won the bid. These examples do not suggest that great strides have been made in monitoring state actors or holding them accountable. While the Thai press is helpful in this regard, to some degree Thaksin was for a time successful in cowing it. Generally speaking, performance indicators are considered appropriate and useful in making government more transparent. The current performance evaluation framework and key performance indicators of Thailand’s RBM contain too many loopholes, however, and this enables patronage and clientelistic exchanges to continue on a ‘‘business as usual’’

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basis. Another weakness of the current system is that few sanctions can be imposed on officials whose performance is substandard – although departments receiving an overall score of less than ‘‘3’’ are given no bonus. Moreover, RBM coverage is limited only to central government agencies. RBM and performance indicators have not as yet been applied to the operations of local governments.

CONCLUSIONS The Thai government has implemented management reform and RBM within the framework of good governance for close to a decade. What kinds of results have been achieved? In the larger scheme of events, the answer may well be, ‘‘not much.’’ In 2008, the Institute for Management Development (IMD) ranked Thailand 27th in terms of competitiveness out of a total of 55 countries. In March 2008, Political and Economic Risk Consultancy (PERC), an independent consultancy firm, surveyed 1,400 respondents in 13 countries in Asia (excluding Burma and Bangladesh). In the opinion of the survey respondents, Thailand ranked second after the Philippines in terms of corruption (www.asiarisk.com). Thailand was ranked 84th out of 180 countries on Transparency International’s 2007 corruption perceptions index (CPI). Thailand’s CPI score was 3.3. The rankings are consistent with Thailand’s performance on good governance as measured by the World Bank’s Worldwide Governance Indicators (WGI) developed by Kaufman, Kraay, and Mastruzzi. The WGI, available for 212 countries for the period 1996–2006, provides measures on six dimensions of governance. The dimension which management reform and RBM address is ‘‘government effectiveness.’’ Government effectiveness indicators measure ‘‘the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies’’ (Kaufmann, Kraay, & Mastruzzi, 2006). In 2006, Thailand was placed in the 65th percentile on government effectiveness. More telling is the fact that Thailand’s percentile rank was actually lower in 2006 than in 1996. In 1996, Thailand was placed in the 72nd percentile. In the decade that followed, despite implementation of management reform and RBM, Thailand slid seven percentiles lower in the ranking. These sorts of rankings, of course, cannot be taken too seriously. In particular, finer distinctions across cases or over time must be taken with a


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grain of salt. And it is of course possible that the Thai government’s performance has been improving in recent years, but not as rapidly as the governments of its peer competitors. For what it is worth, however, anecdotal evidence seems to be consistent with the lackluster trends suggested by these indices. These rankings are of interest for a different reason, however. While we have discussed administrative reform episodes of the past decade, the push for such reforms of one type or another has been more or less continuous at least since Thailand’s international economic linkages grew more complex and pervasive beginning in the mid-1980s. It was during this period that newly powerful, multinational business groups began to press government agencies in a more sustained way for enhanced regulatory performance. Businesses pressed these concerns directly on individual politicians and officials and, increasingly, through networks of quasi-corporatist institutions that developed in influence during this period. Among state elites, for the first time, what was good for Thai business increasingly was judged to be good for Thailand. And business interests had the means to ensure that responsive officials also were rewarded for their policy flexibility. It remains to be seen, however, to what extent groups in Thailand other than capitalists are able to sustain pressures for changes in administrative performance. The last two decades have seen the emergence of a stronger civil society championing issues such as consumer protection. Protests and poor people’s movements also increased, though these typically are local and episodic calls for ecological redress. Our conclusion – tentative though it may be, but substantiated by the rankings – is that Thailand’s programs of administrative reform have had little success in improving government effectiveness. Public sector reform in general and RBM in particular appear to have made little headway in the context of political clientelism. An argument could be made that the reforms themselves were not well designed, that the performance evaluation framework and key performance indicators were flawed. But the fact remains that there has been no serious attempt to identify and correct the flaws: the loopholes that accommodate patronage and corruption remain in place. So what lessons ought we to draw in prescribing programs of administrative reform in contexts of political clientelism? Do the particular circumstances of political clientelism suggest simply that the new public administration paradigm fits, and therefore operates, less well than in other contexts? Or, by contrast, is the lesson that the new paradigm fits not at all in contexts of clientelism? If the latter is indeed the case, what alternative approach should Thais adopt in pursuit of administrative reform?

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Should Thais continue to focus their energies on boosting technical competence and compliance with the law? Should Thais pursue the goal of impersonal administrative effectiveness and defer other goals related to enhanced efficiency and administrative accountability? Is it possible that the latter goals can be pursued effectively only after political leaders, officials, and citizens have been able to establish the rudiments of a legal-rational administrative structure? We have argued that while it is too early to pass judgment, there are grounds for concern about the effectiveness of the efficiency and accountability-linked reforms recently introduced in Thailand.

NOTES 1. Anek’s analysis has been criticized on several grounds, including suggestions that he overstates the extent of a sort of ‘‘civic culture’’ in Bangkok while underplaying the political sophistication and awareness of their own interests found among rural voters in Thailand. 2. The OCSC, with a personnel of roughly 600, is the powerful central agency tasked with overseeing Thai civil service manpower requirements. OCSC issues regulations regarding recruitment procedures, remuneration, and staffing of civil service agencies, as well as providing advice to the government on human resources policies. The importance of the OCSC is underscored by the fact that its secretary general is a Position Classification 11, equivalent to the permanent secretary of a line ministry. 3. Initially the OCSC had sought to expand its formal jurisdiction to cover both personnel matters and administrative reform (which up till then had been an ad hoc function). The OCSC proposal received cabinet approval in April 2002, but final approval had to be obtained from parliament. The OCSC move was interpreted by many as not only extending the power of the OCSC, but also paving the way for its then secretary general (whose nonrenewable term was about to expire) to be nominated to head the ‘‘new’’ agency, to be renamed the Office of the Commission on Public Sector Development (OPDC). In September 2002, however, the Senate decided to retain the OCSC, and to create a separate office (OPDC), headed by a Position Classification 10 official. The reason given was that the OPDC should serve as the prototype of a small yet efficient agency, unencumbered by bureaucratic routines. 4. The reference to decentralization is derived from the concept of good governance.

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CHAPTER 12 DO LEADERSHIP AND MANAGEMENT FOR RESULTS MATTER? A CASE STUDY OF LOCAL E-GOVERNMENT PERFORMANCE IN SOUTH KOREA Soonhee Kim INTRODUCTION Government service delivery is undergoing change as a result of innovations in information technology (IT). Scholars and practitioners have paid attention to electronic-government (e-government) as a strategic tool for delivering services through the Internet and thus enhancing service quality, as well as streamlining internal operations (Council for Excellence in Government [CEG], 2000; Center for Technology in Government, 1999; Ho, 2002; Norris & Moon, 2005; West, 2004). Many local governments have also initiated e-government development and taken advantage of internetbased applications to facilitate community development and communication with constituents (Benjamin, 2001; Modesitt, 2002), as well as to provide online application services (Ho, 2002; Norris & Moon, 2005). Egovernment brings with it the potential for greater cost-efficiency, enhanced citizen involvement, improved service quality, and increased transparency. The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 307–333 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018014

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Although e-government has the potential to provide many benefits, little research has been conducted on e-government performance and the influence of public management on e-government performance in local government. How do local government employees perceive e-government performance in terms of improved service quality, transparency, and cost-efficiency? And what is the impact of public management on the perception of local e-government performance? Based on an employee survey of a local district in the Seoul Metropolitan Government, South Korea, this study explores how three factors, elective executive leadership, management capacity and management for results, affect employee perceptions of local e-government performance. In terms of employee perceptions of local e-government performance, this paper focuses on the quality of e-government services, transparency, and cost-efficiency. Scholars and practitioners hypothesize that leadership is an essential ingredient for successful adaptation of technology by government and that executive leaders should prepare effective plans and targets to provide a road map for future e-government development (Fountain, 2001; National Electronic Commerce Coordinating Council [NECCC], 2000a; Modesitt, 2002; O’Looney, 2002; Perlman, 2002; Wescott, 2007). For example, Fountain (2001) and O’Looney (2002) argue that the transformation to e-government requires organizational leaders’ commitment and willingness to change entrenched public structures and transaction processes. Leadership, then, must be viewed as a necessary component to build e-government capabilities and such leadership could originate with elected officials. This study explores how elected executive leadership affects employee perceptions of local e-government performance. As a result of the emphasis on performance and results-oriented government services, researchers in public administration and government agencies have stressed the need to understand the ways in which management capacity and processes can contribute to the improved innovation and performance potential (Hou, Moynihan, & Ingraham 2004; Ingraham, Joyce, & Donahue, 2003; O’Toole & Meier, 1999; Walker & Boyne, 2006). Ingraham et al. (2003) define management capacity as a government’s ability to develop, direct, and control its resources to support the discharge of its policy and program responsibilities. Accordingly, they argue that management capacity is a necessary antecedent to effectiveness in government organizations because it shapes and supports longer-term performance capabilities (Ingraham et al., 2003). In this study, IT capacity and human resource management (HRM) capacity as they relate to perceived

Case Study of Local E-Government Performance in South Korea

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e-government performance are analyzed. While this paper defines IT capacity as the level of IT resources, financial resources, and know-how of e-government services, HRM capacity here is concerned with fair reward systems and the organizational commitment of employees. This paper also explores the level at which management for a result is applied to e-government development, and the impact it has on employee perceptions of local e-government performance. In light of the rapid speed with which e-government innovations evolve, management for results is an important and challenging task. The local government selected for this study was the Gangnam-gu district (hereafter referred to as ‘‘Gangnam-gu’’) located in the Seoul Metropolitan Government, South Korea. The local government is home to 550,000 citizens and is known as the nation’s financial and business center. The National Committee of E-Government Development in South Korea recognized e-government development in Gangnam-gu as the Best E-Government Practice in the country for 3 consecutive years, starting in 2001. Furthermore, the Intelligent Community Forum, a nonprofit thinktank located in the United States, selected Gangnam-gu as one of the Top Seven Intelligent Communities of 2006 in recognition of its successful e-government innovations (Intelligent Community Forum, 2006). After reviewing the literature on e-government performance, e-government leadership, management capacity and management for results, this paper presents several research hypotheses and discusses findings. Finally, it presents lessons and implications of the study for effective local e-government development.

E-GOVERNMENT PERFORMANCE AND HYPOTHESES E-government is viewed as a process with great potential for improving public service delivery to individual citizens. In 2001, the American Society for Public Administration (ASPA) and the United Nations (UN) offered five guiding principles for e-government development: (a) building services around citizen’s choices, (b) making governments and their services more accessible, (c) social inclusion, (d) information responsibility, and (e) the effective and efficient use of IT and human resources (UN & ASPA, 2001). This paper focuses on three dimensions of e-government performance in local government, including service quality, transparency, and cost-efficiency.

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One of the goals of e-government development in local government is to improve service quality by focusing on customers. A customer focus emphasizes that e-government services are developed in light of demand and user value. Also, the customer focus implies that the Internet can facilitate effective relationships between citizens and government by enabling governments to appear as a unified organization and provide seamless online services (Organization for Economic Co-operation and Development [OECD], 2003). For instance, Birch (2003) notes that most local authorities (91%) in England see e-government as a vehicle for improving accessibility to local authority and services. The local authorities that participated in Birch’s study indicated that e-government has had a positive effect on the way authorities interact with the public and how the public responds to the new opportunities e-government affords (Birch, 2003). E-government development also focuses on citizen access to public information; data sharing among public, private, and nonprofit sectors; private–public partnerships; and eliciting citizen input using IT. The NECCC (2000b) found that the sharing of data among public agencies and private vendors is essential to create a system in which citizens can gain access to government information and services through a single portal. E-government applications can help reduce corruption and increase openness and trust in government by enabling citizen engagement in the policy process and allowing an individual’s voice to be heard in a broad debate (OECD, 2003). For example, in the case of Seoul Metropolitan E-Government, transparency is a central value in e-government that can be summarized by processing all public administration services through e-government and minimizing direct contact between civil servants and civil service applicants (Seoul Institute for Transparency, 2008). While increased citizen input may help establish greater public trust in government and encourage more efficient public service delivery, the challenge remains how to provide public access to e-government services. In response to the digital divide, governments at all levels must decide to what extent they wish to ensure equal access to e-government services, how to provide that access, whether such access should be provided through government partnerships with the private sector, and how to pay for it (Kim & Kim, 2003). Cost-efficiency is another potential benefit expected from e-government application in public organizations (OECD, 2003; Wescott, 2007). Internetbased applications can not only generate savings on data collection, data transmission, and provision of information to and communication with customers, but can also enhance government efficiency through greater sharing of data within and between governments (OECD, 2003). Furthermore, Birch (2003) notes that local e-government has the potential


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Executive E-Government Leadership

Perceived E-Government Performance:

Management Capacity: • IT capacity • HRM capacity: -Fair reward systems -Identification commitment

• Service quality • Transparency • Cost-efficiency

Control variables: position & years of work

Management for Results

Fig. 1.

Research Framework.

to increase the speed and efficiency of internal local authority processes by allowing local authorities to rethink and improve the way the agency works. The e-government research on local authorities in England, however, reveals that local authorities have the perception that e-government has had a much greater impact externally than on the costs and efficiencies associated with internal processes (Birch, 2003). This chapter explores the impact of executive e-government leadership, management capacity, and management for results on the perception of e-government performance in the areas of service quality, transparency, and cost-efficiency (Fig. 1).

EXECUTIVE LEADERSHIP OF E-GOVERNMENT INNOVATION The e-government transformation now underway requires crossjurisdictional collaboration and alliance, matrix or virtual organizations, reengineering of business operation processes, integration of public services, and constant monitoring and updating feedback (Fountain, 2001; O’Looney, 2002). Such a transformation, however, requires organizational leaders’ commitment and willingness to change entrenched public structures and transaction processes. Perlman (2002) notes that the active engagement of elected officials is essential if government is to resolve the challenges of technology management. Scholars and practitioners anticipate that more elected officials will take the lead in using e-government tools to promote civic engagement and encourage citizen participation (National Electronic Commerce Coordinating Council, 2000; Modesitt, 2002; O’Looney, 2002).

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Practitioners of IT management emphasize that visionary leadership, joined with thoughtful planning and monitoring, can make e-government a useful vehicle for government services and information. Transformational leadership theory emphasizes organizational leaders as change agents who initiate and implement new directions within organizations. Based on a study of 12 CEOs in private corporations, Tichy and DeVanna (1990) indicate that leaders need to breakdown old structures and establish new ones to implement new vision and ideas. They also emphasize that the breaking down of old structures may require the leader to create new coalitions of employees who will be compatible with the new vision. This study explores the impact of executive e-government leadership on employees’ perceptions of e-government performance. Executive e-government leadership is defined as a significant facilitator of e-government development who has a clear vision and stimulates innovative ideas Hypotheses 1a–c. The mayor’s leadership of e-government innovation is positively associated with the perception of e-government performance in terms of service quality (a), transparency (b), and cost-efficiency (c).

MANAGEMENT CAPACITY: IT CAPACITY AND HRM CAPACITY Scholars and practitioners note that the success of an e-government strategy may depend largely on its ability to develop IT capacity, including IT resources, financial resources, and know-how to implement e-government services (Center for Technology in Government [CTG], 1999; Kim & Bretschneider, 2004; Broadbent, Weill, & Neo, 1999). IT resources are the source of the capabilities that enable an organization to implement e-government transformation because they permit the organization to develop system and process prototypes (Caffrey, 1996). According to Grant (1991), the resources for IT capacity could include capital equipment, financial resources, and the skills of individual employees. Local governments can create public value by developing capabilities to assemble resources to support e-government development strategies. Mohr (1969) notes that the availability of financial resources is one of the strongest predictors of innovation. For organizational innovation, especially for adopting advanced IT, financial support is indispensable to procuring and developing adequate levels of hardware and software, and training end-users as needed (Kim & Bretschneider, 2004). Broadbent et al. (1999) point out that IT capacity includes both the technical and managerial


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expertize required to provide reliable IT-enabled services. The use of technology to solve a specific problem or perform a particular function also demands adequate knowledge of e-government service development (Kim & Bretschneider, 2004). This study explores the impact of IT capacity, including IT resources, financial resources, and technical know-how in the work unit, on e-government performance. Hypotheses 2a–c. IT capacity is positively associated with the perception of e-government performance in terms of service quality (a), transparency (b), and efficiency (c). HRM capacity in government could be assessed in terms of several criteria, including workforce planning, workforce hiring, sustaining the workforce, motivating the workforce, and structuring the workforce (Donahue, Selden, & Ingraham, 2000). This paper is focused on the criteria of motivating the workforce, especially through fair reward systems and the development of employees’ organizational commitment. Neely (1998) argues that the main functions of performance-based reward systems are (a) to increase the involvement of and communication among all organizational units in a targeted setting, and (b) to collect, process, and deliver information on the performance of organizational units, activities, processes, products, and services. Several researchers (Blau, 1999; Daley, 1986; Organ, 1988) have also emphasized the importance of performance appraisal fairness in determining employees’ job satisfaction. For example, based on a survey of Iowa public employees, Daley (1986) found that performance appraisal fairness is positively associated with job satisfaction. Organ (1988) also argued that employee satisfaction with the performance appraisal process is, logically, related to the perceived ‘‘fairness’’ of this process. On the other side, Blau (1999) noticed that performance appraisal satisfaction seems to be an important ‘‘process’’ satisfaction facet affecting composite ‘‘outcome’’ satisfaction facets, such as pay, job security, the work itself, and other working conditions. To further explore the impact of fair performance-based reward systems on the perception of e-government performance, the following hypotheses are established and tested in this study: Hypotheses 3a–c. Fair reward for employee performance is positively associated with the perception of e-government performance in terms of service quality (a), transparency (b), and efficiency (c). Scholars have found that the level of commitment employees feel toward their organization is positively associated with performance (Larson & Fukami, 1984; Van Maanen, 1975) and negatively related to absenteeism and turnover (Koch & Steers, 1978; Mowday, Steers, & Porter, 1979).

