Anthony Salim, once described by a journalist as a Ferrari-engined executive, has been helming the Salim Group in the post-Suharto era. He very nearly didn't get a chance to know his father. In 1949, just weeks before he was born, his father came close to losing his life in a car accident. Thankful to be alive, Liem named his newborn Fung Seng, literally meaning “meeting a life”. (Decades later, Anthony lived up to his name by resuscitating the conglomerate his father founded, preventing a neardeath of the companies under the Salim umbrella, in the aftermath of the 1997 financial crisis that also ultimately led to the overthrown of Suharto, Salim's main patron.)

Anthony's stewardship of the business group was a gradual process, at least in the eyes of the public. If indeed Liem noticed early that the youngest of his three sons was the brightest, the boldest and the hungriest to get into business, he would not acknowledge it to the world. It is a credit to Liem, though, that he was wise enough to break from the traditional Chinese thinking that the eldest son is automatically the heir apparent and thus entitled to inherit the business. In his early teens, Anthony often accompanied his father to his factories; when he returned in 1971 from his studies overseas, he was impatient to learn the ropes of Salim's growing stable of businesses. Nurturing his youngest son's curious mind, Liem frequently took Anthony along to meetings with Cabinet ministers, officials, other businessmen, as well as with Suharto. Those meetings gave the young man an opportunity to learn by observing. For a long time, Liem refused to be drawn into speculation about who among his children would take over the reins of the group. His older sons Albert and Andree were also assigned to Salim businesses, but Anthony showed keenness to get into every pie.

Asked in 1984 if Anthony was the group's “crown prince”, Liem was purposely non-committal, commenting: “All the children are the same. What's needed here is teamwork. Those who say that Anton will replace me are outsiders.” The year Anthony returned from a two-year course in the United Kingdom, Suharto officiated at the opening of the Salim's first huge industrial venture, Bogasari Flour Mills.

In the film The Year of Living Dangerously, a main character, Billy, falls to his death after unfurling from a high-rise window a banner declaring: “Sukarno, Feed Your People”. The message was similarly applicable to his successor Suharto, who in 1966 was in the process of easing the country's first president out of office. The new leader had yet to consolidate his power, but he was well aware that he badly needed to keep people fed if he was to be accepted. The country was seriously short of rice, the staple and the fulcrum of Indonesian life. The grain was the lifeblood of Indonesians, and at the time, soldiers and civil servants received part of their salary in rice. Inadequate food supplies were fuelling runaway inflation, which by some calculations topped 500 per cent. Supplying food to help prop the nascent anti-communist Suharto regime became an important part of a massive effort by Western nations, led by the United States. Suharto demanded huge aid, sending emissaries to Washington. In September 1966, after meeting Indonesian Foreign Minister Adam Malik, U.S. Vice-President Hubert Humphrey wrote President Lyndon Johnson:

Washington donated some rice but Suharto kept pushing for more, given Indonesians’ attachment to the grain. The United States, however, wanted to promote wheat, of which it had stockpiles. Over time, Suharto signalled that wheat would be okay if there really couldn't be more rice.

After Suharto's resignation, the “reformasi” movement brought pressure for significant change in the political system. For many Indonesians who had lived under the repressive regime of the autocrat, the hope for reform was palpable. A liberated domestic media embraced its new role. In business, meanwhile, rivals of Suharto-assisted groups were sharpening their knives, eager to slash the privileges accorded to Salim and the favoured few. Many people wanted the Salim Group to pay heavily for buttressing Suharto. Some politicians saw a chance to get control of valuable assets and ensure Anthony was crushed in post-Suharto Indonesia. “They could go after him for everything”, Indonesian agricultural economist H.S. Dillon remarked. “He would be a very good symbol to crucify. He is the most vulnerable of the cronies.”

Exacerbating Salim's situation was that Indonesia's new president, B.J. Habibie, was no friend. Habibie was an unpredictable, hyperactive man who, during Suharto's time, pushed grandiose nationalistic plans at great cost to the country. He was distrustful of Salim and saw Liem competing for favoured status with Suharto. Anthony, however, stayed on good terms with Habibie's younger brother Timmy (Suryatim), with whom he had business in Batam. But that cut little ice with Habibie who, Anthony acknowledged, “hated me like hell” because the Salim CEO had urged Suharto in early 1998 to give Gen. Try Sutrisno a second vice-presidential term. Habibie had surrounded himself with advisors who were deemed nationalists and not particularly friendly to the cukong culture. Liem confirmed that he also weighed in on the vice-presidential appointment, warning the president that the German-trained engineer was “like a tiger … he will get you when you are down.” Anthony added that when Habibie became president, he wanted to “change the total picture of the players”.

