Indonesian decentralisation, corruption and its impact on foreign direct investment

Reformasi is the Bahasa term for the three year period of post Soeharto reforms that transformed Indonesia’s centralised autocratic political and administrative system into a highly decentralised democracy. One major reformasi initiative was devolution of responsibility for core government services to almost 300 third tier municipalities, regencies and rural districts in one nationwide ‘big bang’ process. My thesis is that ‘big bang’ decentralisation gave rise to pervasive regional corruption which has had significant adverse impacts on the origin and disposition of Indonesia’s inward Foreign Direct Investment (FDI). Poor policy implementation was a contributor to regional corruption, but above all this study finds regional corruption was attributable to impacts of ‘big bang’ on the country’s institutional settings. As a result, centralised and predictable Soeharto era corruption that coexisted with successful economic development was fractured. It was replaced by decentralised and unpredictable corruption and maladministration that now contributes to Indonesia’s underperformance as a beneficiary of FDI. The result is that FDI from developed countries has diminished substantially, technology transfers have reduced, exports of high value processed manufactures, as a proportion of exports have declined, and Indonesia is now more dependent on volatile mostly unprocessed natural resource exports.