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Scales for measuring organizational commitment ask whether the respondent sees the organization’s problems as his or her own, whether he or she feels a sense of pride in working for the organization, and similar questions (Mowday, Porter, & Steers, 1982). Mowday, Porter, and Dubin (1974) note that committed employees take pride in organizational membership and believe in the goals and values of the organization, and, therefore, exhibit higher levels of performance and productivity. Meanwhile, according to Mowday et al. (1979) organizational commitment entails three factors: (1) a strong belief in and acceptance of the organization’s goals and values, (2) a willingness to exert considerable effort on behalf of the organization, and (3) a strong desire to maintain membership in the organization. Balfour and Wechsler (1996) further elaborated on the concept of identification commitment in a model for the public sector based on a study of public employees. Identification commitment is based on the employee’s degree of pride in working for the organization and on their sense that the organization does something important and does it competently (Balfour & Wechsler, 1996). According to Balfour and Wechsler (1996), in expressing identification with the organization, employees often refer to pride in organizational membership or in the accomplishments of the organization. The authors extend the meaning of identification commitment to include the individual’s feelings about the organization’s mission, purpose, and achievement. Employees’ identification commitment with the organization should lead to enhanced intrinsic motivation and, therefore, lead to better performance (Balfour & Wechsler, 1996). To further explore the impact of identification commitment on the perception of e-government performance, the following hypotheses are established and tested in this study: Hypotheses 4a–c. The level of employees’ identification commitment with the organization is positively associated with the perception of e-government performance in terms of service quality (a), transparency (b), and cost-efficiency (c).

MANAGEMENT FOR RESULTS Organizational performance has been a target of government reforms around the world (Pollitt & Bouckaert, 2000). Improved performance requires more attention to cost, elimination of duplication and redundancy, and improved transparency and accountability in government operations.


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Without organizational commitment to management for e-government results, it is difficult for local governments to figure out the strategy of continuous e-government investment and development. Ingraham et al. (2003, p. 22) define management for results as ‘‘the dominant mechanism by which leaders identify, collect, and use the performance information necessary to evaluate the institution’s success with respect to key objectives, to make decisions, and to direct institutional actions.’’ Jennings and Haist (2004) further emphasize that performance measures provide information that consumers (e.g., public officials, service recipients, and citizens) can use to make judgments about the effectiveness of an organization or program. Not surprisingly, scholars and practitioners continuously emphasize that the appropriate management structure and approaches, including strategic management of e-government and integration of e-government with performance management have been attributed to the success of e-government performance (Bovaird, 2002; Heeks, 2001; Pizzella, 2008). While there are limited studies on specific measurement of output and outcomes of local e-government performance, the results of three surveys of local government in the United States indicate some positive impact of local e-government on increased citizen contact with officials, improved public communication, and customer service (Coursey & Norris, 2008; Norris & Moon, 2005). However, these studies do not pay attention to how organizational capacity of managing for e-government results related to e-government performance in public organizations. To explore the impact of management for e-government results on the perceptions of e-government performance, the following hypotheses are proposed and tested in this study: Hypotheses 5a–c. The degree to which e-government is managed for results is positively associated with the perceptions of e-government performance in terms of service quality (a), transparency (b), and costefficiency (c).

RESEARCH METHODS Case Setting In 1988, the National Assembly broke with the political tradition of centralized authority by passing the South Korean Self-Governance Act, encouraging local governance and grassroots democracy. Elections for local

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legislative council seats began in 1991; elections for city mayors and provincial governors began in 1995. Under the newly elected mayor’s leadership, Gangnam-gu has implemented 71 e-government applications since 1995 as part of its innovative Smart Gangnam – Cyber City Project (Bretschneider et al., 2005). The e-government services Gangnam-gu has developed cover a wide range of service categories, including civil applications, permit applications, real estate information, tax-related inquiries, taxfiling, real-estate/other ownership registration, user fee payment, search and payment of traffic fines, kiosk civil applications, and several e-participation applications. In addition, approximately 1,700 practitioners from more than 50 countries have visited Gangnam-gu to learn e-government practices and innovations. Through e-government innovations, Gangnam-gu is leading a wave of local government reform efforts, making great strides that have significantly enhanced the public value of its democratic processes and government services (Bretschneider et al., 2005).

Data Collection The employee survey was conducted during the last two weeks of July 2004. The data collection was part of a research project on E-Government in Gangnam District: Evaluating Critical Success Factors, which was conducted by the Center for Technology and Information Policy at the Maxwell School of Syracuse University. The purpose of the survey was to identify how various human, organizational, and technological resources, along with the leadership of an elected official, generate capabilities that influence the performance of e-government systems. Gangnam-gu district employs approximately 1,000 people. Four hundred and ninety two employees from 15 divisions located in a main building of Gangnam-gu district government were sampled, of which 286 responded to the survey.1 Thus, the response rate was 58.1% (286/492). A pretest of the employee survey was conducted with the Social Welfare Division before the survey instrument was distributed to the sample population. We received feedbacks from those who participated in this pretest and clarified some vague questions. After revision, the Policy and Planning Division of Gangnam-gu district government helped the research team to deliver the survey instrument to 492 employees. Survey instruments were directly distributed to two divisions by our research team, and the other instruments were delivered and collected by the Gangnam-gu Policy and Planning Division.


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Survey Measures and Items Independent Variables In the interest of improving reliability and validity, multiple-item measures were used for all of the variables except management for results (Appendix). Responses were recorded along a 5-point Likert-type scale, ranging from 1 (strongly disagree) to 5 (strongly agree). Appendix presents the questionnaire items. Executive leadership was measured in terms of (a) facilitating e-government development, (b) communicating a clear vision for e-government, and (c) encouraging innovative ideas. The Cronbach’s alpha for these items was 0.90. Perceived IT capacity in a work unit was measured with three items developed for this study purpose, including IT resource, financial resource, and IT know-how. The Cronbach’s alpha for the IT capacity items was 0.89. Reward system fairness was assessed by three items adapted from research by Balfour and Wechsler (1996). The Cronbach alpha reliability estimate for this section of the survey was 0.85. Employees’ identification commitment was assessed with a three-item commitment scale described by Balfour and Wechsler (1996). The Cronbach alpha reliability estimate for the identification commitment items was 0.82. Management for results was measured with the following item: ‘‘My work unit regularly evaluates the results of e-government service.’’ Dependent Variables Service quality was assessed by three items developed for this study. Those items were: (1) ‘‘E-government service in my work unit has improved the quality of service to citizens,’’ (2) ‘‘E-government service in my work unit has increased my work unit coworkers’ responsiveness to citizens,’’ and (3) ‘‘E-government service in my work unit has changed my coworkers’ behavior from an authoritative style to a citizen-centered service approach.’’ The reliability (Cronbach’s alpha) of the three items was measured as 0.86. Transparency was measured by three items: (1) ‘‘E-government service in my work unit has increased openness and transparency in government,’’ (2) ‘‘E-government initiatives have decreased corruption by civil servants in general,’’ and (3) ‘‘E-government service in my work unit has reduced civil servants’ abuse of authority and power.’’ The coefficient alpha reliability estimate for this section of the survey was 0.86. Three items were adapted from the ICMA E-government Survey 2002 to measure e-government performance in terms of cost-efficiency: (1) ‘‘My work unit has reduced administrative costs due to e-government service,’’ (2) ‘‘The application of e-government has reduced time demands on staff,’’

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and (3) ‘‘The transformation to e-government has streamlined internal processes.’’ The coefficient alpha reliability estimate for this section of the survey was 0.73. Two personal characteristics were also used as control variables: years of working at the agency and the employee’s position level.

RESULTS Survey Respondents Among the participants of the survey, 96 respondents (35.7%) were female. Position levels ranged as follows: lower level (grades 10–8), 58%; middle level (grades 7–6), 40.1%; and higher level (grades 5–4), 2.0%. The distribution for ‘‘Years of work at current job’’ was as follows: less than 1 year, 6.9%; 1–5 years, 71.2%; 6–10 years, 12.1%; 11–15 years, 10.2%; and 16 years or more, 0.8%. The majority of respondents reported having a bachelor’s degree (58%). Descriptive statistics, correlation coefficients and reliability for the study variables are presented in Table 1. Regarding e-government performance items, employees perceived higher levels of Table 1.

Descriptive Statistics, Reliabilities, and Correlations. Mean (S.D.) 1

1. Executive leadership 2. IT capacity 3. Fair reward systems 4. Identification commitment 5. Managing for results 6. Service quality 7. Transparency 8. Cost-efficiency

3.93 (0.92) 3.21 (0.98) 3.17 (0.86) 3.37 (0.64) 3.31 (0.97) 3.72 (0.79) 3.67 (0.79) 3.19 (0.72)

1

2

3

4

5

6

7

8

(0.90)

0.39 1

(0.89)

0.42 0.39 1

(0.85)

0.56 0.38 0.54 1

(0.82)

0.38 0.43 0.39 0.50 1 0.55 0.46 0.45 0.69 0.59 1

(0.86)

0.54 0.46 0.42 0.60 0.54 0.81 1

(0.86)

0.40 0.42 0.50 0.44 0.47 0.61 0.51 1

(0.73)

N ¼ 286. All correlations are significant at the 0.01 level. The coefficient alpha reliability estimates for all of the variables are reported in parentheses.


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improved service quality (3.72) and transparency (3.67) than cost-efficiency (3.19). Interestingly, local government authorities in the United Kingdom also perceived that e-government has a much greater impact on the interaction between the public and government than on the costs and efficiencies associated with internal processes (Birch, 2003). All of the zero-order correlations were statistically significant at p o0.01 (Table 1). All of the measures appeared to be relatively distinct; the largest correlation between independent variables and dependent variables (that between organizational commitment and service quality) was 0.69. The prevalence of significant relationships may suggest some weaknesses in the study measures. To determine whether ordinary least squares (OLS) were the appropriate estimator, multicollinearity has been tested by collinearity statistics. Six independent variables’ variation inflation factor (VIF) values indicate that there is not a severe multicollinearity among the variables.2

EMPLOYEES PERCEPTIONS ON E-GOVERNMENT EFFECTIVENESS Table 2 shows the descriptive analysis of the measures of e-government effectiveness in the survey. Only 29% of the respondents believed that their work unit has reduced administrative costs due to e-government service. However, almost 24% of the respondents disagreed with this, and almost 48%s were ‘‘neutral.’’ Sixty one percent of the respondents answered ‘‘strongly agree/agree’’ to a statement of the quality of service: ‘‘E-government service in my work unit has improved the quality of service to citizens.’’ The percentage of the respondents disagreeing with the statement was only 6.6. Nearly 66% of the respondents believed that e-government service has increased citizens’ trust in Gangnam-gu. Furthermore, nearly 63% of the respondents believed there was an increase of coworkers’ responsiveness to citizens through e-government service. Approximately 61% also reported that e-government service in their work unit has increased openness and transparency in government. While 54% of the survey respondents believed there was a negative impact of e-government service on civil servants’ abuse of authority and power, nearly 61% of the respondents perceived the positive impact e-government initiatives had on the decrease of civil servants’ corruption in general. Nearly 54% of the respondents believed that e-government service caused

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Table 2.

Employees Perceptions on E-Government Effectiveness. Mean

1. My work unit has reduced administrative costs due to e-government service. 2. E-government service in my work unit has improved the quality of service to citizens. 3. E-government service in my work unit has increased citizens’ trust in Gangnam-gu. 4. E-government service in my work unit has increased my work unit coworkers’ responsiveness to citizens. 5. E-government service in my work unit has increased openness and transparency in government. 6. E-government service in my work unit has reduced civil servants’ abuse of authority and power. 7. E-government initiatives have decreased civil servants’ corruptions in general. 8. E-government service in my work unit has changed my coworkers’ behavior from an authoritative style to a citizen-centered service approach. 9. My work unit regularly evaluates the results of e-government service.

Strongly Disagree Neutral Agree Strongly Disagree Agree (%)

3.07 (0.90) 3.76 (0.91) 3.76 (0.90) 3.74 (0.90)

11 (4.0) 4 (1.5) 5 (1.8) 5 (1.8)

54 (19.6) 14 (5.1) 17 (6.1) 14 (5.1)

131 (47.5) 89 (32.4) 73 (26.1) 83 (30.2)

64 (23.2) 105 (38.2) 129 (46.1) 116 (42.2)

16 (5.8) 63 (22.9) 56 (20.0) 57 (20.7)

3.71 (0.91)

5 (1.8)

16 (5.8)

87 (31.5)

112 (40.6)

56 (20.3)

3.56 (0.92)

5 (1.8)

26 (9.5)

94 (34.4)

106 (38.8)

42 (15.4)

3.69 (0.90) 3.65 (0.88)

6 (2.2) 5 (1.8)

14 (5.1) 9 (3.3)

88 (32.2) 112 (41.0)

114 (41.8) 96 (35.2)

51 (18.7) 51 (18.7)

3.31 (0.97)

11 (4.1)

35 (13.0)

112 (41.5)

81 (30.0)

31 (11.5)

N ¼ 286.

behavioral changes in their coworkers, triggering a shift from an authoritative style to a citizen-centered service approach. Only 5% of the respondents disagreed with the issue. Nearly 42% of the respondents agreed with the following statement: ‘‘My work unit regularly evaluates the results of e-government service.’’ However, nearly 17% of the respondents disagreed with this, and almost 42% were ‘‘neutral.’’

IMPACT ON WORKFORCE Table 3 shows the descriptive analysis of the impact of e-government development on workforce. Almost 60% of the respondents reported that e-government application has changed the role of staff. Nearly 40% of the respondents believed that e-government application has reduced time

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Table 3.

Impact on Workforce. Mean

1. E-government application has changed the role of staff. 2. E-government application has reduced time demands on staff. 3. E-government application has increased demands on staff and their workload. 4. E-government transformation has increased citizen contact with Gangnam-gu employees. 5. E-government transformation has streamlined its internal processes.

Strongly Disagree Neutral Agree Strongly Disagree Agree (%)

3.62 (0.83) 3.12 (1.00) 3.13 (0.84) 3.11 (0.95)

4 (1.4) 16 (5.7) 7 (2.5) 11 (3.9)

18 (6.4) 59 (21.1) 50 (17.7) 65 (23.1)

93 (33.0) 95 (33.9) 137 (48.6) 102 (36.3)

133 (47.2) 93 (33.2) 75 (26.6) 88 (31.3)

34 (12.1) 17 (6.1) 13 (4.6) 15 (5.3)

3.40 (0.82)

7 (2.5)

28 (10.0)

102 (36.6)

130 (46.6)

12 (4.3)

N ¼ 286.

demands on staff. However, almost 27% of the respondents disagreed with this, and almost 38%s were ‘‘neutral.’’ On the other hand, 31% of the respondents perceived that e-government application produced increased demands on staff and their workload. Regarding the impact of e-government transformation on internal processes, nearly 51% of the respondents believed that e-government transformation has streamlined its internal processes. Nearly 37% of the respondents believed that e-government transformation has increased citizen contact with employees. However, almost 27% of the respondents disagreed with this, and almost 36% were ‘‘neutral.’’