SHEDDING WEIGHT TO STAY ALIVE

Confronted with a sea change, some Salim executives were not confident about the future of the group. Andree Halim wanted out of Jakarta, as the May riots, the loss of BCA, and the enmity shown after Suharto's exit made him want to stop working in Indonesia. (Andree declined to meet the authors.) The fight to keep Salim afloat was solely on Anthony's shoulders. He was determined to see it survive but given the political situation, it was far from a sure bet.

Liem Sioe Liong never read Dale Carnegie, but for his ability to make friends and win the trust of influential people, he could have been a poster boy for Carnegie's best-selling work How to Win Friends and Influence People, first published in 1936, two years before Liem set foot in Java. Although he was not fluent in the language and knew little about Javanese culture, within a short time of his arrival, Liem was able to attract customers with his winsome smile and charming ways. As a supplier first to the independence fighters in the foothills of Central Java, then to the Diponegoro Division commanded by Suharto, Liem impressed his customers with his honesty and reliability. Among his Hokchia clansmen, he had a reputation for being trustworthy and discreet. Within a few years of his arrival in Java, he was entrusted with the responsibility of harbouring a political fugitive hiding from the Dutch when they were asserting their claim on the country after the Japanese surrender. It turned out that the fugitive was Hasan Din, a father-in-law to the republic's first president, Sukarno. Liem and Hasan Din became friends as well as business associates, of which more would be written about later.

Thirty years after Liem set foot on Java, he was scouting for big money to fund plans for his first huge venture, the flour milling business. Soon after, he needed fresh funds for the planned cement manufacturing. For this, Liem had to go beyond the country's shores to obtain it. Two overseas Chinese tycoons played important roles in channelling funds as well as expertise. For flour, he turned to Malaysian Chinese Robert Kuok; for cement it was Thai-Chinese banker Chin Sophonpanich, a self-made tycoon who knew a thing or two about the importance of having powerful patrons. But to get to that stage, where he could undertake the role of the country's first industrialist, he would have had to earn the trust of the country's new leader Suharto, who became full president in 1968. Although Liem and Suharto had been acquainted since 1949, the Chinese businessman did not have steady contact with the general until after 1966, when Suharto seized power. For Liem's “anointment” into the privileged position of a cukong, he had members of the senior military men belonging to a group dubbed “Financial Generals” to thank.

Nothing in Liem's childhood gave any indication of how illustrious his future would be. He was born to farmers in a small village of some 600 people in Fujian province, China. Like many village children in China in those days, he lived a hardscrabble existence. His village was located in a region considered inhospitable for farming — surrounded by mountains and bordered by the sea, there was a scarcity of arable land. The soil, tainted by the sea's high saline content, allowed only hardy plants such as peanuts and sweet potato to be cultivated. There was no system of irrigation. Still, farmers coaxed rice to grow. (When Liem became wealthy and wanted to help his homeland, one of the early projects he initiated was the construction of a reservoir, feeding an extensive irrigation canal system. This enabled the entire area of Fuqing to develop and indeed, prosper.)

The disagreeable conditions of the region were pithily encapsulated by the local adage: “jiu nian han, yi nian zai”, which translates to “nine years of drought, one year of disaster [meaning floods.]” It was no surprise that many young men from the area left in droves in search of a better life elsewhere. Liem became one of them. In 1937, the Japanese invaded China. The weak and corrupt Kuomintang Nationalist government, facing a growing threat internally by the Communists led by Mao Zedong, were no match for the invaders. Law and order disintegrated in many parts of the country, with local warlords and bandits claiming power over many areas. By 1938, war had reached Liem's doorstep. He had lost his father the previous year, and now faced certain conscription. He was as reluctant to leave his recently widowed mother as she was to have her favourite son leave her side. Confronted with the realities, they agreed he should join his elder brother Sioe Hie, already in Java with their uncle. Thus began Liem's journey to become one of the wealthiest men in Nanyang, as Southeast Asia was then called.

BACKGROUND

Liem was born Lin Shaoliang, in 1917, the Year of the Snake, on the seventh day of the seventh month of according to the Chinese zodiac. Official records in Indonesia listed his birth as 1916, and the family used that to calculate his age.

