26 March, 2010

Social Policy Case Study: Corporate Social Responsibility (CSR) in Indonesia

Description and Purpose of CSR Policy

CSR concept was generated in Europe and United States in response to the excess power of corporations (Kemp 2001, p.1). Although the CSR has been practiced since 1990s in Indonesia, the first legal basis was only issued in 2007 through Limited Liability Company Law (Law Number 40 Year 2007) and Investment Law (Law Number 25 Year 2007).

The above laws assert the purpose of CSR policy as follows: (1) to optimize the role of private sector in building a welfare society, and (2) to reduce the potential for social gap between “company community” and “local community” who live in area surrounding the company’s operation area (Law Number 40 Year 2007, s. 5; Law Number 25 Year 2007, s. 4).

CSR policy reflects the limitation of the State to secure the welfare of society. The State urges corporations to become the source of welfare, not only for their workers (companies must register their workers for insurance according to Law Number 40 Year 2004 Concerning National Social Security System), but also for local communities and society in general. Considering this case study and the typology of social welfare system by Esping-Anderson, Indonesia is near to, but does not exactly follow the conservative model. In conservative model, government will still intervene to help vulnerable families when corporations fail (Esping-Anderson 1990, p. 20; Hill 2006, p. 27). In the case of Indonesia, this is questionable. In many cases, every individual or family who is not working in reliable formal sectors must struggle by themselves for their own social welfare.

The social welfare system of East Asian countries cannot readily be fitted into Esping-Anderson’s typology (Holiday 2000, p. 706). The East Asian model, also called ‘productivist’, considers social policy subordinate to ‘economic growth’ (Holiday 2000, p. 709).

Indonesia has similar characteristics with East Asian model. Economic growth has been the basis of legitimacy since New Order Regime in late 1960s (Crouch 1998, p.168). After the national reform of the late 1990s, and even in the current national development plan 2010-2014, growth and economic stability are still regarded as the key for the improvement of social welfare (Bappenas 2010, p. II.3-1). The proportion of public social expenditure to Gross Domestic Product (GDP) is low (see Table 1). The country focuses on economic growth with low public social expenditure. This makes CSR policy relevant for Indonesian context.

Factors Determine the Nature of CSR Policy

Combination of low tax revenues compared to GDP, and high corruption (see Table 1) make the State have less power and public budget to secure social welfare.

Privatisation and promotion of foreign direct investment (FDI) makes Indonesian economy rely on big corporations. The strong role of Trans National Companies (TNC) has existed since Dutch colonial era (Kemp 2001, p. 2). In the mid-1980s, the privatisation policy began to make the private sector ‘the engine’ of Indonesian economic growth (Schwarz 2004, p. 60). This privatisation policy continues in the (current) Yudhoyono administration (Xinhua News 2006).

The power of local people and local governments determines their relationship with private sectors operating in their area. The national reform and decentralisation policy which began in 2001 has improved political participation and self-determination rights (Haug 2007, p. 38).

Indonesian culture is very much influenced by religion, particularly Islam, which urges generosity of the wealthy to the poor. Islam sharia specifies that the fruits of productivity should benefit the community (Kemp 2001, p. 9).

The Key Actors of CSR Policy

National and local government regulate and monitor the CSR policy and its implementation. For natural resources extraction sector, such as mining, the company must report their CSR progress to the mining ministry in Jakarta. Local governments are supposed to coordinate the CSR program in order to harmonize with local government’s agenda. However, the effectiveness of this coordination role ‘requires the machinery of an effective democratic government and civil society’ (Kemp 2001, p. vii).

TNC and domestic corporations are the implementers of CSR policy. The dynamics of power relation between corporations, local people and government (especially local government) will reach a point where they can agree on how to distribute the CSR resources.

Local people are very often in coalition with local government to face corporations that are considered outsiders. They are basically the beneficiaries of CSR. Their main challenge is to maintain their power so they can influence the decision of how the CSR should be implemented.

The Drivers of Changes of CSR Policy

Change in economic output and the productivity of private sectors will determine the number of resources that are available for CSR.

Ability of government to control politics and public policy will influence who controls the CSR implementation and its resources distribution. It is possible that the implementation of CSR policy will be reduced when:
• the government gets more trust from the people
• the national economy improves
• productive age people dominate the demographic structure
• government collects more revenue in proportion to its GDP
• people want the government to be more responsible on social welfare.

Change of power of local people and local governments will change how the CSR resources are distributed, and how CSR policy is implemented.

Change of composition of the size of corporation dominating national economy will determine the demand and supply of CSR services. The demand to CSR will be less when:
• more people become entrepreneurs managing small scale companies
• small scale companies dominate the national output rather than the big corporation
• number of big corporations diminishes; for example the government policy prioritise domestic and small scale companies to play role in economy.
At the same time, the supply also decreases because small scale companies will not be able to devote enough of their resources for CSR.

Bappenas, see Ministry of National Development Planning.
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—— n.d., Data pokok APBN 2005-2010 (Data base of national government budget plan of 2005-2010), Ministry of Finance of Republic of Indonesia, Jakarta.
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Kemp, L 2001, ‘Corporate social responsibility in Indonesia: quixotic dream or confident expectation?’, Technology, Business and Society Programme Paper Number 6, United Nations Research Institute for Social Development (UNSRID), Geneva.
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Law Number 40 Year 2007 Concerning Limited Liability Company (Republic of Indonesia).
Law Number 25 Year 2007 Concerning Investments (Republic of Indonesia).
Law Number 40 Year 2004 Concerning National Social Security System (Republic of Indonesia).
Ministry of National Development Planning 2010, Lampiran peraturan Presdien Republik Indonesia nomor 5 tahun 2010 tentang rencana pembangunan jangka menenangah nasional (RPJMN) tahun 2010-1014 (National medium development plan 2010-2014 appendix), Ministry of National Development Planning (Bappenas), Jakarta.
OECD 2010, Aggregated data of social expenditure database (SOCX), Organisation for Economic Co-operation for Development, viewed 13 March 2010,
Schwarz, A 2004, A nation in waiting, Talisman Publishing, Singapore.
Xinhua News 2006, ‘Indonesia issues new policy package on financial sector’, Xinhua News Agency, 6 Jul

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