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Bulletin of Indonesian Economic Studies

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ABSTRACTS OF DOCTORAL THESES ON THE

INDONESIAN ECONOMY

To cite this article: (2008) ABSTRACTS OF DOCTORAL THESES ON THE INDONESIAN ECONOMY, Bulletin of Indonesian Economic Studies, 44:3, 437-450, DOI: 10.1080/00074910802395351 To link to this article: http://dx.doi.org/10.1080/00074910802395351

Published online: 06 Nov 2008.

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ISSN 0007-4918 print/ISSN 1472-7234 online/08/030437-14 DOI: 10.1080/00074910802395351

ABSTRACTS OF DOCTORAL THESES ON THE INDONESIAN ECONOMY

Essays on the Empirical Modelling of Money Demand in Periods of Financial Liberalisation: The Case of Indonesia

Gregory A. James(gaj7@le.ac.uk) Accepted 2007, University of Leicester

Financial liberalisation is widely blamed for the instability of empirical money demand models. A stable money demand function (MDF) is a key element in the formulation of monetary policy. Structural breaks brought about by ﬁ

nan-cial liberalisation can impair the predictability of the impact of changes in money on income, the price level and the interest rate, and render monetary policy less reliable. This in turn can inﬂ_{uence individuals’ expectations about future policy,}

and ultimately alter the effects of a given policy measure. Thus, obtaining reliable estimates of the parameters of the MDF—through an appropriate modelling strat-egy that takes into account the structural change induced by ﬁ_nancial

liberalisa-tion—is a crucial task.

The thesis contains three essays on the empirical modelling of money demand in periods of ﬁ_{nancial liberalisation. The empirical analysis uses a quarterly}

time-series data set on Indonesian money, output, price, and interest and exchange rates from Q1 1983 to Q4 2001. The ﬁ_{rst essay uses a univariate method to identify}

endogenous structural breaks in various monetary aggregates as well as in some of the series most commonly used as explanatory variables in the MDF. The sec-ond essay extends this approach to the multivariate case to detect endogenous regime shifts in the demand for narrow money (M1). The third essay explicitly controls for ﬁ_{nancial liberalisation in the MDF for broad money (M2).}

The results provide evidence of a break in M1 occurring in the second quarter of 1991 and coinciding with a major government intervention in the money mar-ket known as the Sumarlin shock. The results also provide evidence of a break in M1 occurring in the last quarter of 1997 and coinciding with a severe economic crisis and a government intervention in the money market for which the Sumarlin shock of 1991 is the precedent. Finally, the study shows how modelling ﬁ_nancial

liberalisation as a deterministic drift process constitutes an improvement over the standard speciﬁ_{cations in terms of yielding more constant and plausible values}

for the parameters of the M2 MDF.

These ﬁ_{ndings support the Mundell–Fleming argument that open capital}

mar-kets, a pegged exchange rate regime and monetary policy autonomy are mutually incompatible. Before the 1997 crisis, during periods of upswing in the economy, rising aggregate demand was accompanied by both increased foreign borrowing and the liquidation of Bank Indonesia Certiﬁ_{cates (SBIs) by sale to the central}

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bank, both of which resulted in increases in base money (given the quasi-ﬁ_xed

exchange rate regime). In such a context, controlling base money growth (and through it aggregate demand) was difﬁ_{cult and required extremely high interest}

rates and/or dramatic contractions of domestic liquidity of the Sumarlin shock type. Most signiﬁ_{cantly, monetary policy was immobilised in the period before}

the decision to ﬂ_{oat the rupiah in 1997.}

More generally, the results support the notion that ﬁ_{nancial liberalisation might}

have rendered base money endogenous with respect to output. The Indonesian central bank would have had difﬁ_{culty in controlling the money supply, because}

even though it could manage to generate credit constraints in the domestic econ-omy, Indonesian banks could easily borrow on international ﬁ_{nancial markets,}

which undermined the effectiveness of monetary policy.

The Determinants of Regional Poverty in Indonesia 1984–2002

Riyana Miranti (mirantisg@yahoo.com)

Accepted 2008, Australian National University, Canberra

The objective of this thesis is to examine the determinants of regional poverty and of poverty decline in Indonesia over the 18 years from 1984 to 2002. The the-sis uses a conthe-sistent provincial data set of selected indicators collected over this period for 26 provinces.