MULTIVARIATE ANALYSIS Results from an OLS multiple regression analysis appear in Table 4. The equation of each model achieves statistical significance at the 0.001 level. The data shows that the mayor’s leadership of e-government innovation is positively associated with employees’ perceptions of improved service quality (po0.01), transparency (po0.001), and cost-efficiency (po0.05) through e-government development. Among the management capacity variables, IT capacity, fair reward systems, and organizational commitment of employees were positively associated with employees’ perceptions of e-government performance. The regression analysis results show that employees who reported a high level of IT capacity were more likely to

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Table 4. Variables

Results of Regression Analysis. Service Quality b (S.E.)

Transparency b (S.E.)

Cost Efficiency b (S.E.)

Executive Leadership IT capacity Fair reward systems Identification commitment Managing for results Position Years of work

0.18 0.11 0.04 0.37 0.31 0.00 0.01

0.25 0.13 0.04 0.25 0.24 0.03 0.01

0.15 0.18 0.17 0.10 0.24 0.04 0.05

R2 Adjusted R2 F

0.654 0.642 54.066

0.518 0.501 31.018

0.397 0.377 19.213

N ¼ 286; po0.05; po0.01; po0.001.

express a positive effect of e-government performance on service quality (po0.05), transparency (po0.05), and efficiency (po0.01) at a statistically significant level. The data also shows that employees who believed reward systems to be fair were more likely to express a positive impact of e-government development on cost-efficiency (po0.01). Statistical support was also found for parts of the identification commitment hypothesis. Specifically, the degree of identification commitment was positively associated with service quality (po0.001) and transparency (po0.001). However, the identification commitment of employees was not significantly associated with cost-efficiency. Management for results was positively associated with the perceptions of e-government performance. That is, employees who believed that e-service performance was regularly evaluated reported higher levels of service quality (po0.001), transparency (po0.001), and efficiency (po0.001) than employees who did not. According to the results, executive e-government leadership, IT capacity, HR capacity, and the level of management for results were significant variables affecting employees’ perceptions of the local e-government performance aspects that were examined in this study. Specifically, executive leadership, IT capacity, and management for results were significantly associated with perceptions of e-government service quality, transparency, and cost-efficiency. There was no significant relationship found between the control variables and the perceptions of e-government performance in the study.


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LESSONS AND DISCUSSION This chapter examined and analyzed the influence of executive e-government leadership, management capacity, and the level of management for e-government results on employees’ perceptions of e-government performance in a local district in the Seoul Metropolitan Government, South Korea. The key findings that gleaned from this study is that executive e-government leadership, IT capacity, HR capacity, and management for results are all important factors affecting employees’ perceptions of local e-government performance. The results of this study indicate that the level to which an e-government program is managed for results is one of the most significant factor affecting employees’ perceptions of e-government performance, including service quality, transparency, and cost-efficiency. This study found that the mayor’s e-government leadership, which demonstrated a clear vision of e-government innovation and encouraged employees’ innovative ideas for e-government, is positively associated with perceptions of e-government performance in terms of service quality, transparency, and cost-efficiency. According to the results, it seems clear that e-government performance requires executive leaders who believe in innovation and experimentation to ensure long-term success. This study also found that IT capacity and the level of identification commitment of employees are positively associated with perceptions of e-government performance. Furthermore, a fair reward system is positively associated with improved cost-efficiency through e-government development. The results of the study reveal several lessons for continuing innovative and effective reforms in local e-government. Visionary e-government leadership, joined with thoughtful planning and monitoring, can make e-government a useful vehicle for government services and information. As emphasized by several scholars of the transformational leadership model (Avolio, 1999; Bass & Avolio, 1990; Northouse, 2001), the study reveals that executive e-government leaders should pay attention to inspirational motivation and to the level of organizational commitment among their organization’s employees, as these are the significant factors in successful implementation of e-government innovations. Successful executive egovernment leadership requires effective promotion and communication of the leader’s e-government vision and goals to senior management and employees. Another important lesson from this study is that local e-government leaders should make a commitment to management for results and performance in e-government. Once the management capacity of

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e-government applications has been established, e-government leaders should make a commitment to manage for results and performance. E-government leaders have to pay attention to ways they can connect management capacity to improved performance. To strengthen the performance of e-government innovations, several strategies can be applied to local e-government development. Organizational leaders can establish a management system that requires a formal performance evaluation process for e-government applications. Furthermore, e-government leaders should emphasize the importance of training programs for performance measurement, service evaluation, and accountability. This study also supports the hypothesis that the perceived performance of an e-government innovation depends on the government’s ability to develop IT capacity, including IT resources, financial resources, and know-how to implement e-government services. Local government can create public value by developing capabilities to assemble resources to support e-government development strategies. To enable organizational innovation through e-government, organizational leaders and IT project managers need to carefully assess system development needs for specific services, financial support for IT projects, and employee training. The use of technology to solve a specific problem or to perform a particular function in local government also requires adequate know-how regarding the development of e-government services, innovative business operation procedures, and management of customer-relations (Bretschneider et al., 2005). Accordingly, organizational leaders and IT departments should pay attention to their e-government strategic plan, especially regarding IT capacity. This capacity plan should address IT planning, system development, resource allocation, stakeholder analysis, and return on investment. In particular, e-government development requires organizational leaders’ commitment to ongoing training programs that develop employee skills and knowledge of IT systems and e-government services (Bretschneider et al., 2005). Additionally, this study found that employees’ identification commitment with the organization was positively associated with perceived e-government performance in the areas of service quality and transparency. Accordingly, organizational leaders should pay attention to the organizational factors affecting employees’ organizational commitment. Local government may discover that increased communication with employees about job responsibilities and a sincere effort to increase participative decision making can lead to enhanced levels of organizational commitment among employees. Wright and Kim (2004) note that employees need to understand not only how their work can contribute to the organization’s performance (task


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significance), but also to what degree their current work performance and strategies are making that contribution (performance feedback). Training programs for managers and supervisors emphasizing effective communication skills and mentoring relationships would not only facilitate more effective employee involvement but would also increase employees’ organizational commitment. Participative management of e-government development can improve an employee’s understanding of the organization’s processes for e-government innovation and provide opportunities to develop important changes to operational procedures related to IT adoption and e-government services. Finally, active communication with employees not only helps to decrease tensions related to role ambiguity but also provides important performance feedback that can enhance their level of organizational commitment, especially regarding e-government success. Finally, the study results show that employees, who believed reward systems to be fair, were more likely to express a positive impact of e-government development on cost-efficiency. To implement fair reward systems, it is necessary that organizational leaders and HR leaders create organizational policy regarding the regular assessment of job descriptions to respond to organizational environment changes. Performance-based reward systems should be managed based on job-related criteria that are developed from updated job descriptions. Managers and supervisors should clearly understand the importance of regular employee performance feedback, as well as good communication with employees about reward systems. Organizational leaders should provide regular training programs for supervisors and line managers about the reward system and effective communication. Furthermore, local e-government leaders should reward and recognize the accomplishments of teams and individuals that help improve e-government performance management practices.

CONCLUSIONS This study extends our understanding of how leadership, management capacity, and management for results affect employees’ perceptions of e-government performance in local government. Important limitations to this research should be noted. First, the measures used here were perceptual rather than objective; a more complete analysis would require additional data on e-government performance and longitudinal studies of the patterns of e-government efficiency and effectiveness. Second, the generalization of this study is very limited as it was based on a local e-government case

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in South Korea. Third, to analyze e-government performance, more data should be collected targeting on service quality and citizen satisfaction. While this research focused on service quality, transparency, and costefficiency, it is important to note other competing attributes of e-government performance and effectiveness, including digital divide issues, privacy issues and security issues (Hammit, 2002; Kim & Kim, 2003; Stowers, 2002). Hammit (2002) and Stowers (2002) note that the September 11, 2001 attacks accelerated public concern over public information security, especially internet access to confidential information. The prevailing idea is that while e-government should support online access to a broad range of information and applications, it has yet to strike a proper balance between the demand for convenience and the need to maintain the security and privacy of sensitive data. Scholars continuously demand more empirical studies to understand the impact of e-government on government change, effectiveness, and citizen participation and to evaluate e-government research methods (Coursey & Norris, 2008; Heeks & Bailur, 2007; Yildiz, 2007). For example, Coursey and Norris (2008) argue that e-government development models (e.g., Baum & Di Maio, 2000; Hiller & Be´langer, 2001; Layne & Lee, 2001; Ronaghan, 2001; Wescott, 2001) do not explain e-government development status and progress of local governments in the states. Coursey and Norris (2008) further express their concern regarding optimistic predictions and normative expectations of the e-government development models. It is still difficult to generalize the positive and negative impacts of e-government development in global communities due to limited data and in-depth case studies. However, the present argument and debate of the positive and negative impacts of e-government development explores a bigger and more important question regarding how to conduct local e-government development research in the context of globalization and decentralization in different regions and countries. Are there different approaches and impacts of e-government development in different regions and countries? If so, what are the independent variables to explain the variances of e-government development and impact in global communities? How do globalization and decentralization lead to e-government development in local government and what are the impacts of e-government development on government performance and accountability? To clarify the impact of e-government development on local government efficiency, effectiveness, quality of service, and citizen satisfaction, more research should be done at the local level in relevant countries. The demands of economic and social development and decentralization also influence


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citizens’ expectations about local government responsiveness, performance, and accountability. Accordingly, local governments should respond to these challenges with a proactive strategy for building management capacity to institutionalize e-government applications that best meet citizens’ needs and expectations. The findings of this case study in South Korea show that decentralization and an elected executive leader’s commitment to government reforms are important factors affecting e-government development for enhancing government performance and transparency. In terms of the impact of e-government, majority of employees perceived positive impacts of e-government innovations on service quality, responsiveness, and transparency. However, many employees have reservations about the positive impact of e-government on cost-efficiency. There are important gaps of knowledge in the discourse of public administration when it comes to e-government performance in local government, the role of local government capacity and leadership, and the dynamics of decision making for enhancing government effectiveness, democratic governance, and transparency in various countries. Based on valid empirical studies, scholars may introduce diverse models of e-government development and local government changes given the difference between developed and developing countries in government capacity, civil society strength, IT maturity, and democratic institutions. More in-depth case studies in various regions and countries may help develop e-government models, and rigorous testing of the models with valid data by scholars would facilitate theory building about e-government in public administration. Future researchers may also want to focus on (a) the political context and its impact on e-government initiatives, especially on IT investment decision making, (b) motivational factors (i.e., internal and external) and their impact on the organizational commitment of IT project managers as well as employees, (c) citizens’ perceptions of e-government efficiency and effectiveness, (d) factors affecting citizens’ satisfaction with e-government services, and (e) comparative studies of e-government leadership and management capacity among local governments.

NOTES 1. The 15 divisions participating in the survey (numbers of participants in parentheses): Information Technology (18), Parking (84), General Affairs (17), Land Registry (16), Tax (12), Culture and Public Relations (9), Civil Affairs (10), Family

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Welfare (5), Park and Green Zone (6), Transportation Administration (7), Health Sanitation (11), Self-governing Administration (14), Financial Administration (15), Construction Management (18), and Environmental Cleaning (20). 2. According to Neter et al. (1990, p. 409), the largest VIF value among all variables is often used as an indicator of the severity of multicollinearity. A maximum VIF value in excess of 10 is often taken as an indication that multicollinearity may be unduly influencing the least square estimates. All of the VIF values of the eight independent variables are less than 2.2, leading the author to conclude that multicollinearity was not a problem. 3. Cronbach’s alpha in parentheses. 4. Items were measured on a 5-point frequency of occurrence (almost never, rarely, sometimes, often, and almost always). All other items used a five-point agree/ disagree scale (strongly disagree, disagree, neither agree nor disagree, agree, and strongly agree).

ACKNOWLEDGMENTS Support for this research by the Division of Policy Planning at Gangnam-gu is gratefully acknowledged. Author also acknowledges the Gangnam-gu project team members, including Stuart Bretschneider, Jon Gant, Heungsuk Choi, Hyunjoon Kim, Jooho Lee, and Michael Ahn. This chapter has been published as an article in the International Public Management Review, 2009, 10(1): 170–198.

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Jennings, E. T., & Haist, M. P. (2004). Putting performance measurement in context. In: P. W. Ingraham & L. E. Lynn (Eds), The art of governance: Analyzing management and administration. Washington, DC: Georgetown University Press. Kim, H. J., & Bretschneider, S. (2004). Local government information technology capacity: An exploratory theory. Working paper presented at the 37th Hawaii International Conference on System Sciences, January 5–8, Hawaii. Kim, S., & Kim, D. (2003). South Korean public officials’ perceptions of values, failure, and consequences of failure in e-government leadership. Public Performance and Management Review, 26(4), 360–375. Koch, J. L., & Steers, R. M. (1978). Job attachment, satisfaction and turnover among public employees. Journal of Vocational Behavior, 12, 119–128. Larson, E. W., & Fukami, C. V. (1984). Relationships between worker behavior and commitment to the organization and union. Proceedings of the Academy of Management Journal, 222–226. Layne, K., & Lee, J. (2001). Developing fully functional e-government: A four stage model. Government Information Quarterly, 18(2), 122–136. Modesitt, C. (2002). Bridging the gap between citizens and local government with information technology: Concepts and case studies. Denver, CO: National Civic League. Mohr, L. B. (1969). Determinants of innovation in organizations. American Political Science Review, 63(1), 111–126. Mowday, R. T., Porter, L. W., & Dubin, R. (1974). Unit performance, situational factors and employee attitudes in spatially separated work units. Organizational Behavior and Human Performance, 1(2), 231–248. Mowday, R. T., Steers, R. M., & Porter, L. W. (1979). The measurement of organizational commitment. Journal of Vocational Behavior, 1(4), 224–227. Mowday, R. T., Steers, R. M., & Porter, L. W. (1982). Employee organizational linkages: The psychology of commitment, absenteeism, and turnover. New York: Academic Press. National Electronic Commerce Coordinating Council. (2000a). E-government strategic planning: a white paper, NECCC Annual Conference, Las Vegas, NV. December 13–15. National Electronic Commerce Coordinating Council. (2000b). Critical business issues in the transformation to electronic government, NECCC Annual Conference, Las Vegas, NV. December 13–15. Neely, A. (1998). Measuring business performance. London: Economist Books. Neter, J., Wasserman, W., & Kutner, M. H. (1990). Applied linear statistical models (3rd ed.). Homewood, IL: Irwin. Norris, D. F., & Moon, M. J. (2005). Advancing e-government at the grassroots: Tortoise or hare? Public Administration Review, 65(1), 64–75. Northouse, P. G. (2001). Leadership: Theory and practice (2nd ed.). Thousand Oaks, CA: Sage. O’Looney, J. A. (2002). Wiring governments: Changes and possibilities for public managers. Westport: Quorum Books. Organ, D. (1988). A restatement of the satisfaction-performance hypothesis. Journal of Management, 14(4), 547–557. Organization for Economic Co-operation and Development (OECD). (2003). Checklist for e-government leaders. The Public Affairs Division, Public Affairs and Communications Directorate. Retrieved on August 13, 2008 from http://www.oecd.org/publications/ Pol_brief


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O’Toole, L. J., & Meier, K. J. (1999). Modeling the impact of public management: Implications of structural context. Journal of Public Administration Research and Theory, 9(4), 505–526. Perlman, E. (2002, May). Policy, politics and leadership. Retrieved on August 10, 2008 from http://www.governing.com Pizzella, P. (2008, December 23). Department of Labor CIO Patrick Pizzella talks federal e-government. Public CIO Magazine. Retrieved on August 10, 2008 from http:// www.govtech.com/pcio/575169 Pollitt, C., & Bouckaert, G. (2000). Public management reform: A comparative analysis. New York: Oxford University Press. Ronaghan, S. A. (2001). Benchmarking e-government: A global perspective. New York: United Nations Division for Public Economics and Public Administration and American Society for Public Administration. Seoul Institute for Transparency. (2008). The outline of anti-corruption programs. Retrieved on August 11, 2008 from http://opensystem.sit.re.kr/ENGLISH/sub1.html Stowers, G. N. L. (2002). The state of federal websites. Washington, DC: PriceWaterhouseCoopers Endowment for the Business of Government. Tichy, N. M., & DeVanna, M. A. (1990). The transformational leader (2nd ed.). New York: John Wiley. United Nations & American Society for Public Administration. (2001). Global survey of e-government, http://www.unpan.org/egovernment2.asp Van Maanen, J. (1975). Police socialization: A longitudinal examination of job attitudes in an urban police department. Administrative Science Quarterly, 20(2), 207–228. Walker, R. M., & Boyne, G. A. (2006). Public management reform and organizational performance: An empirical assessment of the U.K. Labor government’s public service improvement strategy. Journal of Policy Analysis and Management, 25(2), 371–393. Wescott, C. G. (2001). E-government in the Asia-Pacific region. Asian Journal of Political Science, 9(2), 1–24. Wescott, C. G. (2007). E-government: Applications of technology to government services. In: D. A. Rondinelli & J. M. Heffron (Eds), Globalization and change in Asia. Boulder, CO: Lynne Rienner Publishers. West, D. M. (2004). E-government and the transformation of service delivery and citizen attitudes. Public Administration Review, 64(1), 15–27. Wright, B. E., & Kim, S. (2004). Participation’s influence on job satisfaction: The importance of job characteristics. Review of Public Personnel Administration, 24(1), 18–40. Yildiz, M. (2007). E-government research: Reviewing the literature, limitations, and ways forward. Government Information Quarterly, 24(3), 646–665.