The partnership that became the most powerful business group during Suharto's time started from very modest premises. In the late 1960s, when the four men — Liem, Sudwikatmono, Djuhar Sutanto and Ibrahim Risjad — began working together, their office was a non-airconditioned room measuring 8 × 6 metres on the top floor of a nondescript building in the heart of Jakarta's Chinatown. One had to hoof it up four storeys to get to the austere office at Number 20 Jalan Asemka, as there were no elevators. Initially, the room had only one desk and two chairs. There was a single telephone, and even that line was shared with another office. Sudwikatmono, or Dwi, as he was often called, recalled that in the early days, when the four partners had their meetings, two of them would be standing while two sat. Dwi remarked that the highly superstitious Liem was always reluctant to make changes that might affect his luck or disturb the good feng shui of a room or building.

IN THE BEGINNING

The conglomerate that arose from those humble beginnings, usually simply called the Salim Group, was essentially a Suharto creation. At the very least, he played the role of midwife in its birth. After all, he put Liem together with Dwi, and suggested Liem team up with Djuhar. Match-making business partners seemed to be an activity the new leader liked to make time for. He got his financial generals working on ventures with Chinese businessmen. In 1967, a Sukarno-era trading company, Hanurata, got new shareholders — two of his yayasans, Trikora and Harapan Kita. Liem Sioe Liong provided the capital and was asked to run it. Suharto also installed his brother-in-law in the company and arranged for his cousin Dwi to be there. The successful pairing of Liem and Dwi was a Suharto initiative, but other business match-making propositions did not work out so well.

Liem Sioe Liong was a relative newcomer to the Suharto inner sanctum; as mentioned earlier, two other Liems preceded him: Jantje Liem and Liem Oen Kian (Djuhar Sutanto). Suharto suggested that the three Liems joined forces. They tried but it didn't last.

INTRODUCTION

Indonesia's ‘big bang’ decentralization program has already generated a considerable literature, although few of the published studies examine the post-2001 changes in light of previous debates on central–regional political and economic relations in Indonesia. A common assumption appears to be that the system in place from the transfer of power from the Dutch in 1949 until the end of the Suharto era in 1998 was highly centralized. Section 2.2 of this chapter reviews the changes in the structure and role of provincial and subprovincial governments in Indonesia after independence, and examines the debates in the early 1950s culminating in the Nasroen proposals for reforming central–regional fiscal relations. Had the proposals been properly implemented, they would have made a considerable difference to the future course of central–regional relations. But they turned out to be the road not followed; instead, after Suharto took power in 1966, a process of recentralization of economic and political power took place. Section 2.3 examines the consequences of the Suharto-era policies for regional development in Java and elsewhere.

DEVELOPMENT OF REGIONAL GOVERNMENT AFTER 1950

Federalism: the path not taken

To many observers both at the time and later, it would have seemed logical for the newly independent Indonesian republic to choose a federal constitutional structure in 1949. Indeed, as Feith (1962: 72) has claimed, there were some convinced advocates of a federal structure within the republican leadership, ‘and Prime Minister Hatta appeared at times to be one of them’. In an interview after Suharto had left office, Feith pointed out that Hatta, ‘who played the central role in dissolving that federal structure, was actually a federalist’ (Jakarta Post, 18 November 1999). Hatta became Indonesia's first prime minister after the Dutch finally conceded sovereignty in 1949. He wanted to hold an election immediately so that an elected body could decide between a federal and a unitary state. But this did not happen; instead, general elections were held only in September 1955. Elections for a Constituent Assembly (Konstituante), which was to decide on a constitution, followed in December 1955. Voter turnout for both elections was high (Nasution 1992: 30).

INTRODUCTION

In the last few decades, Indonesia has witnessed many changes in its demographic and socio-economic characteristics. Today, Indonesians have smaller families, longer life expectancy and more education. The average number of children per woman, as measured by the total fertility rate, declined from 4.6 in 1980 to 2.6 in 2010 (BPS 2012). Over the same period, life expectancy increased from 57.6 to 69.4 years. The implementation of compulsory education started with six years of schooling in 1984, increasing to nine years in 1994 and 12 years in 2012. This has significantly increased school enrolment rates; the net enrolment rate for senior secondary school, for example, increased from 17 per cent in 1975 to 51 per cent in 2012 (BPS 2013). In response to such significant changes, and the concomitant developments in local and global economic conditions, population mobility and migration patterns have also changed considerably.