The study begins with an analysis of the growth elasticity of poverty across several growth episodes: (1) the ﬁ_{rst period of liberalisation (1984–90); (2) the}

second period of liberalisation (1990–96); and (3) the post-crisis recovery period (1999–2002). The ﬁ_{ndings show that the growth elasticity of poverty is signi}ﬁ_cant.

Growth is shown to have been ‘friendly’ to the poorest of the poor, even when other variables and inequality are not controlled for. The results suggest that, in general, the relationship between labour-intensive growth and the growth elas-ticity of poverty is not as strong as the data on employment seemed to indicate. If inequality is taken into account, the growth elasticity of headcount poverty is shown to have been strongest during the second period of liberalisation, and there is a possible lag in the impact of liberalisation policies on poverty.

The study then examines the growth elasticity of poverty across groups of prov-inces. It is found that poverty was highly growth-elastic in Java–Bali, conﬁ_rming

that better infrastructure and human capital allow a greater transmission of the growth impact to poverty reduction. In contrast, the growth elasticity of poverty was low both in the isolated provinces of Nusa Tenggara and in the resource-rich provinces. For the latter, this ﬁ_{nding is attributed to the fact that growth based on}

mining, oil and gas has a low impact on poverty because such growth is unlikely to be very labour intensive. In addition, until the 2001 decentralisation most of the revenue from this growth went back to the central government rather than to the producing provinces.

In general, the results support the hypothesis that growth is a substantial deter-minant of poverty reduction, but that other deterdeter-minants also matter. The growth elasticity of poverty was around –2.5 over the 18 years from 1984 to 2002. This is

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comparable to ﬁ_{ndings in the earlier literature, especially other single-country}

and Indonesia studies. Growth also was found to be more pro-poor (to have had a higher impact on poverty) when better human capital, infrastructure and open-ness were controlled for.

Determinants of poverty other than growth are then analysed: (1) natural resources; (2) openness; (3) human capital; (4) inequality; and (5) infrastructure. A special focus is given to the role of two new determinants usually ignored in the literature: recent inter-provincial migration (assisted and non-assisted migration and out-migration) and inter-governmental transfers in the form of regional development grants during the study period. The thesis investigates both the direct channel to poverty and the indirect channel to poverty through growth. Through regression analysis, it is found that inter-provincial migration affects regional poverty only indirectly through economic growth. Non-assisted in-migration and out-migration are growth-enhancing strategies, but this is not true for assisted in-migration (transmigration). In contrast, surprisingly, inter-governmental transfers are neither growth enhancing nor poverty reducing. As for the role of other determinants, only growth, low inequality and infrastructure are found to be direct poverty reduction strategies in Indonesia.

Family Planning, Community Health Interventions and the Mortality Risk of Children in Indonesia

Ranjan Shrestha (ranjan.shrestha@mso.umt.edu) Accepted 2007, Ohio State University, Columbus, Ohio

In the last four decades, Indonesia has experienced rapid declines in infant and child mortality alongside active government interventions. The government instituted a small family norm through an extensive family planning program, and improved access to primary health care through various community-based programs. Using the Indonesian Family Life Survey, my dissertation studies the impact of two major government programs on the decline in mortality rates: (1) the national family planning program introduced in 1970, which is considered to have been very successful in increasing contraceptive prevalence; and (2) the village midwife program initiated in 1989, which trained and placed over 50,000 midwives in villages across the country.

The ﬁ_{rst two chapters describe the nature of the family planning program in}

Indonesia and empirically examine the relationship between the program and the risk of infant and child mortality. Access to modern contraceptives gives cou-ples better control over the fertility process, allowing them to avoid unwanted pregnancies and to plan better for a desired number and age composition of chil-dren. This affects child survival through improvements in the mother’s health and the resources allocated to the upbringing of children. First, using the differ-ence in the timing of the family planning program’s introduction in two sets of provinces, I employ a difference-in-difference approach to show that the mortality rates of children fell in provinces where the family planning program was intro-duced. Second, I examine the relationship between contraceptive acceptance by

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the woman and the likelihood of survival of subsequent births. A bivariate probit framework is used to overcome the bias that would arise in a single-equation framework owing to correlation between contraceptive use and unobserved indi-vidual characteristics of the woman. The results show a 5% reduction in the risk of child mortality after a woman has used contraceptives, but there is no such effect of contraceptive use on infant mortality.