APPENDIX A. SURVEY ITEMS3 E-government leadership (0.90) The mayor’s leadership has been a significant facilitator to e-government development.

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The mayor clearly identifies his e-government vision. The mayor does encourage employees’ innovative ideas for the e-government services. Fair reward systems (0.85) This organization provides me with a fair opportunity for advancement and promotion. My work unit leader’s assessments of my job performance are fair. Overall, the rewards I receive here are quite fair. Identification commitment (0.82) I am quite proud to be able to tell people whom it is I work for. What this organization stands for is important to me. I work for an organization that is competent and able to accomplish its mission. IT capacity (0.89)4 I believe my work unit has adequate IT resources to provide e-government service. I believe my work unit has adequate financial resources to provide e-government service. I believe my work unit has adequate know-how to provide e-government service. Management for results. My work unit regularly evaluates the results of e-government service. E-government performance Service quality (0.86) E-government service in my work unit has improved the quality of service to citizens. E-government service in my work unit has increased my work unit coworkers’ responsiveness to citizens. E-government service in my work unit has changed my coworkers’ behavior from an authoritative style to a citizen-centered service approach. Transparency (0.86) E-government service in my work unit has increased openness and transparency in government.


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E-government initiatives have decreased corruption by civil servants in general. E-government service in my work unit has reduced civil servants’ abuse of authority and power. Cost-efficiency (0.73) My work unit has reduced administrative costs due to e-government service. E-government application has reduced time demands on staff. E-government transformation has streamlined business operation processes.

CHAPTER 13 COULD A DECENTRALIZED HUMAN RESOURCE MANAGEMENT SYSTEM IN CAMBODIA STRENGTHEN PERFORMANCE AND ACCOUNTABILITY? Eng Netra and David Craig INTRODUCTION Cambodia is embarking on a major programme of decentralisation and deconcentration (D&D) reforms, which have the potential to transform the way the country is governed and to build greater accountability into its governmental system. The D&D reforms promise to transfer much greater powers and capabilities to province and district level administrations. Provincial public servants will have the responsibility to deliver most services and to be accountable to elected councils. Potentially, they will move government closer to the people in important ways. However, if they are to do this responsively and accountably, a great deal will have to change in the ways that public administration – and especially


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human resource management (HRM) in the civil service – is structured and operated. As this chapter will show currently the sub-national authorities in particular suffer from systemic weaknesses involving centralisation and patronage, and manifesting in their inability to recruit and remunerate staff, non-attendance, the inability to discipline staff or motivate performance within formal channels. Frontline staff in core service areas (education, health, rural development) suffer most from these problems, and routinely resort to seeking informal payments or significant outside work. On contrary, their counterparts in resource- and securityrelated sectors (forestry, fisheries, land and agriculture) work under patronage and vertical accountability arrangements that mean they are not effectively subject to local government control at all, and largely operate in ways that combine interdiction with rent seeking. This situation means they too are proving highly ineffective in safeguarding the poor’s access to the resources they depend on for livelihoods (Ministry of Planning, 2001). Through D&D reforms, the government envisions addressing some of these problems by creating a unified sub-national administration (Royal Government of Cambodia, 2005). The organic laws required by the constitution for sub-national governments were passed in 2008, yet more routine aspects of public management, including HRM, are still in the making. At the same time, the government simultaneously embarked on several other substantial reforms, all of which will affect sub-national HRM: public financial management (PFM), generic public administration, legal and judicial reform, and a range of important sectoral shifts, especially in health. While these reforms are all critical in improving sub-national HRM accountability, they are each moving according to their own logic, slowly, and with highly uneven outcomes. As we argue in concluding, focussing all of them on delivering better paid and qualified, and more formally accountable professionals working at sub-national levels would provide them with a close understanding of the nature of the problems faced, and what needs to be done about it. This chapter is about existing, pre-reform accountability and HRM in the Cambodian civil service, both in general and with a special focus on sub-national arrangements. It considers the current situation, its interactions with the political dimensions of the wider governance reforms and the implications for future D&D reform. It sets out to describe and analyse sub-national HRM accountabilities, with a

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view to seeing how understanding these realities might indicate what might be done.

RESEARCH METHODS This study is based on an extended programme of fieldwork involving interviews and observations, as well as on case studies drawn from these processes and from existing literature. The study, and CDRI’s wider study of sub-national accountability, departed from most previous CDRI work, in that from outset to conclusion it was conceptualised by Cambodian researchers, with support from research advisers. It was obvious from the beginning that the most challenging part was for Cambodian researchers to understand better the multi-disciplinary framework that draws in different concepts, and then contextualises for governance characterised by high patronage networks and aid dependency. A literature review on accountability and neo-patrimonialism in Cambodia was produced and published in early 2007 (Pak et al., 2007) to serve as a conceptual foundation for this more field-focussed chapter. This contributed a great deal to understanding the complexities of accountability: where its key notions come from and how they might be defined and observed in Cambodia. Conceptualisation and literature review on HRM and aid management were also done, focussing on the implications from and for patronage networks. The study employed three techniques to collect the primary data: (1) formal interviews, (2) informal discussions and (3) other observations at meetings and events.1 Because this was qualitative research, the team developed some key questions and used them as guides. Analytical memos were written after returning from the field. There were breaks of a few weeks from one province to another, because the team needed time to write up their experience and meet with key people at the centre. Observation and informal discussions away from designated fieldwork were also important. These issues are widely discussed in Cambodia: they are something that ‘‘everyone knows about, but no-one will say much about in public.’’ Team members were also involved in wider central discussions around HRM in a number of different forums and contexts, over several years. Finally, all of us have worked in, or have close family working in the public service. Anyone familiar with these contexts will confirm that the observations we make are the common experience and knowledge of everyday governance.

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CENTRALISATION OF SUB-NATIONAL ADMINISTRATIVE EMPLOYER FUNCTIONS As World Bank and ADB expenditure review noted, ‘‘y the vast majority of civil servants, approximately 79 percent, are based in the provinces’’ (2003, p. 101). However, the vast majority of provincial public servants (with the exceptions, usually, of the health and education) do not perform significant duties. Most crucial aspects of Cambodian HRM – and thus most of the real power over employer functions such as recruitment and discipline – remain very highly centralised. In Green’s (2005) assessment of staffing authority among Asian subnational authorities, Cambodia ranks lowest of all countries surveyed in terms of its assignment of core employer functions to sub-national or local levels. Simply, central government controls and dominates almost all sub-national employer functions, from setting wage rates to recruitment to deployment to disciplining and firing. The consequence is that all employer authority is vested with the government in Phnom Penh, meaning that in many aspects public officials in the provinces work under Phnom Penh’s supervision. Provincial and district administrations are designed as branches of their ministries. They must maintain regular relations with the centre by attending regular meetings, by sending weekly, monthly and quarterly reports and by asking for instructions. As a result, provincial actors from governors to lower public servants feel disempowered and frustrated by the lack of resources and discretion to do their jobs.2 Some of this frustration can be heard in these quotes drawn from provincial fieldwork interviews: I feel like a scarecrow watching over my province, but cannot act if I see a crow destroying the crow. This is because the central interest is stronger in this area. We have to ask for permission from the centre even when we want to make noodles. Every move we make must first be approved by the centre. (Anonymus, 2008)

Although provinces and districts are legally recognised units of administration, they are not intended to be autonomous in policy other than having some flexibility in implementing centrally determined programmes. Even within the areas that are delegated functions of the province, the extent to which the centre can influence decisions is blurred. For instance, on paper provinces have some autonomy in budget preparation and execution, and in hiring short-term floating or contract staff. In reality, this role is limited to making requests for additional staff at the start of


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budget preparations, and doing so in ways that allow for formal and informal trimming of allocations. Each provincial department prepares a request and returns it to its ministry. In terms of new recruits, the requests are mostly ‘‘wish list’’ or ‘‘fishing’’ exercises, the total number of recruits requested being based not on assessed staffing needs and rationalisation of the workload, but on the potential annual funding increase for each ministry. Altogether, those in the province see the whole process as ineffective and demotivating. The department does not have any authority to recruit its own staff; that is the responsibility of the ministry. The department makes an annual staff request for its own needs, if any, to its ministry and then waits for the results. If we cannot have new staff this year, we have to wait and see in the following years. We have no more role to play. (Anonymus, 2008) I am tired of running requests to hire contracting and floating staff to ministries. I spend two or three days to take and coordinate the request to ministries in Phnom Penh. The approval takes a long time, about a year. Moreover, ministries always trim the number; for example, last year I submitted a request for 20 contract staff, but only 10 were approved. I am tired of going through this process. However, I keep doing it because I find that contract staff are helpful for line departments. (Anonymus, 2008) We work hard to prepare our plan for staff recruitment. Our plan is approved and recruitment takes place. We are happy to receive new staff; however, it usually turns out that all the new staff are for Phnom Penh offices and that no persons ever turn up in provincial offices. We are the victims in this process. (Anonymus, 2008)

After the government approves the budget and staffing requests, each ministry starts recruitment. Formally, all recruiting should be done through the State Secretariat of Public Functions. Its processes are supposed to ensure high national standards and other important aspects of establishment control. However, in a centralised neo-patrimony, the formal system enables informal practices. Standardised and centralised national selection not only become opportunities for rent seeking, but also have an inherent bias that prevents provinces getting the recruits they need. Despite formal examinations and other centralised procedures, cheating and informal networks remain key to entry to government posts. Exams have no content that provides a measure of individuals’ competence for the job; the exam involves simply filling in dates, names and numbers based on what might be considered general knowledge, but which in practise are memorised in advance for the exam. One informant said that of any ten public sector vacancies, at least five spots are reserved for families, friends and comrades. Three spots are for those who pay to pass the exam (in 2009, $US 3,000 in one central ministry), and the other two spots might be for merit-based recruitment.

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In our research, many respondents described the problems with the current system, especially in the role of informal influence. It is still far from merit-based recruitment because we have only created a system but have not changed people’s practices or social values. The exam is prone to cheating y It is easy for someone to help a candidate because the exam consists of filling in names, numbers and dates. In my position as director of department, my most challenging task is to say no to someone who wants to have their families or friends working in the department. In most cases, I have to accept them because my boss at the centre gives me a call. (Anonymus, 2008)

Currently, centralisation and informal processes (including systematic cheating) ensure that a large proportion of successful candidates are from families with good connections and high status and, most likely, from Phnom Penh. These candidates are likely to be able to use their backgrounds further in the future, especially if they are able to stay close to the action in Phnom Penh. From this pool of candidates, ministries select and appoint new staff through their Phnom Penh headquarters. Senior officials with control over recruiting will be approached privately, commonly at his or her (Phnom Penh) house or through a third party, and offered inducements. The results are mixed. Information circulates mainly around the centre, with minimal publicity (or closer, more personalised information) going to other areas. This restricts candidacy mainly to those living at the centre. On one hand, this means recruiting can attract more qualified graduates from the capital. On the other hand, the majority of new recruits in Phnom Penh never transfer to the provincial offices to which they are assigned, but do anything they can to stay in or near Phnom Penh. This reinforces central patrimony and rent seeking. Staff who do go to the provinces often stay for only a short time, often just long enough to request (and make payment for) permission to transfer to Phnom Penh. The most significant cases are in education and health, in which recruitment is conducted centrally and candidates are then assigned to district and provincial posts. A large number of teachers and health workers never visit their posts. Instead, they leave their name on the records and their salary to be divided between central and locally well-placed officials. After the required minimum 12 months, many recruits apply for leave without pay, or they give their salary to the host institution and find work elsewhere or request a transfer to the centre. All this comes at a cost, to the system and to the individual. The consequences for accountability are several. Recruits are not always those most capable of doing the job, which reduces the extent to which they


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can be professionally accountable. Those who get the jobs already have debts and obligations to networks and patrons, which they will be expected to continue to meet. They in turn will support and replicate the network, and the cycle will continue. As indicated, most networks have strong connections to the centre, meaning that if a member is sent to the provinces, this will be in part in order to extend central links and fulfil central network needs.

PERFORMANCE MANAGEMENT AND DISCIPLINE Another area where the province has formal responsibility is the management and evaluation of staff. The centre passes responsibility to the province in a situation where it is clear that there are insufficient resources for staff to perform assigned tasks, and that evaluations are often futile or falsified. Evaluated staff may be rewarded with a medal or an incremental promotion, but their pay is such that they seldom attend work. Even ghost employees routinely get incremental promotions, which end up in a few central and higher-up provincial pockets. Grade promotion is conducted every two years. But no one seems really to care because the salary difference between grades is almost nothing. Medals are used to ensure the quality of staff performance. However, most of my staff get them. Some of them receive medals for reasons of good work, and they can get it very early. Others can also get medals, but for other reasons such as ‘honesty’ or ‘struggle’. (Anonymus, 2008)

Promotion to higher categories is a different matter. It rarely happens; most provincial public servants do not advance beyond basic grades. For higher positions, the criteria are related to performance, but not simply actual job performance. Here, too, it is often the relationship between civil servants and the centre that determines outcomes. Provincial patronage and politics are additional factors affecting outcomes. Staff discipline is a serious problem. Expectations of performance are already low due to the lack of resources. For the same reason, the threat of discipline is not highly effective, and punishment of wrongdoing is rare. The authority to fire is held centrally, and in most cases provincial staff can only be stood down for a period. This might affect their small salary and their ability to gain rent from their job, but it does not affect the basic value of their sinecure, their ability to do political party work or their contribution to the total number of employees against which central officials can generate

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rents. The inability of the province to fire ghost workers is especially convenient for both the centre and for high provincial officials, who keep some of the ghosts’ salary. In practice, enforcement is generally not to punish staff, but to reward them, allowing them to take time out for other income generation and routinely passing them on performance review. This happens because provincial employers acknowledge that poor performance is caused, not by staff, but by the system. Provincial employers feel guilty about their inability to take care of staff. I cannot enforce the rules on my staff because I understand their situations. I sometimes open one eye and close the other and pretend to know nothing by letting my staff leave early, say at 10 am, so that they can spend from 10 am to 2 pm on outside work to make extra money. I feel tense working in this [administrative and personnel] office sometimes because, apart from staff management, I try to understand my staff’s situations, be flexible and make everything easy for them. I have been working for this department for three years. In that time, only one staff member who worked at district was suspended for a short time for bad conduct. Afterwards I let him come back to work again. (Anonymus, 2008)

TRANSFERS: KEEPING THE BEST FOR THE CENTRE Transfers are another area in which HRM can enable or constrain a strong and accountable provincial public service. If transfers are readily available, a province can regularly turn over its staff from a range of different sources and attract public servants from elsewhere. Transfer offers staff a quick fix, enabling them to move on from one job or office to another without having to undergo selection. Currently, staff with permission from the centre can transfer between departments and provinces, but this by no means operates at an optimum. Transfers affect a small but significant proportion of provincial staff. Most lower level staff stay in one place and one job for a long period. For example, in Siem Reap the Department of Rural Development has not recruited staff for the last few years. In 2006, it had 74 staff, about 70 percent of whom had worked there since the department was established in 1994. Since then, two or three staff have transferred in from other provinces and other departments each year. Altogether, in the period between 1999 and 2006, 17 staff transferred into the department.


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As might be expected, there are many issues with this transfer system and centralised deployment authority. Staff transfer is a lucrative business. A transfer request for a teacher to be relocated from Svay Rieng to Phnom Penh costs US$ 500. In a system where a single signature enabling an application to pass through one loop in the procedure costs US$ 200–500, and where altogether a successful transfer request can cost up to US$ 2000, individuals at the centre who must sign off on such transfers can earn a lot of money. Nonetheless, they are usually kept busy processing requests. The transfer system enables skilled staff to avoid provincial postings. Overall, the provinces suffer through the uneven distribution of staff between priority sectors and locations. For example, about 70 percent of doctors are employed in Phnom Penh, leaving the remaining 30 percent of doctors to serve 70 percent of the population in rural areas. The Ministry of Health has more than 3,000 (18 percent) of its 17,000 staff who are either on leave without pay or who have transferred to urban centres from rural areas (Hansen, 2005).