At the same time, there have been significant improvements in transport, especially road and air transport, and in communications technology, which have also facilitated population mobility. The growing Indonesian diaspora, estimated to number 3–6 million (Muhidin and Utomo 2013), is further evidence of Indonesians’ willingness to migrate. Mobility is a complex process involving the interaction of a wide range of factors, both personal and to do with the regions of destination and origin. Using the concept of a ‘mobility continuum’, Pooley, Turnbull and Adams (2005: 3) have observed that population mobility may include simple mobility (travel for work, shopping or leisure), circular mobility (involving regular longer travel) and longer-distance residential migration. The latter concept of mobility is the focus of this chapter.

According to the 2010 population census, Indonesia is home to 238 million people, about 27 million (12 per cent) of whom live outside their provinces of birth (BPS 2011). The proportion of such migrants varies widely across regions, however, from less than 3 per cent in the provinces of East Java, West Nusa Tenggara and Central Java, to as much as 42 per cent in Jakarta and 48 per cent in Riau Islands.

THE ISSUES

In 2001, Indonesia embarked on a ‘big bang’ decentralization involving a major transfer of administrative, political and financial authority primarily to the district/municipality (kabupaten/kota) level of government. Together with the rapid transition from authoritarian to democratic rule in the late 1990s, this initiative has transformed the country's political, social and business life. While national government remains the major area of contestation, power has shifted irreversibly away from the centre. How this significantly increased regional autonomy works will have a crucial bearing on the future of the Indonesian nation-state. This volume, featuring contributions by 43 authors, provides a timely, comprehensive and analytical assessment of the country's regional development dynamics in the post-decentralization environment.

The regions (daerah) are central to an understanding of modern Indonesia. With its 17,000 islands stretching across three time zones, Indonesia is the world's largest archipelagic state. It features enormous diversity in its economy, ecology, ethnography, demography and much else. At the district level, for example, the richest region has a per capita income more than 50 times that of the poorest. Were they independent states, some parts of Indonesia would be classified as upper middle-income states, comparable to much richer Malaysia and Thailand, while other regions would be in the least developed group of extremely poor states. The policy and intellectual paradigms in and on Indonesia reflect this diversity. It is the key sentiment in the national motto, ‘Unity in diversity’ (‘Bhinneka tunggal ika’). Indonesians worry about the preservation of territorial integrity and national unity to an extent that may surprise outsiders unfamiliar with the country's struggle to create a new nation-state. After all, Indonesia did not formally exist as an entity until 1945, or even in the imagination of the nation's independence leaders until the early twentieth century. In fact, it came into existence in part as a result of lines drawn arbitrarily on a map in far-off European metropolitan capitals. Given the colonial history of divide-and-rule tactics, Indonesians are often shocked by the seemingly innocuous observation to the effect that ‘A glance at a map might seem enough to suggest the improbability of Indonesia’ (Cribb 1999: 3).

INTRODUCTION

The prevailing view among many policy makers, policy advisers and other interested observers in Indonesia is that decentralization has been somewhat of a disappointment. This assessment derives from the observation that local public service delivery has improved little, if at all, since the government began implementing its regional autonomy program in 2001, despite an apparently significant transfer of funds to provinces and districts to discharge their newfound responsibilities. A number of theories have been put forth to explain the seemingly meagre results of decentralization, each with its own set of policy reform prescriptions.

The main intent of this chapter is to review the experience with decentralization since 2001, to critically assess various explanations for the failure of regional autonomy to significantly improve local services and to gauge the prospects for reform going forward. First, the chapter provides a brief review of the history of fiscal decentralization in Indonesia (section 6.2). Next, it examines some of the empirical evidence on decentralized service delivery outcomes (section 6.3). It then discusses and appraises the standard rationales for poor service outcomes (section 6.4). In section 6.5, the chapter offers an alternative explanation for inadequate decentralized service delivery, and in section 6.6 it evaluates the near-term policy reform agenda for decentralization. The chapter concludes with a consideration of the likelihood of successful reform.

A BRIEF HISTORY OF FISCAL DECENTRALIZATION

Indonesia is a unitary country comprising central, provincial and local levels of government. Until 2001, the regional administration of public affairs operated through a hierarchical, multi-tiered and parallel system of deconcentrated central government agencies and nominally autonomous subnational units.1 Throughout most of its history, Indonesia's public sector was counted among the most centralized in the world (Smoke and Lewis 1996; Lewis and Smoke 1998).