The third chapter estimates the impact of the village midwife program on infant mortality. Trained midwives placed in villages through the program pro-vided ante-natal, intra-partum and post-partum assistance to village women who would otherwise have relied on traditional birth attendants for help during the birth process. Prior studies on the village midwife program have shown general improvements in women’s health and the birth-weights of newborns. However, they have not directly examined the impact of the program on the safety of the birth process, improvement of which was its primary objective. I estimate the program effect by aggregating mortality outcomes at the district level and taking a district ﬁ_{xed-effects approach to overcome the bias due to non-random}

place-ment of these midwives. The results suggest that the program is associated with a reduction in infant mortality primarily through reductions in neo-natal mortality, but not through reductions in post-neonatal mortality. However, the inclusion of time-speciﬁ_{c effects into the analysis removes the effect of the program on infant}

mortality.

Shocks, Coping Strategies and Their Consequences: An Application to Indonesian Data

Francesca Modena (francesca.modena@email.unitn.it) Accepted 2008, University of Trento, Italy

Analysis of the way risk or uncertainty affects household economic choices is a key issue in developing countries, where the economic environment is riskier, households may be more vulnerable to risk, and shocks may have dramatic conse-quences for household living conditions. This dissertation investigates the way in which potential and actual shocks inﬂ_{uence economic conditions and the choices}

of rural Indonesian households. The analysis focuses on three main issues. First, I explore which strategies are chosen for different types of shocks. Second, I investi-gate the speciﬁ_{c mechanisms adopted in the face of the most common shock (crop}

loss), and the consequences for consumption. Finally, I examine the consequences of risk and shocks for a particularly important household decision: how much to invest in children’s education.

The source of data used in this dissertation is the Indonesian Family Life Sur-vey. The survey collected a large amount of information on household economic conditions and household and individual characteristics, and the questionnaire has a detailed section on shocks experienced by the household during the ﬁ_ve

years prior to the interview.

Three main sets of conclusions emerge from this dissertation. First, I found that household responses to shocks depend on the nature of the shock (for example,

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whether demographic or economic, idiosyncratic or common), and on household characteristics. In particular, data suggest that informal arrangements (for exam-ple, family assistance) are important means to overcome demographic and idi-osyncratic shocks, while they are marginal as a response to economic hardships. On the other hand, households are more likely to use labour supply responses to cope with economic and common shocks. A characteristic that has important con-sequences for the way households respond to shocks is clearly household wealth (and the presence of liquidity constraints that may be related to this). Indonesian data show that poor and non-poor households differ in their choice of coping strat-egies: the former are more likely to use a labour supply response, while rich house-holds are more likely to sell assets (for demographic shocks) and to use savings.

The second main conclusion is that poor and non-poor households behave in very different ways in the face of shocks. In general, rich households smooth consumption relative to income, whereas the need to accumulate savings both to build a buffer stock of assets and to self-ﬁ_{nance pro}ﬁ_{table investments leads poor}

people to rely more on ex post income smoothing strategies (taking an extra job) and to use part of this extra labour income to preserve their level of assets, even reducing consumption if necessary.

Finally, it is necessary to deepen our knowledge of the long-run consequences of shocks, particularly with respect to human capital formation through the edu-cation of children. Given the irreversibility of withdrawal from school—that is, children cannot re-enrol once they stop going to school—temporary interrup-tions to schooling have long-term impacts on a child’s ‘human capital’. Under the assumption of irreversibility, the impact of uncertainty on schooling decisions is subtler than is suggested by much of the development literature. Our results sug-gest a new channel through which uncertainty may affect education: in the face of household income variability parents are more likely to send their children to school than to withdraw them, in order to give them the option to continue to higher levels of schooling in the future (and hence achieve higher earnings as adults).

Environmental Change in a Frontier Region of Java: Besuki, 1870–1970

Nawiyanto (nawi_@hotmail.com)

Accepted October 2007, Australian National University, Canberra

This thesis examines the relationship between humans and the environment in the Besuki region of Java from 1870 to 1970. In this period Besuki experienced rapid environmental change. In a century the region’s environment was radically altered, while in many other parts of Java this degree of change took centuries to materialise. It is argued that the fast-changing environmental realities in Besuki resulted from demographic and socio-economic processes that took place more or less simultaneously. Drawing upon diverse historical materials, the thesis dis-cusses the role of human agency in changing the environment of Besuki, and the responses to the changing environment. In elaborating the argument, the study looks speciﬁ_{cally at population and major forms of natural resource use, including}

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agriculture, forest extraction, ﬁ_{shing and conservation, and their role in altering}

the environmental realities of Besuki.