SENIOR APPOINTMENT AND PROMOTION All of these issues come together in the area of senior appointments. It is generally accepted that all senior sub-national staff positions have to be approved or appointed by the centre, although it is often the informal rather than the official power of ministers or senior officials. Formally, Phnom Penh has the authority to appoint directors of provincial departments and district governors, but in provinces with strong CPP governors, this authority is often rather ceremonial. In provinces dominated by strong governors (who often have strong links to the party or higher individuals), most senior staff owe their positions, and therefore their loyalty, to provincial party committees (usually headed by the governor), which select and propose appointees to the centre. Thus the CPP has established a formidable local political network, supported by trusted and loyal officials carefully selected from the ground. Within these general constraints, promotion to higher provincial or central positions occurs if there is a vacancy, or what is known as a ‘‘[vacant] box.’’ This aspect is critical, creating patronage and rent-seeking opportunities: the box offers power and possible income, as well as an opportunity to extend a line of clientelism or influence upward or downward. Incumbents can also be removed (often, to save face, ‘‘kicked upstairs’’)

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to create an empty box for other candidates, providing a regular flow of cash around a few central patrons. When there is a vacancy for a director of a line department or a governor, the motivation to secure the position is high, and many candidates pop. If it is a lucrative position, candidates know that it is likely that they will be able to keep the job only for a short time, and make their bids (and retain patronage support) accordingly. To win the competition, there are several important criteria besides being a qualified candidate: alignment with one or more central patrons (friends or kin); how much you can pay your patrons (usually equal to a minister or higher); how much you might be able to pay after you get the job (per month or per year and as necessary); being a loyal, trusted and active party member (which will mean considerable involvement in electioneering and other party support); a good working record; academic background, or involvement in further study. Of all factors, one above all remains necessary. ‘‘You don’t have to possess the required qualifications to be in powerful and financially rewarding positions in the government. What you need is a powerful backer from the right line.’’ This has strong centralising effects: Appointments are made secretly by consensus among a few top officials, and are confirmed from higher up before the appointment is shared with everyone in the salakhet. The most negative aspect of the government is promoting loyalty of government members to a few individuals and a powerful political party. (Anonmyus, 2008)

Particular institutions might have the formal authority to review and approve certain functions or appointments, but several top officials must also approve or at least be consulted before decisions are made. Such processes require much informal networking in and after working hours, and also often extensive paperwork travelling from one desk to another within the same office or ministry and, in some cases, to several other desks of other ministries. Both centrally and provincially, departmental work, including HRM, involves this kind of ‘‘running work’’ (Khmer Rot kar). The paperwork will often involve formal ratification of arrangements discussed and agreed elsewhere. It will require everyone involved to sign consent, the signature signalling that the party’s interests have been taken into account.


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These interests can be resolved on the spot (with a payment for the signature in cash) or in longer term arrangements.

POLITICISATION AND NEO-PATRIMONIALISM, AND IMPLICATIONS FOR ACCOUNTABILITY Many of the above arrangements have become entangled with politics and neo-patrimonialism, further restricting provincial governors’ and line departments’ abilities to manage HRM in ways that promote accountability. Since 1993 and the tenure of UNTAC, many factional and political comrades from disparate backgrounds (including the Khmer Rouge and many political party members) were integrated into the government and given positions. This political entanglement is one of many cases that are not caused by technical and procedural issues, but are shaped by complex political dynamics. This section discusses several entangled dimensions of the politicisation of the civil service, including neo-patrimonialism, and the complexities in party politics and bureaucracy emerging from widespread patronage, faction and group networks. Neo-patrimonialism is the interweaving of formal bureaucracy and more traditional patronage networks (Pak et al., 2007; Bratton & van de Walle, 1994; Brinkerhoff & Goldsmith, 2002). In Cambodia, as we have suggested, this most commonly involves powerful ‘‘backers’’ (khnorng) who provide security, protection and opportunity for advancement and reward within formal, informal and political systems in return for personalised loyalty. Clients become part of an entourage around the backer or, more commonly, part of a ‘‘line’’ (ksae), a hierarchical string extending to the backer. The personalised authority within networks is powerful, and to a large extent respected and desired. It creates very strong informal sanctions and incentives, arguably much stronger than those in the formal system. In Cambodia as elsewhere, informal accountabilities can to a significant extent determine the outcomes organisations produce (Fukuyama, 2004). While there are formal appointment procedures to vacancies in the public sector, the way into government is often through lines and backers. Posts are often seen as the gift of an individual: prime minister, ministers, governors and heads of departments. Officials can offer their services to those seeking positions in return for financial or other incentives. Overall, there is a strong tendency among provincial officials to consolidate their positions through ties with networks and supporters rather than by addressing the needs of the

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province. Movement of a provincial governor from one province to another has always been followed by senior staff transfers. Party politics are dominated by the CPP, which has 5 million members. Not only does the CPP dominate national and commune electoral politics, but lines from its factions dominate most if not all ministries and departments. Throughout government, administrative and secretariat staff readily identify themselves as party members or activists. Some consider their engagement with a political party as a way to show respect and loyalty to their ‘‘second parents’’ (CPP) or to the king (FUNCINPEC). Some join a political party because they have no alternative if they want job security, opportunities and advancement. A CPP saying is: ‘‘With the CPP it’s as if you live in a concrete house; if you are with others you can only live in a hut’’. The interviews described several aspects of this: The division between political parties at work is very strong. Staff belonging to and registered for the CPP have a greater chance of being promoted and benefiting from project work under the CPP-headed departments and ministries. Similarly, CPP ministers are more powerful and get a more substantial share of development funds than FUNCINPEC ministers. Sometimes I wonder where I would be today if I were not with the C Do you think I would have been given this position? I think not, not without the support of my boss and the C I am a CPP member because that is the political party I’ve been in for a long time and I don’t want to change. I love the policies of the CPP even though some individuals in the party do not behave well. The CPP provides many supports and initiatives to my village. For example, children of good CPP members can enrol in Build Bright University free of charge. H.E. Sok An also supports us and visits us often. It is like walking on a tightrope in my position. I have to be careful not to upset the key and powerful CPP figures in the province; otherwise I am in a dead end, not able to move my fingers. (Anonymous, 2008)

This arrangement may suit the career needs of many of those signing up, but it enormously complicates HR operations and wider accountability. It creates a two or more headed accountability system, in which party and everyday accountabilities are profoundly convoluted. In HRM, formal, informal and political systems and processes are intertwined in such ways that in any given situation, the same actor wears at least two hats (formal and neo-patrimonial, technical and political/ factional), changing from one to the other as necessary to balance obligations. The informal and political have been built into the heart of the system of government. For public servants, ‘‘That is just how the government works.’’


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(Anonymous, 2008) Government, including in public service HRM, is shaped by these loyalties and powers to the extent that unpredictable, even extraordinary outcomes can emerge. In the words of a well-known saying, ‘‘Anything is possible if our group agrees, even if the decision is outrageous.’’ (Anonymous, 2008).

OTHER REFORM ISSUES: PAY AND SALARY SUPPLEMENTS; COMPLEXITY IN DONOR MODELS AND GOVERNMENT REFORMS Civil service wage rates are established centrally. With the exception of recent increases for teachers and health staff, pay is uniform across ministries and provinces. There is very little differentiation across grades, and the pay is extremely low, especially for junior or unskilled positions. In our field interviews, low pay was raised as the most serious issue in all provinces. It results in low morale, a poor work ethic, second jobs and staff departures to NGOs and donor projects. It also strengthens those in a position to offer inducements in return for services and loyalty. In Siem Reap, low pay is the key issue in HRM. Staff need better salaries for better living standards. Although salaries have recently been increased, they are not enough for current expenses; this is even more obvious when comparing the prices of electricity [800 riels/kwh] and water [1200 riels/m3]. (Anonymus, 2008)

The provincial staff categories A, B, C and D are paid different base salaries and receive different benefits, paid together monthly. The money is disbursed from Chapter 10 of the provincial budget. Although the government spends around US$ 78 million per year (23 percent of total revenues) on civil servants’ salaries, this amounts to only around $40 per month, one-fifth to one-eighth of the minimum cost of living. In addition, local managers provide mission money to cover expenses, including per diem and travel costs. The government is committed to increasing civil service pay annually by 15 percent of the base salary, but it hardly keep up with that promise. In addition, in real terms this increase in base salary is very small; for example, between 2005 and 2006 there was a 16 percent increase in the index of base salary but for lower rank officials the increase is worth less than a dollar. As many provincial officials put it, ‘‘My salary cannot even cover the cost of gas for my motorbike to come to work.’’ A socio-economic survey by the Ministry of Planning in 2001 found that $280 a month was necessary to

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meet basic needs in Phnom Penh, $180 in provincial towns and $80 in rural areas (MOP, 2001). Pressure continues for pay increases across the board. Even for unskilled workers in the lowest grades, there is evidence that comparable private sector and NGO wages are on the rise. Cambodian civil servants receive the lowest pay in the region (ASEAN, 2005). Despite remarkable macroeconomic growth and the substantial increase in government spending, civil servant wages have not increased substantially. The majority of male civil servants rely on their wives’ small businesses to support the family. Many others have second or even third jobs. A handful of staff rely on informal networks within the government to allow them to ‘‘run work’’ and seek rents. A small group of staff receive additional income from salary supplements provided by donor and NGOs projects. Poor pay for teachers and health professionals has led to a proliferation of sector initiatives such as Priority Action Programmes and use of service charges to pay front office staff as well as salary supplements. These payments are important to keep teachers and doctors working rather than leaving after an hour or two to provide private services. However, the fact that these incentives are far larger than their public salaries creates serious management difficulties. Outside of health and education, salary supplements for provincial staff are more rare, often because these have generally been allocated to central agencies and PIUs. Here we see a vicious circle in action: because of low pay there is no performance sanction in the formal system, while certain activities are tolerated or encouraged and loyalty towards superiors is expected. This in turn permits inactivity, with poor performance linked to abject dependence. Furthermore, if pay were to increase significantly without discipline and firing sanctions for non-performers and corrupt officials, little change could be expected (Filmer & Lindauer, 2001). This is reflected in common sayings: I help you to survive, so you must stay with me. Surviving together means surviving for a longer time. No one is interested in work with no money attached; they therefore do what you are told and no more. (Anonymous, 2008)

Third, low pay makes civil servants non-functioning for the state, while transforming them into elements of the political and entrepreneurial networks that operate within the state (Hughes 2006; General Accounting Office, 2002). This creates another vicious circle: rent is unevenly distributed to reinforce the unequal power of the patrons, and to give them further

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opportunities for rent seeking and patronage. This strips resources from the formal system that might have gone to paying salaries. As the common saying goes, ‘‘Big eats lots, small eats little’’ (Anonymous, 2008). This is an economic base for neo-patrimonial power on which protective shields and obligations are sustained, as reflected in comments from officials: I paid to get my position because I know I can make extra from the post. But even then I don’t get to keep a lot because I have to give lots of it to my bosses. I have to pay my bosses; otherwise they will kick me out. And I have to pay more, not less; otherwise I can be the scapegoat for anything. (Anonymous, 2008)

The overall situation can be summed up in a Khmer phrase, ‘‘Know how to be corrupt, know how to feed the boss, know how to perform’’ (Anonymous, 2008). The most obvious and economically significant cases are police deployed in strategic locations, tax and customs officers, fisheries and forestry officers, cadastre, treasury officers and personnel managers. These people receive a salary not much higher than their colleagues, but are extremely rich, powerful and influential (Table 1). Table 1.

Monthly Earnings of Civil Servants (US$). Formal

High school teachera Health worker Traffic police Commune chief PDoRD PDoWA PDoH PDoE Forestry Office

Informal

Total

State salary

Salary supplement

Daily Sub- Direct Registering Sharing Suballowance total contact among total peers

90

–

–

90

300

–

–

300

390

60 50 25

50 – –

– – 50

110 50 75

250 150 400

– – 200

50 50

300 200 600

410 250 675

200 200 200 200 80

800 500 1,000 1,000 –

– – – – –

– – – – –

200 200 200 200 –

1,200 200 1,200 1,200 10,000

2,200 1,100 2,200 2,200 10,080

1,000 1,000 700 1,200 1,000 1,200 1,000 80 10,000

Abbreviations: PDoRD, Provincial Department of Rural Development; PDoWA, Provincial Department of Women’s Affairs; PDoH, Provincial Department of Health; PDoE, Provincial Department of Education. Source: Authors’ calculation of data collected in interviews a High school teacher earns extra from tutoring – about $10 per day.

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Fourth, and related to the above reasons, there are minimal pressures and few attempts within the state apparatus to increase revenue to support civil servants’ wages. Revenue from natural resources is diverted to patrimonial interests. Forestry, which in the past was very lucrative, contributed about 4 percent of government revenue at its peak in 1994 and only 0.5 percent in 2004 (Independent Forest Sector Review Team, 2004, p. 10). Tax revenues have increased but are still small, and a large percentage are kept informally. This situation makes state institutions incapable of demanding more resources from the government, while almost half of government funds are allocated for military and security expenses. Finally, although the government has made several pay increases, it has failed to make any progress towards across-the-board increases as agreed in principle at the Consultative Group meeting in 2006. This failure makes salary top-ups and projects the main means to resolve salary tensions for some key sectors. The well-documented consequence is that NGOs or external partners handle a large share of Cambodia’s service delivery. Some officials are cynical about this approach because the government is relieved of the need for serious commitment to pay reform, while the arrangement diverts development responsibility from the state to partners.

PAY REFORM AND IMPLICATIONS FOR ACCOUNTABILITY The government has committed to developing a new pay policy that provides adequate pay and incentives to civil servants. The government and development partners recently embarked on a targeted approach in which 700 AA3 officials in high priority sectors and functions are raised to competitive salaries, through a pay increase of $130 to $205 per month. In late 2005, programmes including the Priority Mission Group and the Merit-Based Pay Initiative started to roll out, but so far these cover only a very small number of positions. Both successes and challenges have been documented, and a recent evaluation has raised many lessons (Sok Saravuth, 2007). Successes include (1) achieving major planned activities; and (2) a majority of staff involved found performances improved and motivation and commitment also high. However, challenges remain, including: problems of centralised management and decision making; disincentives for staff who are not part of the initiatives and therefore lower performance and resistance to cooperation;


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continued benefit sharing, which is counter to performance-based pay; jealousy and comparisons between high and low, national and subnational officials destroying morale and commitment; and conflicts and ownership issues among actors within government and donors. Pay reforms will be particularly difficult to put in place. Even when implemented, the impact of pay improvement on performance and the reduction of informal activities might not always be significant in light of the far higher rents from the informal economy that civil servants can extract. Low pay is less significant for officials in higher positions and places with potential rents. So far, attempted pay increases have targeted mainly central and high officials. Some of these people are technically able, and will benefit greatly from being able to spend more time doing their job, and less time making ends meet. Second, in the absence of reliable audit and interdiction systems, many managers will still not be able to discipline civil servants over performance and accountability. In the World Food Programme and World Bank demobilisation projects, despite significant reported losses from project funds, no government officials were held accountable (Ear, 2007). Pay increases across the board will be critical, not least because there are few opportunities to trade off staff numbers against pay. Retrenchment is politically implausible, and would save very little because salaries are low. Nonetheless, pay is a central part of improving sub-national accountability.