Many observers would date Indonesia's modern administrative and fiscal decentralization program to Law 5/1974 on Basic Principles on Administration in the Regions. This legislation did indeed provide a basis for greater involvement of decentralized subnational governments in the provision of those public services that existed at the time. In the early 1990s some implementing regulations were written and a pilot program for regional autonomy was undertaken, but little real progress was made in operationalizing the general principles outlined in the early law over the succeeding 25 years (Brodjonegoro and Asanuma 2000; Lewis 2002b).

INTRODUCTION

Has Indonesia's decentralization in 2001 been successful at improving service delivery and governance quality at the local level? Has democratization in the districts helped foster the quality of public services? More than 10 years into decentralization, we are able to provide an assessment based on systematic empirical evidence from the districts. This chapter reports results from large panel data analyses studying the effects of decentralization and local democratization on government spending (Kis-Katos and Sjahrir 2014), on governance quality (Sjahrir, Kis-Katos and Schulze 2014) and on public service delivery (Schulze and Sjahrir 2014). A synopsis of these three perspectives allows a well-rounded, balanced picture of the impact of these two far-reaching structural reforms on the quality of local government behaviour. It allows us to portray and identify the effects of these reforms on the production process for public services, comprising inputs, technology (governance) and output.

The effect of decentralization and democratization on the quality of government behaviour has been a contentious issue in the academic debate, both theoretically and empirically. The first generation of the fiscal federalism literature stressed that decentralization allowed easier generation of location-specific knowledge and better preference matching (Hayek 1948; Oates 1972 and others); moreover, mobile individuals could sort themselves into the jurisdictions that offered the best mix of public services and taxes for them (Tiebout 1956). The second generation has focused on the effects of decentralization on accountability and the political process in general. Inter-jurisdictional competition for mobile factors (firms and individuals) curbs the ability of local governments to exploit their citizens and forces them to provide better services to attract these mobile factors (Brennan and Buchanan 1980). As decentralization brings decisions closer to the people, the transparency of and participation in the political process should be enhanced. Incumbents seeking re-election will be disciplined, at least partially, by the requirement to secure a majority of the vote (Ferejohn 1986). Decentralization implies unbundling of public goods provision, both regionally and by government function, which allows citizens to hold decision makers more directly accountable (Seabright 1996; Farfán-Vallespín 2014). Whereas, under centralization, a local constituency can hold the (central) decision maker accountable only in cooperation with other constituencies representing at least half the population, under decentralized rule a local constituency can hold its (local) decision maker directly accountable.

INTRODUCTION

Improved local governance has been the spirit of decentralization in Indonesia. Enacted not long after the start of the reformasi era in 1998, and effective since 2001, Law 22/1999 on Regional Government explicitly stated that democratic principles and public participation would be the basis of regional autonomy. The law also referred to various decrees issued by the People's Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR) in 1998 to reform governance and counter corruption. The revised law on regional government (Law 32/2004) continues to emphasise the importance of community empowerment, grassroots participation and democratic principles to accelerate people's welfare and improve regional competitiveness.

Globally, good governance is believed to be the main path to sustainable economic growth and improvements in welfare. In Indonesia, a number of studies have examined the relationship between the quality of governance and economic growth. This chapter complements those studies by analysing the correlation between various local governance indicators – economic, budget allocation and public sector financial management – and development outcomes, with the latter defined with reference to household-level expenditures and the Human Development Index (HDI).

Section 7.2 discusses recent developments in local governance, including key reforms to lift standards, and describes the current state of public sector financial management. Section 7.3 focuses on issues related to local budget policy and execution, and section 7.4 provides a brief overview of levels of development across the country. Section 7.5 dwells on the correlation between economic and social outcomes, good governance indicators, budget policy indicators and administrative characteristics. The chapter concludes by offering some policy implications.

RECENT DEVELOPMENTS IN LOCAL GOVERNANCE

More than a decade after decentralization, it is not clear that the quality of local economic governance has improved. This is the main conclusion from two datasets derived from surveys of businesses conducted by Regional Autonomy Watch (Komite Pemantauan Pelaksanaan Otonomi Daerah, KPPOD) and the Asia Foundation in four provinces: East Java, West Nusa Tenggara and East Nusa Tenggara (as part of nationwide surveys conducted in 2007 and 2010–11) and Aceh (which was surveyed separately in 2008 and 2010) (KPPOD and Asia Foundation 2008a, 2008b, 2010, 2011). These were the only four provinces to be surveyed twice, allowing comparison of the progress of local economic governance over time.