The theoretical framework that informs the argument of the thesis comes pri-marily from frontier theories. These theories deal mainly with how the resource frontiers were created, expanded and eventually closed, sometimes through the exhaustion of available resources, sometimes through the achievement of a stable economic system. The frontier analysis is sharpened by the use of environmental adaptation and conservation politics approaches. The environmental adaptation approach elaborates the ways in which humans responded to the environmental problems and new environmental realities. The conservation politics approach looks at the emergence of conservation interest and its transformation into public and policy issues, conservation measures, and the execution of these measures.

The thesis concludes that the advance of the frontiers of Besuki was driven by a combination of population growth, market demand and technological innova-tion. These forces generated the rapidly expanding frontiers of settlement, agricul-ture, forest exploitation and ﬁ_{shing that led to Besuki’s emergence as the region}

with the largest proportion of migrants in Java, as a leading centre of agricultural production and as the second largest ﬁ_{shing complex in Indonesia. On the}

envi-ronment, these big transformations brought about a stronger presence of human-made environmental landscapes and attendant problems, thus pushing back the boundaries of natural forests. However, the closure of the Besuki frontiers was not due exclusively to the reality that there were no longer any new areas to move into, but also in part to the interest in nature conservation, which led to human efforts to limit the impact of economic change on the environment.

The fact that the advance of the Besuki frontiers occurred not long before the emergence of the conservation movement gave the region an opportunity to avoid becoming one of the frontier societies that destroyed their all-important environmental base. The conservation movement and the establishment of con-servation areas prevented the closure of Besuki’s frontiers from happening simply because all natural resources had gone. It must be acknowledged, however, that part of the region’s natural values could no longer escape damage or extinction because concern about their protection came too late. Further, effective protection of the conservation areas was difﬁ_{cult to implement because of a lack of funds}

and personnel, and because of unresolved contests over resources among differ-ent parties, which remained a serious problem until the late 1960s. Despite these facts, post-1970 Besuki retains remnants of its natural heritage, which deserve protection and are too valuable to be allowed to disappear from the region’s envi-ronment.

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Environmental Disclosures and Earnings Management by Environmentally Visible Indonesian Corporations

Susi Sarumpaet (susi@unila.ac.id)

This thesis examines: (1) the association between environmental visibility and environmental disclosure; and (2) whether ﬁ_{rms with poor environmental ratings}

will manage earnings downward to avoid political costs associated with environ-mental externalities. A conceptual framework that explains the above propositions is developed under two theoretical perspectives of environmental disclosure that are used widely in the literature—the social and economic perspectives. Using this framework I argue that environmentally visible ﬁ_{rms have the incentive}

to disclose environmental information and to engage in earnings management related to environmental performance.

Using a sample of Indonesian companies listed on the Jakarta Stock Exchange from 2001 to 2005, the study measured environmental disclosures and earn-ings management. Proxies used for a ﬁ_{rm’s environmental visibility are its}

size, industry type, environmental performance ratings, cross-listing status, proﬁ_{tability and performance. Environmental ratings are those issued by the}

Indonesian government’s environmental ratings program, PROPER (Pollution Control and Performance Evaluation and Rating). The program uses ﬁ_{ve colour}

ratings to grade the environmental performance of facilities, and releases the results to the public.

The study ﬁ_{nds that the level of environmental disclosure by Indonesian}

cor-porations remains very low and that environmental reporting by companies is still dominated by soft (not easily veriﬁ_{able) rather than hard disclosure items.}

However, the trends show increasing levels of environmental disclosure, both in the number of items disclosed and in the number of companies reporting the items. A pre- and post- evaluation of the effectiveness of the PROPER program reveals that environmental disclosures increased signiﬁ_{cantly one year after the}

implementation of the program in 2002.