SALARY SUPPLEMENTS AND THEIR EFFECTS ON SUB-NATIONAL ACCOUNTABILITY Salary supplements in Cambodia are extraordinarily significant, taking up to 25 percent of all donors’ disbursements (Danida, 2004). They are also highly significant due to low state salaries, weakness and distrust of government administration and lack of donor coordination, leading to aid delivery through technical assistance and PIUs. Overall, the use of technical advisers and PIUs has resulted in a lack of national ownership, limited capacity development, distorted incentives, capable staff diverted from serving the state and reduced pressure on the government to reform its administration (Mysliwiec, 2003; OECD, 2005; CDC, 2007). But they remain crucial to programmes and to the livelihoods of many public servants. According to the Council for the Development of Cambodia, the

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average salary of state civil servants is around $28, roughly $1 per day (CDC., 2004). This is certainly not enough, and they have to look elsewhere. Salary supplementation needs to be addressed with care and a deep understanding of the context, both holistically and in terms of specific projects. Throughout the fieldwork, there were several explanations given of why salary supplements are favoured and how they intertwine with neo-patrimonial interests. First, supplements can improve administrative efficiency and have enabled government staff to spend more time attending to their responsibilities (especially, but not exclusively, where project function aligns with department core function). They contribute to improving service performance and to completing necessary work and field visits. In projects with salary supplements, there is evidence that good things can happen within the current administration. Second, they have also created incentives, not all of them good, to show greater respect and loyalty to local managers. This may or may not result in better performance of duties. Because of low pay, local managers relax discipline and do not press their staff too hard, so that even when there is a performance problem, it is rare for any sanction to be imposed on people receiving salary supplements. Most officials take a short-term view of supplements, regarding them as one-off deals. I respect my boss because he helps us get involved with projects so we receive salary supplements. It is very difficult for me to punish my staff who are on projects while being relaxed about those who are not. We share one roof and so need to understand and forgive. They know how to behave when they are selected to work with a project, but there are times when other needs or commitments arise and they cannot turn their backs on us. Otherwise they will be called ‘crocodile’ and might be excluded from future opportunities. (Anonymous, 2008)

This makes it very difficult to take a strong stand on formal accountability. They are afraid to disrupt their long-term staff relationships, and often avoid conflict with staff and colleagues altogether. Leadership benevolence is also in play, local managers feeling pity for their staff and helping them get outside money to survive. Some offices share the mission money from the department budget, using false receipts. It is not uncommon for them to overclaim salary supplements and to cover for non-existent fieldwork. Not all of us get to be project staff. In order to live together, we often share our bit with colleagues who don’t have salary supplements and therefore get them to help us in activities for the project.


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It is important that I, as leader, take care of my staff. We don’t ignore anyone but try our best to help and share our little cake so that we all can live in difficult times. (Anonymous, 2008)

Third, these possibilities create incentives for public servants to invest time and money into their own professional development and education to improve their chances of joining projects. However, because only 30 percent of overall government staff receive supplements, these opportunities and incentives are not universally or equally distributed. Many provincial staff, including older staff who might not be expected to show an interest, try to travel to Phnom Penh for study. Whether this means they are able and have the time to do a better job is another question. In general, despite the disruptive effects discussed below, there is very little opposition to salary supplements from those able to access them. They are said to be useful to ensure staff morale and loyalty, and also to get their work completed. They are good for neo-patrimonial interests because they take pressure off scarce resources and allow staff to undertake activities with outside support. They create personal gain and loyalty, support patron network servicing and stabilise the patron–client network. Salary supplements create obligations for staff who are in the network, while shielding and even enabling rent seeking and other informal activities that those staff perform for the neo-patrimonial interest. All this illustrates how everyday new public management HRM, relying on incentives to meet outputs, can be assimilated by the neo-patrimonial system. Rather than transforming it, they reinforce its day-to-day functioning.

DISTORTION OF ESTABLISHMENT CONTROL, PERFORMANCE AND RETENTION OF STAFF PIUs and donor-supported programmes are commonly staffed by government officials. These officials retain a position within their ministry, but are recruited to work mainly for the project, by which they are paid benefits in addition to their base salary. Many staff are grateful for the salary supplements and training allowances, which are needed for survival. The overall and long-term effects might not be as promising. As one interviewee recalled, receiving a salary supplement of $80 per month makes him happy and committed to his work, so he devotes all his time to the project. When the project ends, however, he increases his commitment to help his wife with her business. This implies an increase in short-term individual incentives but

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a loss of overall system gain, affecting long-term capacity and motivational stability. Most importantly, accountability is distorted because staff members whose salaries are supplemented see their government work as secondary. Thus while salary supplementation has made it possible for civil servants to carry out their expected tasks, it also draws capacity away from core activities. Public servants may retain their sinecures, but it is not uncommon for them to devote all their time to a donor or NGO project. Especially in sub-national government, the promise of better pay in the NGO sector has attracted many of the more capable staff away from state institutions. We lose our good staff to NGO projects and the private sector because they can earn more and work more effectively. We cannot do the same – poorly equipped office, no computer, little money y Our office is as quiet as an abandoned building because staff go to work for their businesses and for NGOs. (Anonymous, 2008)

State offices can be seen merely as launching pads for NGO careers. Fresh graduates who do not have a job or work experience tend to seek government positions, where they are trained to be better workers. As soon as they possess the skills and confidence they need, they leave in search of outside work, usually with NGOs. This has transformed state offices into training camps where people come and go with no commitment to their operation. I do not have enough capable staff to help me with the department work. Sometimes, I have to ask my son and relatives to help me. Almost half of my department staff are category D. These people spend only 40 to 60 percent of their total working hours [at the office]. They don’t have any responsibilities. They do not produce any output. They come to work just to show their faces, and that is it. (Anonymous, 2008).

Other outcomes and directions are emerging. Partly because high salary differentials occur in a context of a strong tradition of patronage within government, NGOs may, perversely, have contributed to changing public service performance in two new ways. The unequal pay between NGO and government jobs creates incentives for government staff to seek rents. And it places stress on monetary benefits to motivate civil servants, while the experience of other countries is that other factors in addition to salary are critical for motivation.


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How could you [project staff] expect us [government staff] to perform like you if we earn only about one-tenth of your salary? We actually work harder than you, because we work during off hours as well to make ends meet. (Anonymous, 2008) I spend most of my time meeting with delegations and missions on their project support. It is a headache and very difficult to manage and follow. (Ministry Official, 2008) I don’t have time for myself to plan and think about the work that my department wants to do because of the demands for immediate attention I must give to the many projects we have.’’ (Ministry Official, 2008) We want to do more in the project but can’t because our time and commitment at the office are less than the project needs. I think in the end the project team takes all the work because they can’t wait for us, and besides it is their job – they get paid more, are better trained and have clearer work assignments. And if I get more involved and hit a problem, I will be identified as problematic, so it is safer for me to do little. (Anonymous, 2008)

WHERE TO FROM HERE? The D&D reforms offer the possibility of systemic change which, if well implemented, could make substantive changes to this situation. Current lack of clarity around what they will entail, however, mean that currently many of those interviewed speak of reform in either general terms, or in terms of immediate, short-term answers, which do not affect the basic ways the system operates. On a general level, many interviewees expressed concerns over the current arrangements regarding personnel management and both vertical and horizontal accountability. The power and authority of provincial governors vis-a`-vis directors of line departments need to be clearly assigned in order to correspond to their mandates. The current arrangement is very messy y overlapping roles and responsibilities of ministries and departments. Line departments and governors’ offices are legally equal because they are supervised by ministerial prakas, and this creates ambiguity over who looks after whom. The centre does not trust the provinces, especially on important matters like revenue collection. Central staff come to collect revenues themselves and manage projects without consultation with the provinces. This arrangement is complicated and ineffective y and needs to change. (Anonymous, 2008)

On contrary, short-term solutions appeal. The authority to hire floating and contract staff has proved critical in providing space and flexibility for

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the province to manage its personnel and resources. Line departments in particular are pleased that they can be a formal employer of contract staff, who they believe are respectful and easier to supervise. Contract staff are also useful when staff needs are urgent, because selection and appointment are conducted and supervised locally. The Department of Health had 38 contract staff in 2006, which included doctors, nurses and people with computer skills. Most of them are graduates of schools. I find they play very important roles in helping the department; for example, they can be placed wherever they are needed. I find contract staff helpful for line departments because they are young students and most of them are fast learners. I want to keep them working in the departments after the end of their contracts, but most of them work for line departments only for experience or opportunities to work for NGO projects. Their ultimate goals are in fact to work for NGOs or the private sector for better pay. (Anonymous, 2008)

While many contract staff are skilled graduates who set out to impress, some have other, or reduced incentives. For contract staff, provincial managers can tend to select their relatives and friends because there is less scrutiny, and to falsify contract durations and exaggerate staff numbers in the payroll. In many offices, floating staff are mainly sons and daughters of relatives and friends of the head because they see this as a step to becoming permanent staff. Several informants told us that contracts were the fastest way to appoint relatives and friends to provincial or central government. Yet contract staff, once approved, can be a bonus to provincial governments in formal and informal ways. Contracts offer a short-term opportunity for up and coming public servants, and show what locally devolved hiring and firing mandates might achieve. But they do not offer a permanent solution to provincial human resource problems: these require the long-term sustained recruitment of skilled and motivated officers in a system in which recruitment, adequate pay, transfers and promotions are routine.

CONCLUSIONS There are specific and practical areas where we think D&D reform can start to achieve some short-term impact and build the foundation for long-term transformation. Here, HRM issues are important, but they are also intermeshed with other accountability issues and areas. This perspective


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and the already positive examples of various initiatives can be built on and scaled. These include: Establish a study group and give it space to discuss the real issues, including the effects of existing revenue, political and patronage arrangements. A study group could be established, involving selected government officials (central and sub-national, with strong backing) with research support to begin a genuine and realistic discussion about the nature of existing arrangements, what needs to be done and how to do it regarding decentralising HRM. The study group could report internally to government, and engineer change away from the public eye and in facesaving ways. Or, it might also report to or dialogue frankly with the National Committee to Support Decentralisation and Deconcentration sub-group on capacity building and HRM. For instance, the group could start work on opening up freer discussion about the current system and the sub-national challenges, then look into what D&D want to achieve and the organic law intentions, contextualise other countries’ experience and explore opportunities to improve recruitment, appointment and promotion. The study group could also follow particular reform efforts, such as those being explored in health through the Special operating Agencies, or in the Forestry Administration (in partnership with Danida) around alignment of job descriptions with decentralised functions and a merit-based pay initiative. Strengthen transparency in basic payroll and HRM systems. At present there are several different databases of public servants, and these for a range of reasons have not been convincingly integrated. There is resistance to sharing information even at central levels which raises significant suspicion that different central agencies are using computerised systems to enact compromised payroll activities. This difficulty is also reflected a broader need to strengthen and align both central and subnational establishment control in order better to collect, verify, store and manage staffing information. An integrated computerised system, subject to external scrutiny and open to authorised users at both provincial and sub-national level would thus be a strong step towards transparency and a more realistic understanding of who actually gets what. Reforming agencies should push hard for the scheduling of platforms of reform in this area. Furthermore, major HRM processes such as need identification and recruitment must be reviewed to ensure that priority needs and new recruits are matched, and appointment and promotion of staff are transparent and based on performance and merit.

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Define functions by agency and rank. Without clearly reviewing the functions of each agency and rank – and even the roles of individual staff – any reform that tries to improve establishment control, improve pay and strengthen HRM will be defeated. Agencies and staff need to have clear job descriptions and clear lines of accountability. This is also a key PFM reform benchmark. The Ministry of Health is doing major baseline work on identifying functions and outputs by offices and departments in order to appoint the right person for each job and rationalise workload. The other key is merit-based pay for those with clear job descriptions so that performance can be strictly monitored. Merit-based pay is also an attempt to strengthen monitoring of performance and enforcement of discipline for individual staff and delegate appropriate discretion to local managers. The Forestry Administration and Ministry of Land Management are also attempting to align pay, functions and staff capacity. Build on the Ministry of Health’s attempt to decentralise recruitment. This experiment, for all its difficulties, was especially useful for showing what can be achieved and the challenges. This type of initiative should be scaled up, particularly in regard to delegating authority to provinces for recruitment, posting and transfer of staff. If recruitment remains centralised, it creates vicious cycles of only low capacity personnel remaining in local positions. In such initiatives, the centre must ensure that another layer of rent seeking does not result. Learn from the good examples of SEILA/NCDD and Phnom Penh Water Supply Authority. Both these programs have achieved some better results in the area of HRM. Our wider study’s case studies identified some aspects of HRM behind one or both of these agencies’ success. Autonomy in aspects such as HRM planning, recruiting and performance evaluation and expenditure management can result in better accountability and effective administration. Salary supplements can be used to help people do their mainstream government job, not to take them away from it. Recruitment can make or break an organisation’s HR base: finding ways to say no to soft appointments of relatives is essential. Leadership matters, as do motivation and support for staff who have leadership potential and commitment to reforms. Non-monetary incentives matter; the working environment, organisational expectations of performance and enabling management can make a huge difference in how staff and organisations perform.


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Pilot HRM decentralisation. Devolving of resources and personnel to provinces and districts can be realised in part through the ways that provincial governors manage their personnel. The MoI should devolve recruitment, appointment, transfer, promotion, evaluation and establishment control of salakhet personnel to the governors in order to create clear accountability to local managers. This would also provide lessons for the ongoing review of the Sub-committee on Personnel and HRM Development Policy, as it examines risks and opportunities for decentralised public administration. Achieving accountability in Cambodia is complex and requires understanding of the key dimensions of its sub-national features. Promoting and strengthening these dimensions are crucial for reducing poverty. The question is what more should be done and how to do it. The goal of D&D is to get government closer to the people so that it can be responsive to the needs of the poor by supporting sub-national governments with adequate resources and capable civil servants who are accountable, motivated and committed, loyal and professional, and responsive to service delivery for the poor. We now need further dialogue and policy discussion with research-based information, but which also opens up the issues in ways that can produce realistic results.

NOTES 1. Sources for interviews are not indicated to protect the rights of those interviewed during this study. 2. However, there are areas in which governors hold significant power, such as managing armed force and natural resources. 3. These allowances are given to officials from director general down to deputy director of department.

REFERENCES ASEAN. (2005). Labor and employment: Statistical yearbook, available at: www.aseansec.org/ SYB2005/Chapter-3.pdf Bratton, M., & Van de Walle, N. (1994). Neo-patrimonial regimes and political transitions in Africa. World Politics, 46(4), 453–489. Brinkerhoff, D., & Goldsmith, A. A. (2002). Clientelism, patrimonialism and democratic governance: An overview and framework for assessment and programming. Bethesda, MD: Abt Associates. CDC. (2004). The country context, available at: http://www.cdc-crdb.gov.kh/cdc/cbp_ feb2004_3.htm

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CDC. (2007). The Cambodia aid effectiveness report. Phnom Penh, Cambodia: Royal Government of Cambodia. Danida. (2004). Public administration reform. Draft Working Paper, available at: http:// www.phnompenh.um.dk/NR/rdonlyres/A0325587-3563-4D05-A5CE-6C24EE7BFEE6/ 0/DanidaDraftWorkingPaperonPARpassw.pdf Ear, S. (2007). The political economy of aid and governance in Cambodia. Asian Journal of Political Science, 15(1), 68–96. Filmer, D., & Lindauer, D. (2001). Does Indonesia have a low pay civil service? Policy Research Working Paper no. 2621. World Bank, Washington DC. Fukuyama, F. (2004). State building: Governance and world order in the twenty-first century. London: Profile Books. General Accounting Office. (2002). Cambodia: Governance reform progressing, but key efforts are lagging. A report to the Subcommittee on Foreign Operations, Committee on Appropriations, US Senate, available at: www.gao.gov/cgi-bin/getrpt?GAO-02-569 Green, E. A. (2005). Managing human resources in a decentralized context. In: East Asia decentralizes: Making local government work. Washington, DC: World Bank. Hansen, J. (2005). Evaluation of the Ministry of Health’s 2005 recruitment process and related factors affecting the number of midwives employed in Cambodia. Phnom Penh, Cambodia: Ministry of Health. Hughes, C. (2006). Cambodia. IDS Bulletin, 37(2), Institute of Development Studies. Independent Forest Sector Review Team. (2004). Independent Forest Sector Review: The forest sector in Cambodia: Part I: Policy choice, issues, and options N. Ministry of Planning. (2001). A socio-economic survey in Cambodia. Phnom Penh, Cambodia: MOP. Mysliwiec, E. (2003). The case of Cambodia. In: J. Olsson & L. Wohlgemuth (Eds), Dialogue in pursuit of development. Stockholm: Almqvist and Wiksell International. OECD. (2005). Paris declaration on aid effectiveness, available at: http://www1.worldbank.org/ harmonization/Paris/FINALPARISDECLARATION.pdf Pak, K., Horng, V., Eng. N., Ann, S., Kim, S., Knowles, J., & Craig, D. (2007). Accountability and neo-patrimonialism – A critical review. Working Paper no. 34. Cambodia Development Resource Institute, Phnom Penh, Cambodia. Royal Government of Cambodia. (2005). Strategic framework for decentralization and decentralization reforms. Phnom Penh, Cambodia: Council of Ministers. Sok Saravuth. (2007). 2006 annual progress report: Achievements and challenges. Slide presentation to the MEF’s annual review of Public Financial Management Reform Programme, Siem Reap, 1–9 April. World Bank and Asian Development Bank. (2003). Cambodia mid-term expenditure framework review. Phnom Penh, Cambodia: WB and ADB.

CHAPTER 14 ASSESSING THE IMPACT OF CRISES ON THE PERFORMANCE AND GOVERNANCE OF ASIAN COUNTRIES Gene A. Brewer, Yujin Choi and Richard M. Walker INTRODUCTION Governments and other organizations are confronted with more frequent and devastating crises and disasters as the environment within which they operate becomes more complex and tumultuous (Hwang & Lichtenthal, 2000; Rosenthal & Kouzmin, 1997). Recent catastrophic events, such as the tsunami in Southeast Asia and Hurricane Katrina in the United States, have heightened interest in efforts to plan for and resolve these crises. However, despite the far-reaching disruptions caused by these crises, the literature on the topic of crisis impacts has hitherto been relatively scant, and most studies are not empirical (Pelling, Ozerdem, & Barakat, 2002). In this chapter, we will examine the impact of crises and disasters across the Asian region. Asia has experienced a range of regional crises over the past decade. For example, the financial crisis in 1997 that swept over East Asian countries caused tremendous damage to national economies, and the 2004 tsunami produced a death toll of over 225,000, leading it to be regarded as one of the worst natural disasters in history The Many Faces of Public Management Reform in the Asia-Pacific Region Research in Public Policy Analysis and Management, Volume 18, 361–381 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0732-1317/doi:10.1108/S0732-1317(2009)0000018016

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(Baade, Baumann, & Matheson, 2007). A considerable number of studies have examined the causes and effects of these crises in Asia (e.g., Chowdhry & Goyal, 2000; Long, 1978; Prakash, 2001; Samarajiva, 2005), but these studies have not paid sufficient attention to the impact of crises on governance and performance in cross-country settings. Put more precisely, the existing literature mainly consists of case studies of crisis issues and on the relationships between crises and individuals and organizations, such as firms or banks, in the private sector, rather than considering the seminal role of national governance. Disasters and crises can be probed at different spatial scales, such as personal and global (Pelling et al., 2002; Gibbons, 2007). Instead of focusing on organizations or individuals, however, this study explores the impact of crises at the country level, which remains quite unexplored. This approach can be a more comprehensive way to present the subject because crises and disasters may have society-wide impacts. They can ‘‘disrupt or destroy many different sorts of functions and institutions at all once’’ (Hewitt, 1997, p. 36). What is more, cross-country studies on the topic of governance have been sparse, although growing attention to issues of governance is evident (Brewer, Choi, & Walker, 2007; Isham, Kaufmann, & Pritchett, 1997). Only a few of these studies employ an evidence-based approach, and their focus has been on Western countries; thus, Asia has been somewhat neglected in this line of research (Brewer et al., 2007). Accordingly, this chapter investigates the impact of crises on the governance capacity and performance of Asian countries. The chapter utilizes World Bank Governance Indicators to undertake a longitudinal analysis from the mid-1990s to 2006. We focus on the Asian Financial Crisis, the tsunami in December 2004, and the several outbreaks of bird flu as key crises. We examine the impact of these ‘‘shocks’’ on governance (i.e., voice and accountability, political stability, government effectiveness, regulatory quality, the rule of law, and corruption). We investigate both short- and long-term impacts and seek to offer a more sensitive analysis of these crises by controlling for both the wider international effects of these events, and the socioeconomic and political contexts of Asian countries. We have organized this chapter as follows. The first section reviews previous studies concerning the impacts of crises. The second section introduces the cross-country data set and research method used in this study. The third section reports on the analysis and results. Finally, we write some conclusions and speculate about the implications for future research.

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REVIEW OF CRISIS IMPACT LITERATURE A crisis (or disaster) is essentially a multidisciplinary phenomenon (Pauchant & Douville, 1994; Smith, 1990). Scholars in various academic fields, such as economics, sociology, psychology, and political science, have tended to define and discuss crises in different ways (Pearson & Clair, 1998; for a review of definitions and types of crises, see Hermann, 1972; McCartney, Crandall, & Ziemnowicz, 1999; Pearson and Clair, 1998; Quarantell & Dynes, 1977; Gibbons, 2007). It seems, however, that there are no empirical studies, which directly address the link between crisis and governance. In this section, we briefly provide an overview of the previous literature on the impact of crises, in terms of different perspectives. The relationship between an organization and its environment is associated with open system and contingency approaches (e.g., Burns & Stalker, 1961; Thompson, 1967). Regarding organizational change, one body of literature focuses on changes that result from external events and environmental jolts or shocks, and examines how organizations respond to these events (Meyer, 1982; Meyer, Brooks, & Goes, 1990). In a similar fashion, punctuated equilibrium theory is grounded in the organizational change literature (e.g., Gersick, 1991; Romanelli and Tushman, 1994). According to punctuated equilibrium theory, institutions (organizations) change very little over time except when working through periods of crisis (Ikenberry, 1988; Krasner, 1984). Moreover, their decision-making processes tend to reflect path dependence. As Krasner (1984, p. 240) explains: y a basic analytic distinction must be made between periods of institutional creation and periods of institutional stasis. The kinds of causal factors that explain why a set of state structures is created in the first place may be quite distinct from those that explain its persistence over time. New structures original during periods of crisis y . But once institutions are in place they can assume a life of their own, extracting societal resources, socializing individuals, and even altering the basic nature of the society itself y . Furthermore, once a critical choice is made it cannot be taken back. There may be a wide range of possible resolutions of a particular state-building crisis. But once a path is taken, it canalizes future developments.

For our purposes, the critical conjuncture occurs when external shocks force the organization to change (Gould & Eldredge, 1977). Another theory of organizational change, which may be relevant, is isomorphism. This theory suggests that organizations in a common environment will conform to external pressures and come to resemble each other over time. This is, in part, because their common characteristics have played a central role in their evolution and survival (DiMaggio & Powell, 1983).

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Isomorphism suggests that countries in a particular region of the world tend to resemble each other, and furthermore, they are likely to exhibit similar responses and undergo similar changes in their effort to survive these crises. Crisis-impact studies, from a political science standpoint, indicate that crises and disasters have effects on political systems and citizens’ behavior toward government. For example, Abney and Hill (1966) emphasize the influence of the physical environment on political behavior. Criticizing the lack of awareness on this issue, they provide empirical evidence for the relationship between a natural disaster (i.e., Hurricane Betsy) and a mayoral election in New Orleans, but their results did not show that the hurricane had a significant impact on voters’ attitudes in the mayoral election. In an edited volume, Boin, McConnell and ‘t Hart (2008) explore ‘‘postcrisis politics,’’ or what happens after a crisis is contained and stability is restored. In particular, the authors focus on the processes of investigation, accountability, and learning as governments try to improve their capacity to cope with future crises. In the face of competing pressures for change and stability, the authors find that existing policies, institutions, and leaders may occasionally be uprooted, but often survive, largely intact. In comparison to the above studies, the crisis management literature stresses more the role of government during crisis periods. This literature tends to employ the individuals within organizations or organizations themselves as the level of analysis, and focuses on the management’s decision making and responses to crises (e.g., Hickman & Crandall, 1997). In general, these studies investigate how to manage crises better; hence, much crisis management literature is interested in the antecedents of crisis, formulating appropriate management plans for crisis events, and for the assessment of crisis management effectiveness. Although these studies suggest prescriptions for managing crises, most are not empirically tested, but are derived from qualitative case studies (Pearson & Clair, 1998; Spillan, 2003). Another strand of crisis-impact studies considers the link between disasters and economic development (or growth). Several studies argue that underdeveloped countries are more likely to suffer more severe impacts from crises than developed countries (e.g., Albala-Bertrand, 1993; David & Seitz 1982; Horwich, 2000; Kahn, 2005). For instance, Toya and Skidmore (2007) examine the total deaths and economic damage from natural disasters. To do so, they run regression analysis to determine the relationship between the level of development and disaster impacts. Their findings show that fewer disaster-related deaths and damages/loss of GDP occur in more developed economies. Controlling for income, countries with higher


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levels of education, more open economies, and smaller governments tend to suffer less human and economic loss (Toya & Skidmore, 2007). Long (1978) demonstrates the negative impact of natural disasters on agricultural selfsufficiency in the Third World. He contends that, in agricultural-centered developing countries, disaster control is important for building national development plans to mitigate the negative effects of natural disasters. Pelling et al. (2002) emphasize the macroeconomic impacts of disaster at the country level. They use a more sensitive methodology (the European Commission for Latin America and the Caribbean (ECLAC) methodology), which includes direct, indirect, and secondary losses rather than simple indicators such as population density or GDP per capita. They also argue that ‘‘disaster impacts are shaped by the size and structure of the receiving socioeconomy, as well as the nature of the triggering event’’ (Pelling et al., 2002). Skidmore and Toya (2002) extend a previous short-run analysis on the effects of natural disasters on economic factors by investigating longterm economic growth. Building on the above-mentioned review of crisis-impact studies, but going beyond their scope, this chapter turns to examining a more comprehensive concept, governance, as a dependent variable, in order to estimate the impact of crisis events. In so doing, we also make some useful points regarding the manifold impacts of crises and disasters.

METHODS Governance: Data and Measures Governance and performance are multidimensional concepts and difficult to measure (Boyne, 2003; Isham et al., 1997). According to the World Bank’s definition, ‘‘governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them’’ (Kaufmann, Krray, & Mastruzzi, 2008, p. 10). In order to measure key dimensions of governance, we employed the updated World Bank Governance Indicators, which covered 212 countries worldwide over the period 1996–2006 (this includes biannual data for 1996– 2002 and annual data thereafter). The political, economic, and institutional dimensions of governance are captured by six aggregate indicators: voice

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and accountability, political stability and the absence of violence, government effectiveness, regulatory quality, the rule of law, and control of corruption. These dimensions consist of 33 data sources constructed by 30 organizations (for further details, see Kaufmann, Krray, & Mastruzzi, 2007; www.worldbank.org/wbi/governance). Kaufmann et al. (2007, p. 4) depict the measures as follows: (1) Voice and accountability measure ‘‘the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and free media.’’ (2) Political stability measures ‘‘perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism.’’ (3) Government effectiveness measures ‘‘the quality of public services, the quality of the civil services and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.’’ (4) Regulatory quality measures ‘‘the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.’’ (5) Rule of law measures ‘‘the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence.’’ (6) Control of corruption measures ‘‘the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as capture of the state by elites and private interests.’’ Our literature review suggests that crisis events of great magnitude will destabilize host governments and make their (governments’) environments more challenging and uncertain. This can, in turn, lead to precipitous declines on all five governance indicators. This expectation forms the crux of our framework for empirical analysis, which is described in more detail in the following sections.

CRISES IN ASIA EXAMINED This study will examine three crises of great magnitude that recently took place in Asia: the Asian Financial Crisis in 1997, the Asian Tsunami in late 2004, and the Bird Flu Crisis in mid-2003 and July 2005. The countries


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directly affected by these crises are as follows: Asian Financial Crisis in 1997 – South Korea, Thailand, Indonesia, Malaysia, and the Philippines; First Bird Flu Crisis in Mid-2003 – South Korea, Viet Nam, Japan, Thailand, Cambodia, Laos, Indonesia, China, and Malaysia; Second Bird Flu Crisis in July 2005 – Kazakhstan, Mongolia, and Turkey (World Health Organization (WHO) Avian influenza fact sheet); and the Asian Tsunami in December 2004 – India, Indonesia, Malaysia, Myanmar, Sri Lanka, and Thailand. We measure each crisis as a dummy variable. Control Variables For multiple regression analysis, we employ four control variables that had a potentially confounding influence in previous studies: income, form of government (democracy or ‘‘other’’), population size, and size of government. Except for income and form of government, data are drawn from World Development Indicators (2006, http://publications.worldbank.org/WDI/). The control variables are measured as follows: Income level is used as a measure of the wealth of nations. Income data come from the World Bank List of Economics (2006), which includes 2005 data for gross national income per capita. The four groups of income level are as follows: low income – $875 or less; lower middle income – $876–3,465; upper middle income – $3,466–10,725; and high income: $10,726 or more. Size of government is measured as the percentage of GDP consumed by the general government. The form of government (democracy or ‘‘other’’) is measured with a dummy variable. Asian countries are sorted into two groups: countries with a democratic central government (South Korea, Malaysia, Japan, Taiwan, East Timor, Indonesia, Philippines, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan, and Singapore) and those with other forms of central government (Vietnam, Thailand, Brunei, China, North Korea, Macao, Hong Kong, Myanmar, Laos, and Mongolia.). Total population (in millions).

ANALYSIS We begin our empirical analysis by observing the governance trends of Asian countries over time, and then analyze the short- and long-term

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impacts of the three crises in Asia and other regions of the world. The regions are classified into eight groups (i.e., crisis-affected Asian countries, nonaffected Asian countries, Africa, North America, South America, the Caribbean/Central America, Europe, and Oceania).1 To do this, analysis of variance (ANOVA) and t-tests were computed. The short-term effects of crises were calculated by comparing the means of indicators between two years, the one preceding and the one following the crisis. For example, the short-term effect of the Asian Financial Crisis consists of the difference between the governance indicator in 1997 and that in 1996. Long-term effects were determined by comparing the means of indicators for the preand post-crisis years. We also ran a multiple regression analysis to examine the effects of all the crises on governance, including several control variables which may better account for variations in governance than the crises themselves. In this analysis we considered the independent effects arising from the region and time, and also examines the interaction effect of these two terms to better gauge their impact on governance and performance.

RESULTS Fig. 1 shows the trends in governance and performance over time in Asia. The first thing to note is that all the scores are below zero, suggesting that in comparison to other countries of the world, governmental performance in 0.00 -0.10 -0.20 -0.30 -0.40 -0.50 -0.60 -0.70 -0.80

1996

1998

2000

2002

2003

2004

2005

2006

Voice & Accountability

Political Stability

Government Effectivenss

Regulatory Quality

Rule of Law

Control of Corruption

Fig. 1.

Trends in Governance Performance Over Time (Asia).

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Asian countries is relatively weak. This is particularly noteworthy in relation to the indicator for voice and accountability. By contrast, government effectiveness is a relatively high score. A simple eyeballing of the data in Fig. 1 suggests that that there are no dramatic changes around the specific year when each crisis occurred – 1997, 2003, 2004, 2005. To determine whether there are variations in short- and long-term effects for each crisis, ANOVA tests were employed. Tables 1 and 2 show the shortand long-term effects of the Asian Financial Crisis across regions worldwide. According to the ANOVA results presented in Table 1, the differences across the test regions were statistically significant for voice and accountability, and for regulatory quality. On the whole, estimates for the rest of the indicators are not statistically significant at the threshold level employed in this study (Po0.1). In the case of the long-term effects of the Asian Financial Crisis, the ANOVA results in Table 2 reveal that the differences across regions for government effectiveness and regulatory quality are statistically significant, at the 0.01 level. The short-term effects suggest that the crisis had an immediate positive effect on voice and accountability in the countries affected (it is, however, possible that they were already better performers on this variable). The affected countries scored second worst on regulatory quality in the short and long terms, and the long-term effects on

Table 1.

Short-term Effect of Asian Financial Crisis by Region: Means and ANOVA.

Indicator (Mean) Countries Affected Asian countries Nonaffected Asian countries Africa North America South America Caribbean/Central America Europe Oceania F-score

Voice and Political Government Regulatory Rule Control of Accountability Stability Effectiveness Quality of Law Corruption 0.008

0.208

0.300

0.168

0.208

0.186

0.094

0.044

0.078

0.110

0.059

0.035

0.015 0.085 0.095 0.165

0.058 0.057 0.012 0.130

0.014 0.101 0.108 0.125

0.059 0.311 0.046 0.070

0.025 0.014 0.072 0.055

0.050 0.023 0.059 0.060

0.058 0.228 0.73

0.057 0.094 1.57

0.023 0.263 2.02

0.002 0.120 0.79

0.067 0.107 0.78

0.004 0.020 2.06

Po0.1; Po0. 05; Po0.01.

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Table 2. Long-term Effect of Asian Financial Crisis by Region: Means and ANOVA. Indicator (Mean) Countries Affected Asian countries Nonaffected Asian countries Africa North America South America Caribbean Central America Europe Oceania F-score


0.353

0.153

0.251

0.311

0.228

0.090

0.043

0.065

0.055

0.018

0.016

0.009 0.034 0.054 0.173

0.087 0.077 0.120 0.126

0.040 0.223 0.045 0.186

0.045 0.157 0.489 0.184

0.064 0.010 0.196 0.086

0.029 0.008 0.069 0.219

0.089 0.118 1.75

0.059 0.055 0.80

0.130 0.148 2.8

0.257 0.038 0.174 0.230 4.48 1.25

0.063 0.254 0.67

Po0.1, Po0.05, Po0.01.

government effectiveness placed these countries second worst to Caribbean Central America. It might be expected that the Asian Financial Crisis has negative effects on government effectiveness as the economies within each country decline, thus reducing government revenues from taxation and, in turn, service delivery. It is also plausible to speculate that regulatory quality fell because governments were not overly keen to heavily regulate private markets that were reeling from the crisis. What is of interest in these data is that a number of the countries succumbing to the Asian Financial Crisis later identified widespread corruption in some of their businesses; this was the case in South Korea (e.g., Haggard, 2000). Yet the crisis does not appear to have affected the World Bank Governance Indicators. Likewise, Tables 3 and 4 show the effects of the bird flu outbreaks across regions of the world. From the evidence shown in Tables 3 and 4, we infer that, for several variables, there are significant differences in bird flu effects across regions. Specifically, in Table 3, the ANOVA results show that shortterm effects on three variables (i.e., voice and accountability, government effectiveness, and rule of law) are statistically significant. In each case, the affected Asian countries performance is amongst the lowest in the world, and lower than the unaffected countries for government effectiveness and rule of law, but not for voice and accountability.