Using a series of ordinary least squares regressions, the study regresses envi-ronmental disclosure levels on the various proxies for envienvi-ronmental visibility, while controlling for auditor choice, ﬁ_{rm age and leverage. Environmental}

dis-closure levels are found to be positively associated with multiple proxies for environ mental visibility: ﬁ_{rm size and the environmental sensitivity of the}ﬁ_rm’s

industry; inclusion in the environmental ratings program; and cross-listing on foreign stock markets. It also appears that environmental disclosures are associ-ated with the choice of auditor. However, there is no evidence to show that envi-ronmental disclosure is affected by a ﬁ_{rm’s age or its leverage.}

Using the subset of PROPER-rated ﬁ_{rms, the study regresses the discretionary}

accruals estimates against receipt of a negative rating, while controlling for ﬁ_rm

size, ownership structure and auditor choice. Consistent with the political cost hypothesis, the ﬁ_{rms receiving poor environmental ratings appear to use}

income-reducing discretionary accruals. Earnings management is also associated with

ﬁ_{rm size and inside ownership.}

Overall, the results of this study are consistent with predictions made on the basis of political cost and legitimacy theories in relation to environmental

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visibility. Both conceptually and empirically, the research identiﬁ_{es a clear link}

between environmental visibility and environmental disclosure, and between environmental performance and earnings management.

Technological Progress, Efﬁ_{ciency and Environmentally Adjusted}

Productivity Growth of Indonesian Rice Agriculture

Joko Mariyono (mrjoko28@telkom.net)

Rice production in Indonesia is important because it contributes more than 50% of the total value of the agricultural sector. Rice represents the largest source of caloric intake for more than 200 million people. Chapter 2 of this thesis indicates that rice has been a priority in Indonesian agricultural development. Various programs and investments in infrastructure have been undertaken to modern-ise rice production. Current policy still gives some priority to rice production through an agricultural revitalisation program. The thesis investigates agricul-tural modernisation in the form of technological change and improvements in technical and allocative efﬁ_{ciency, and the impact of this on productivity and the}

environment.

In chapter 3, the environmental consequences of agricultural modernisation are analysed using the concept of biased technological change. Analysis of a data set from the central statistics agency demonstrates that between 1979 and 1995 agriculture underwent regressive and environmentally biased technologi-cal change. Technologitechnologi-cal changes during the Green Revolution were more agro-chemical intensive. The subsequent change to a more environmentally sound policy reduced the intensity of agrochemical use.

Analysis of technical efﬁ_{ciency is provided in chapter 4. Technical ef}ﬁ_ciency

estimates are obtained using a data set from the Indonesian Centre for Agricul-tural Socio-economic and Policy Studies. The results show that there is variation in rice production due to technical inefﬁ_{ciency. The sources of variation in}

techni-cal efﬁ_{ciency are household characteristics, composition of labour and tractor use.}

Javanese rice agriculture is the most technically efﬁ_{cient in the country, and the}

technical efﬁ_{ciency of rice agriculture in all regions has increased. Overall,}

techni-cal efﬁ_{ciency is low. Therefore there is still considerable room for improvement in}

rice production, given state-of-the-art agricultural technology.

Chapter 5 provides further analyses of efﬁ_{ciency related to the use of}

environ-mentally detrimental inputs and to social efﬁ_{ciency. The results show that there}

is evidence of low environmental efﬁ_{ciency, leading to signi}ﬁ_{cant agrochemical}

waste. Large-scale farms generate more waste because of the large amounts of agrochemicals used. Rice production also fails to allocate all inputs at the correct level. Land is still under-utilised and other inputs are over-used.

Chapter 6 decomposes productivity growth into technological change, efﬁ

-ciency and scale effects. Productivity growth is also adjusted for the environmental costs associated with the use of agrochemicals. The results show that total factor productivity growth is driven by technological change and allocative efﬁ_ciency

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effects. If environmental costs are taken into account, this lowers the measure of productivity growth. Nevertheless, environmentally adjusted productivity growth is a fair measure. Both productivity growth and environmentally adjusted productivity growth have increased over time.

The policy implications of the study should contribute to sustainable increases in rice production and conservation of the agricultural environment. The results suggest that environmentally friendly technology should be continually developed and applied to reduce agrochemical intensity, and that the rate of efﬁ

-ciency improvement should be enhanced. Special attention should be paid to dealing with the problem of agrochemical pollution caused by the inefﬁ_{cient use}

of agrochemical inputs. It is expected that implementation of these policies will bring about a sustainable increase in productivity growth.