371


Table 3.

Short-term Effect of Bird Flu Crisis by Region: Mean and ANOVA.

Indicator (Mean) Countries Affected Asian countries Nonaffected Asian countries Africa North America South America Caribbean Central America Europe Oceania F-score

Voice and Political Government Regulatory Rule Control of Accountability Stability Effectiveness Quality of Law Corruption 0.038 0.053

0.042

0.061

0.034

0.014

0.012 0.045 0.048 0.017

0.003 0.021 0.036 0.029 0.011 0.065 0.040 0.030

0.036 0.021 0.045 0.010

0.019 0.169 2.45

0.015 0.035 .053 0.091 1.45 2.46

0.051 0.035 1.28

0.058

0.062

0.010

0.089

0.056

0.054

0.078 0.001 0.099 0.093

0.015 0.012 0.107 0.047

0.025 0.019 3.68

0.001 0.020 0.99

Po0.1, Po0.05, Po0.01.

Table 4.

Long-term Effect of Bird Flu Crisis by Region: Mean and ANOVA.



0.005

0.001

0.007

0.053

0.049

0.070

0.180

0.048

0.023

0.059

0.026

0.042 0.025 0.018 0.040

0.158 0.070 0.060 0.300

0.043 0.149 0.060 0.065

0.110 0.037 0.390 0.174

0.061 0.048 0.130 0.064

0.022 0.031 0.028 0.263

0.068 0.085 1.27

0.018 0.036 2.54

0.093 0.083 2.06

0.268 0.052 0.072 0.033 6.63 1.17

0.034 0.132 0.72

Po0.1, Po0.05, Po0.01.

372


With regard to the long-term effects of the bird flu crisis, as shown in Table 4, the differences in each region are statistically significant for political stability, government effectiveness, and regulatory quality. Government effectiveness is thus impacted in short and long terms. However the longterm impact on affected Asian countries was not particularly severe, as their mean score is relatively high compared to other regions. The mean scores for regulatory quality are similar, whereas political stability is actually the second highest mean score – again this could be a characteristic of the countries that form the set of nations most affected by the financial crisis. We analyzed the short- and long-term effects of the tsunami crisis on governance via the ANOVA procedure. As Tables 5 and 6 indicate, each region shows differences from the tsunami’s impact for the following variables: political stability, government effectiveness, and regulatory quality for both short and long terms. The estimates for these variables are statistically significant. In Tables 7 and 8, we restricted our analysis to Asian countries. We first categorized them into two groups: those affected by the crisis and those not affected. Then, we ran a t-test to see if the two groups had statistically different scores for the short and long runs. According to the results in Table 7 (short-run analysis), the bird flu breakout and the Asian Financial Crisis are statistically distinct for only the rule of law indicator. On this

Table 5.

Short-term Effect of Tsunami Crisis by Region: Mean and ANOVA.



0.067

0.038

0.033

0.038

0.038

0.003

0.018

0.015

0.005

0.003

0.022

0.006 0.032 0.020 0.017

0.046 0.104 0.015 0.057

0.036 0.151 0.049 0.107

0.031 0.114 0.047 0.043

0.008 0.007 0.016 0.043

0.027 0.109 0.035 0.083

0.023 0.027 0.86

0.034 0.197 3.75

0.061 0.231 3.67

0.025 0.039 1.78

0.005 0.079 0.66

0.003 0.063 1.54

Po0.1, Po0. 05, Po0.01.

373


Table 6.

Long-term Effect of Tsunami Crisis by Region: Mean and ANOVA.

Indicator (Mean) Countries

Voice and Political Government Regulatory Rule Control of Accountability Stability Effectiveness Quality of Law Corruption

Affected Asian countries Nonaffected Asian countries Africa North America South America Caribbean Central America Europe Oceania F-score

0.009

0.031

0.003

0.133

0.006

0.004

.035

0.120

0.063

0.044

0.048

0.021

0.029 0.029 0.017 0.028

0.159 0.122 0.056 0.206

0.056 0.188 0.056 0.117

0.101 0.048 0.352 0.106

0.032 0.075 0.125 0.025

0.021 0.063 0.042 0.325

0.060 0.095 1.18

0.050 0.032 2.59

0.167 0.032 0.163 0.039 5.99 1.15

0.013 0.146 1.23

0.041 0.055 2.19

Po0.1, Po0.05, Po0.01.

Table 7. Indicator

Short-term Effect of Crises within Asia (t-test).

Voice and Political Accountability Stability

Government Regulatory Rule Control of Effectiveness Quality of Law Corruption P values

Asian financial crisis Bird flu Tsunami

0.34

0.17

0.21

0.85

0.04

0.18

0.63 0.99

0.94 0.36

0.27 0.75

0.73 0.67

0.06 0.60

0.69 0.84

Po0.1, Po0. 05, Po0.01.

measure, the score of Asian Financial Crisis-affected countries (0.208) was lower than the score of nonaffected countries (0.059). Comparing the mean scores of bird flu effects between the two groups produces the same result. The score for bird flu-affected countries (0.053) is lower than that for nonaffected countries (0.034). However, the tsunami does not seem to produce any differences in the impact between the two groups of Asian countries. As shown in Table 8, t-test results on the long-term impacts of the crises indicate that only the Asian Financial Crisis resulted in statistically

374


Table 8. Indicator

Long-term Effect of Crises within Asia (t-test).

Voice and Political Accountability Stability

Government Regulatory Rule Control of Effectiveness Quality of Law Corruption P values

Asian financial crisis Bird flu Tsunami

0.05

0.30

0.50

0.41

0.04

0.28

0.41 0.79

0.21 0.39

0.48 0.48

0.80 0.12

0.94 0.63

0.78 0.85

Po0.1, Po0. 05, Po0.01.

significant differences between crisis-affected countries and nonaffected countries. The differences were for two of the World Bank Governance Indicators – voice and accountability, and rule of law. These results suggest some impacts on rule of law in the short term arising from any type of crisis. However, the long-term findings suggest that health crises and natural disasters have little impact within Asian countries on governance indicators, but that financial crises, which strike at the heart of government, affect voice and accountability and the rule of law. Our findings give some helpful insights into understanding the short- and long-term impacts of the crises that occurred in Asia; but, overall, the impacts were limited. Moreover, the differences between the two groups of Asian countries may be due to factors unrelated to the crisis events. For example, countries most affected by these crises could all have weak rule of law, which would explain the short- and long-term differences. Therefore, in the next analysis, we employ multiple regression to more intensely probe the relationship between crises and governance. We ran multiple regression analyses on the World Bank Governance Indicators in Asian countries. Table 9 presents the regression estimates for the six dimensions of governance. As Table 9 shows, income as a control variable produces consistently significant estimates, having a positive influence on all dimensions of governance. Wealthy countries achieve higher scores on the World Bank Governance Indicators. The size of government does not matter for any indicator. Population affects the results for just one indicator – control of corruption, and the finding suggests that larger countries perform worse. The control variable for democratic form of government produced two opposite effects: it increased performance on

0.7033767 (1.127921) 0.081252 (0.21661) 0.1342398 (0.207128) 21.39 0.8652/0.8247

70.18 0.9547/0.9411

0.470391 (0.211675) 0.061045 (0.24082) 0.284215 (0.145227)

0.376433 (1.083485) 0.255027 (0.299002) 0.3899516 (0.224477)

(0.096253) 0.7421223 (1.128308) 4.42E-10 (5.50E-10) 0.0090695 (0.022577)

0.1899231

0.949985 (0.640865) 0.011332 (0.123074) 0.036771 (0.117687)

0.434786 (0.12027) 0.0493876 (0.13683) 0.050784 (0.082516)

0.0909283 (0.615617) 0.1008157 (0.169888) 0.236752 (0.127544)

(0.054689) 0.63516 (0.641085) 3.25E-10 (3.13E-10) 0.0141204 (0.012828)

0.4564772

Po0.1, Po0.05, Po0.01.

F-score R2/Adj. R2

Region time

Time

Tsunami Region

Region x time

Time

Bird flu Region

Region x time

Time

Asian financial crisis Region

Size of government

Population

Democratic

Income

Multiple Regression Analysis.

176.78 0.9815/0.9759

0.519543 (0.478091) 0.056185 (0.091814) 0.08722 (0.087795)

0.00639 (0.089722) 0.089495 (0.102076) 0.05813 (0.061557)

0.86867 (0.459256) 0.2304 (0.126738) 0.176463 (0.095149)

(0.040799) 0.765343 (0.478255) 2.62E-11 (2.33E-10) 0.004493 (0.00957)

0.390552

106.23 0.9696/0.9604

1.608346 (0.640093) 0.0439998 (0.122926) 0.022443 (0.117545)

0.2034329 (0.120125) 0.2072671 (0.136665) 0.0845258 (0.082416)

2.428544 (0.614876) 0.495565 (0.169683) 0.3372904 (0.12739)

(0.054624) 2.029747 (0.640313) 4.07E-10 (3.12E-10) 0.0216302 (0.012812)

0.3230757

Voice and Accountability Political Stability Government Effectiveness Regulation Quality

Table 9.

190.54 0.9828/0.9776

0.69477 (0.449362) 0.04037 (0.086297) 0.04618 (0.08252)

0.16387 (0.084331) 0.018567 (0.095942) 0.02363 (0.057858)

0.234671 (0.431659) 0.33345 (0.119122) 0.202129 (0.089431)

(0.038347) 0.23864 (0.449516) 9.12E-11 (2.19E-10) 0.0088 (0.008995)

0.501023

Rule of Law

209.30 0.9848/0.9796

0.993223 (0.439677) 0.0714188 (0.084437) 0.133751 (0.080741)

0.238968 (0.082513) 0.1054208 (0.093875) 0.0664024 (0.056611)

0.7339659 (0.422355) 0.343756 (0.116554) 0.1594055 (0.087504)

0.3016705 (0.037521) 1.077057 (0.439827) 3.60E-10 (2.14E-10) 0.013822 (0.008801)

Control of Corruption

Impact of Crises on the Performance of Asian Countries 375

376


regulation quality but reduced the likelihood of high scores on the control of corruption measure. Turning to the variables of interest, we assess the effect of each crisis as an independent and joint effect. The independent effects are for the affected region and the time when it occurred. The interaction is between these two variables and is the effect of greater interest in our analysis. There are six independent effects that achieve statistical significance in the Asian Financial Crisis model. The time variable is statistically significant in relation to regulatory quality and rule of law, and is negative in both cases. In relation to government effectiveness, both the region and time variables are negative and statistically significant, showing that the Asian Financial Crisis hit the affected countries hard, damaging the performance of their central governments. For the control of corruption measure, time is again negative, however the region effect is positive (though at the lower level of 0.1). It is, nonetheless, noteworthy that the financial crisis lowered the level of corruption in the affected Asian countries. However, this is offset by the negative coefficient for time. Turning to the Asian Financial Crisis interaction term we see a different story – the coefficient is statistically significant for every dimension of governance. Furthermore, the results indicate that in five of the six cases the impact was positive and only on the voice and accountability element did the crisis hurt governance overall. These results suggest that the overall impact of the crisis has been positive: the economies may have been hard hit by the crisis, which resulted in job losses and major economic slowdowns and hardships. However, the governments in the regions involved responded to these challenges and improved their governance capacity, at least as measured by the World Bank Governance Indicators. One explanation is that the rest of the world was affected by the financial difficulties these countries experienced and responded by providing international assistance that focused on improving the institutions and processes of governance. Estimates from the analysis of the twin bird flu crises show mixed results in terms of coefficient direction for the region and time variables: the coefficients for regulatory quality and voice and accountability are in a positive direction, but countries with bird flu experience a negative impact on political stability, rule of law, and control of corruption indicators. The time variable is not statistically significant in any of the models. Political stability is the sole indicator where the bird flu interaction had a statistically significant influence on governance. In contrast to the financial crisis and bird flu epidemics, the tsunami had little impact on governance in Asian countries. It negatively impacted


377

control of corruption, and this resonates with anecdotal evidence from Thailand and Indonesia that government relief was not always delivered to the intended population. Such ‘‘leaky buckets’’ can be corrupt, and they can undermine other elements of governance such as effectiveness. More surprisingly, the tsunami had a positive impact on political stability. It was perhaps the sheer size and devastating impact of the tsunami that forced governments to address the problem, and this may have enhanced political stability as countries banded together to assist those in need. Another explanation is that the tsunami had a devastating impact on business and society, but government institutions were a bit more resilient out of necessity. This speculation clearly needs to be investigated through additional research. When controlling for context, time, and country, the results suggest two main points. First, the Asian Financial Crisis affected all dimensions of performance and governance, but it had the most impact on effectiveness, regulation, rule of law, and control of corruption. Second, regarding the regional impacts from the bird flu and tsunami crises, the most perplexing finding is not the positive impact of the tsunami on regulation, which can be explained as a governmental response to market failure, but rather the positive effect of bird flu on accountability, possibly because it represents an ongoing and largely unseen threat that governments respond to by becoming more transparent and disclosing more information to citizens.

CONCLUSIONS In this chapter, we assess the impact that key crises had on governance across selected Asian countries and regions. Our findings suggest the following conclusions. First, the effects of crises are not uniform. Second, economic crises have more dramatic and long-term effects than natural crises, at least in the sample of crises examined in this chapter. Third, not all crises have negative effects on governance. In fact, the joint effects from the Asian Financial Crisis suggest that major economic crises can improve governance and performance. Crises, traditionally, are believed to be negative (Abney & Hill, 1966), but overall they may produce a wider spectrum of effects. Also, some crises can be anticipated (e.g., the Asian Financial Crisis, once started), or they can be unexpected and dramatic (e.g., the Asian Tsunami). Our finding is consistent with prior studies which note that crises have both functional and dysfunctional results (Albala-Bertrand,

378


1993; Skidmore & Toya, 2002; Quarantell & Dynes, 1977). In addition, managers and governments can reasonably cope with crises, according to these data, but context matters and accounts for much of the variation explained by our statistical models. We used longitudinal cross-country data to examine the variations of governance in Asian countries that suffered recent crises. The World Bank Governance dataset allowed our study to span governance research in the Asian context, which remains underresearched. Isham et al. (1997) cite several hindrances to cross-country research, including the lack of comparable datasets – especially for developing countries. Pelling et al. (2002) also point out the importance of comparable outcomes. In this sense, our study contributes to the need for more exploration on governance in the Asian region by examining the impacts of key crises on governance in Asian countries. Scholars have critiqued the World Bank dataset, and their challenges might affect the validity of our results. We have already raised questions about the unusually high correlations among the six indicators of governance, but noted that they are still of interest because they provide a rare glimpse into government performance and effectiveness on a worldwide stage (Brewer et al., 2007). We also acknowledge that better and more extensive contextual variables are needed to more fully specify our models, and a measure of government capacity would be revealing as well. Also, our measure of the key independent variable – crisis events – is not sensitive enough to plumb and capture the severity of each crisis. In fact, we employ dummy variables to measure each crisis, which is oversimplistic and somewhat crude. Thus, we encourage future researchers to develop a more sensitive, precise metric for gauging the severity of each crisis. Finally, we acknowledge that these are concurrent events that played out on the same continent and in the same decade; thus, it is hard to isolate their independent effects. Our effort to identify countries that experienced direct impacts is clearly limited because such impacts spill over to other countries in the region. Overall, the findings of this chapter should be considered exploratory in nature, in light of these several limitations. However, we believe this study offers some solid findings and some good directions for future research. This study also answers the call of previous studies (such as David & Seitz 1982) who urge more comparative cross-national assessments of crisis effects, and particularly studies that focus on regions of the world that lie outside the U.S. context.


379

NOTE 1. These classifications are based on United Nations groupings, http://unstats. un.org/unsd/methods/m49/m49regin.htm).

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