Has Indonesia’s Decentralisation Led to Improved Forestry Governance? A Case Study of Bulungan and Kutai Barat Districts, East Kalimantan

Ida Aju N. Pradnja Resosudarmo (daju.resosudarmo@anu.edu.au) Accepted 2008, Australian National University, Canberra

This study investigates the devolution of forestry authority to local governments under Indonesia’s 2001 decentralisation. It focuses on the relationship dynamics of district governments and other actors through case studies of the forest-rich Bulungan and Kutai Barat districts, East Kalimantan. Many studies have exam-ined devolution of forestry governance to community levels, but few their trans-fer to local government level.

Using qualitative case studies for the period 1999–2004, the research frame-work integrates and extends three approaches to the analysis of decentralisation of natural resource governance. The ﬁ_{rst emphasises actors, power and}

account-ability. The second focuses on institutional aspects of democratic, administrative and ﬁ_{scal decentralisation. The third, a model for decentralised forest}

manage-ment, highlights power relations among actors.

Decentralisation profoundly affected the dynamics of forest governance in Indonesia—most dramatically in control of access to timber resources, which moved from the centre to the districts, and then largely back again. Districts enjoyed signiﬁ_{cantly augmented}ﬁ_{scal powers and shares of forestry revenue.}

During the period of substantial formal devolution to district level, the two case study governments exploited the space created by their decentralised mandates quite effectively, increasing local actors’ importance in district decisions and the beneﬁ_{ts accruing to the local level. However, many accountability outcomes}

expected from decentralisation did not eventuate. Few downward accountabil-ity mechanisms, considered critical for improved natural resource management, proved effective. Thus, increased control of access to forest resources and shares of forestry-derived revenue did not improve forest management in the study districts.

The study revealed dynamic and ﬂ_{uid district-level forest politics. District}

forestry decision making and operations reﬂ_{ected the interplay between the}

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legal–regulatory framework, centre–district relations, relations among district-level actors, and organisational and individual actor interests.

Ambiguity and inconsistency in the legal–regulatory framework, and central actors’ reluctance to forgo powers, resulted in a bitter centre–district power strug-gle. Perceiving their window of opportunity to be insecure, district actors vigor-ously pursued short-term beneﬁ_{ts from forest exploitation. Despite the centre’s}

efforts to retain and subsequently regain its powers, the case study district gov-ernments were able to develop strategies, at least for a period, to safeguard the beneﬁ_{ts they and other local-level actors derived from regional autonomy.}

Power relations among actors have shaped district-level timber politics. Local actors increasingly inﬂ_{uenced government decision making and forestry}

opera-tions in the districts, and destabilised the previously ﬁ_{rm position of centrally}

linked actors operating at district level. However, as decentralisation progressed, the centre’s policies ultimately determined district decisions, eclipsing local actors’ inﬂ_uence.

Forest exploitation continued at the district level at the expense of longer-term forest sustainability. Given the absence of strong downward accountability mech-anisms, vertical accountability to the judiciary was the most effective mechanism for keeping districts’ forestry powers in check.

The research results suggest that the framework developed here is useful for analysis of forest governance dynamics at district level under decentralisation. Both de jure and de facto powers were important in analysing how decentralisation operated in practice. The institutional analysis that highlights the importance of decentralised ﬁ_{nancial powers, and the analysis of the role of various}

accountabil-ity relations beyond conventional downward accountabilaccountabil-ity, were relevant and useful.

Finally, the rapidly evolving nature of Indonesia’s decentralisation, and its pro-gression beyond the early phase investigated by this research, suggest the impor-tance of establishing whether outcomes and trends reported here will continue, or will change as decentralisation and associated institutions mature.

Local Leadership in Transition

Explaining Variation in Indonesian Subnational Government

Christian von Luebke (cvluebke@stanford.edu) Accepted 2007, Australian National University, Canberra

Why do some local governments perform well, while others perform badly? That question, which frames the analyses of this study, connects to a wider puz-zle in recent development debates. Many post-authoritarian regimes that have embarked on pronounced decentralisation and local democracy reforms have dis-played, if anything, declining government performance over the last 10 years. The persistence of bureaucratic inefﬁ_{ciencies and corruption, irrespective of efforts to}

‘move governments closer to people’, calls for a deeper inquiry into the dynamics of local decision making following decentralisation. Indonesia provides an excel-lent case study of these dynamics. Indonesia’s rapid regime change, from

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tralised authoritarian to decentralised democratic rule, has brought about a large variation in sub-national policy outcomes. This is particularly evident in strongly diverging tax, licensing and corruption practices across Indonesia’s 440 newly empowered district governments. These pronounced business climate variations make it possible to test two contending explanations for government perform-ance: (1) ‘societal pressure’, which is advocated as an essential reform mechanism in good-governance literatures; and (2) ‘government leadership’, which emerges as a key determinant in recent policy reform literatures.

Based on eight district cases (comprising 1,000 business surveys and 120 in-depth interviews) and multivariate regression analyses (using data from over 200 districts), I demonstrate that societal pressure is less signiﬁ_{cant in explaining local}

policy outcomes than is government leadership. In Indonesia’s early transition to democracy, reform pressures from local ﬁ_{rms and district councillors are largely}

absent owing to collective action problems and dysfunctional political incentives. For most ﬁ_{rms, the bene}ﬁ_{ts of engaging in collective reform action rarely justify}

the costs of doing so: this holds true for small ﬁ_{rms that face high coordination and}

retaliation costs, for Chinese minorities who anticipate disproportional social and bureaucratic risks, and for large ﬁ_{rms that expect higher bene}ﬁ_{ts from}

sustain-ing collusive government ties than from scrutinissustain-ing public shortcomsustain-ings. Local business chambers and district councils rarely take the initiative to solve these collective action problems: while the former lack membership and resources, the latter remain occupied with securing party list positions at national or provincial levels.

Conversely, the quality of local government leadership emerges as a salient determinant of local policy outcomes. Qualitative and quantitative analyses show that a number of district leaders have skilfully used the powers of their ofﬁ_{ce—motivated by political career aspirations, national acknowledgment}

and prospective donor funding—to forge reform coalitions and introduce local business climate improvements. They have introduced new monitoring instru-ments—such as call-in talk shows and SMS/email complaint boxes—that reduce collective action problems and encourage societal actors to report bureaucratic shortcomings and transgressions. These initiatives provide local constituencies with a means to voice their concerns and, at the same time, allow government leaders to strengthen support bases for reform efforts and upcoming elections. In response to the ‘good governance’ debate, this study demonstrates that gov-ernment leadership can be an effective, and often under-estimated, reform mechanism, which compensates for weak societal pressures in early transition periods.

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The Economic Role of Formal and Informal Inter-Firm Networks in the Development of SMIEs:

Study of Symbiosis in the Indonesian Garment Industry

Latif Adam (latif.adam@lipi.go.id; latif_adam@yahoo.com.au) Accepted 2007, University of Queensland, Brisbane

This study examines the development of SMIEs (small and medium industrial enterprises) from the perspective of internal ﬁ_{rm management, and identi}ﬁ_{es the}

factors that lead SMIEs to develop and maintain long-term inter-ﬁ_{rm networks. It}

also analyses to what extent and in what ways inter-ﬁ_{rm networks contribute to}

improvement in the performance of SMIEs.

The results indicate that although SMIEs play an important role in the Indo-nesian economy, they suffer from a number of problems either in securing and expanding their markets or in accessing capital, technology and raw materials. To ease these problems, some SMIEs develop inter-ﬁ_{rm networks. This gives them}

an alternative means not only to secure and expand their markets but also to gain access to capital, technology, information and raw materials.

Using a binomial logit model, the study reveals that several attributes of entre-preneurs, particularly educational background, correlate positively with deci-sions by SMIEs to develop inter-ﬁ_{rm networks. The higher the educational level of}

entrepreneurs, the more likely they are to develop networks. This may be because educational background correlates positively with the ability to build contacts and communicate with others. The better entrepreneurs communicate with oth-ers, the better able they are to develop inter-ﬁ_{rm networks.}

The study also indicates that trustworthiness and competence are fundamental determinants of the success of permanent networks. Thus, to develop such net-works, SMIEs must not only build trust and competence but also ﬁ_{nd trustworthy}

and competent partners. The SMIEs studied use several initial mechanisms to develop networks. Interestingly, the initial mechanism that SMIEs choose deter-mines whether or not their networks can be maintained permanently. If entre-preneurs develop networks through mechanisms other than trade and industry associations and government programs, this increases the sustainability of those networks.

Using an ordered probit model, the study shows that each type of inter-ﬁ_rm

network positively inﬂ_{uences the performance of SMIEs in terms of}

technologi-cal capabilities, competitiveness and growth. Engaging in more than one type of network improves the performance of SMIEs more than involvement in only one type of network. Further, entering a vertical network has a greater posi-tive impact on improved SMIE performance than does entering a horizontal network.

The study reveals that long-term inter-ﬁ_{rm networks provide much greater}

beneﬁ_{ts to}ﬁ_{rms than do short-term networks. However, it also found that}

long-term networks can only be developed successfully if they are based on economic and proﬁ_{t motivations rather than social and political considerations. From an}

economic policy point of view, this suggests that, instead of intervening directly, the government can support the development of networks by designing and introducing a legal framework that can be used to solve the commercial disputes

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of ﬁ_{rms in a network. If the government were also to eliminate various nuisance}

taxes and reduce tariffs and taxes on high-quality imported inputs, this would make it easier for SMIEs to develop networks. Finally, the government should eliminate discriminatory policies against SMIEs and implement anti-monopoly laws to ensure that SMIEs and LIEs (large insustrial enterprises) can compete fairly.

Local Clusters in Global Value Chains:

A Case Study of Wood Furniture Clusters in Central Java (Indonesia)

Roos K. Andadari (roos.kities@staff.uksw.edu) Accepted 2008, Vrije Universiteit, Amsterdam

Small ﬁ_{rms have some advantages but, according to internal}ﬁ_{rm theory, they}

also have disadvantages that arise from a lack of resources and cause them to be uncompetitive in the international market. To be able to overcome their disadvan-tages, cluster theory suggests that small ﬁ_{rms can enjoy some economies by}

locat-ing in clusters. Clusterlocat-ing provides opportunities for poollocat-ing of labour and other inputs, and for obtaining knowledge spill-overs. This literature also suggests that clustering offers collective efﬁ_{ciency by providing both external economies and}

scope for cooperation and joint action. Moreover, the competitive atmosphere arising from clustering encourages ﬁ_{rms to be innovative. Some studies stress the}

importance of clustering with similar ﬁ_{rms, while others emphasise the bene}ﬁ_{ts of}

clustering with different ﬁ_{rms. However, cluster theory focuses on bene}ﬁ_{ts from}

local mechanisms involving local actors, and neglects the role of external actors. Global value chain theory stresses that ﬁ_{rms will improve their competitiveness}

in international markets if they link to a global value chain, as this provides them with access to information and technology from the international market. This theory emphasises the role of external actors and neglects that of local actors.

Based on these different views of how to improve ﬁ_{rm competitiveness, the}

study formulates the following research questions. What factors contribute to

ﬁ_{rm performance in small and medium scale enterprises in the wood furniture}

sector in Central Java? More speciﬁ_{cally, what is the contribution to}ﬁ_rm

perform-ance in the Central Java wood furniture clusters of (1) internal ﬁ_{rm factors; (2)}

cluster externalities; and (3) international linkages?

Both secondary and primary data are used to answer these questions. The sec-ondary data are based on relatively large and medium (L&M) ﬁ_{rms in Central}

Java. They are taken from the annual manufacturing survey conducted by the central statistics agency for the 10 years from 1994 to 2003. The primary data are from the author’s surveys of relatively large and medium ﬁ_{rms in four clusters}

in Central Java in 2005, complemented by data on relatively small ﬁ_{rms from the}

Jepara cluster in Central Java.

A production function approach is used to test the data in the ﬁ_{rst case; it reveals}

the importance of proximity of relatively L&M ﬁ_{rms to}ﬁ_{rms of similar size and}

of linkages to foreign buyers. Proximity to small-scale ﬁ_{rms has no impact on}

L&M ﬁ_{rm performance, and neither does urban location. However, linking to}

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international buyers improves ﬁ_{rm performance. An integrated approach is used}

to test the primary survey data on the relatively L&M ﬁ_{rms in four clusters. This}

indicates that cluster factors and linkages to foreign buyers are important to ﬁ_rm

performance, in addition to internal ﬁ_{rm factors. Among the cluster factors, the}

role of external economies is more conspicuous than local cooperation and com-petition. A multivariate analysis applied to small ﬁ_{rms in the Jepara cluster shows}

that some of the variables that determine L&M ﬁ_{rm performance are different}

from those that determine performance in relatively small ﬁ_rms.