Ade Cahyat

Should international trading in emission permits be encouraged?

2011-07-03T14:05:00.000-07:00

Introduction

Many evidences show that climate change is real. The National Academy of Sciences reports 'with a high level of confidence that global mean surface temperature was higher during the last few decades of the 20th century than during any comparable period during the preceding four centuries' (2006, p. 3). Although the economic impacts of climate change are hard to predict, there are serious prediction in non-market impacts such as the additional 165,000 to 250,000 children could die (Stern 2007, p. 63).

The serious mitigation actions must be taken at global level as soon as possible. The delay inaction will just cost the world economy i.e. US$5.7 trillion per year (Bosetti et al. 2009, p. 304). Since the GHG concentration is caused directly by human activities (Australian Academy of Science 2010, p. 4), the key thing in mitigation is to change people's behaviour. In domestic level, there are three public policy options which currently practiced and/or considered; they are: carbon tax, cap and trade, and the combination of both (the hybrid). The former sets the carbon price; the second fixed the emission quantity; while the latter start by settling the emission quantity but also allowing additional permits to control the carbon price. Although there are huge debates on comparing the three (see, for example, McKibbin & Wilcoxen 2007, pp. 187-190; Hansen 2009, p. 2; Stiglitz 2007; Garnaut 2008a, p. 311; Pizer 2002), the basic principle of the three approaches is the same; that is to put a price into carbon. Carbon price is important because price has rationing and allocating function of the scarce resources (Frank et al. 2009, p. 233). Theoretically, the price must be set at the level so that the cost of the emission equal to the present value of the social damage it causes (IMF 2008, p. 9). The three carbon pricing approaches are central to carbon market.

The current international emission permit trading practices are operated under carbon market mechanisms. There are three carbon market mechanisms under the 1997 Kyoto protocol; they are: carbon trading, clean development mechanism (CDM), and joint implementation (JI) (Gerrard et al. 2007, p. 1). Both carbon trading and JI involve international permit trading, the difference is that the latter is project based, whereas the former is purely a permit trading. Meanwhile, CDM is only about offset either it is project or program based. Permit trading can be conducted only between actors in countries with cap, whereas countries without caps can provide offsets to countries with caps.

This paper will focus on international trading in emissions permits (IPT). It will first elaborate the pros and cons of IPT and will argue that IPT should be conducted gradually after the improvement of the capacity of the developing countries and the global market regulatory body.

Pros

IPT could reduce the global mitigation costs which reflected by the lower permit price or lower carbon price. That could happen because of the marginal abatement costs differ across countries (McKibbin et al. 2004, p. 25; Nordhaus 2008, p. 13), which developing countries have lower marginal abatement costs (Weyant & Hill 1999, p. xxxv; Howes 2009, p.10). When there is global trading, the abatement cost will be equalized into a global price which will be between the developed countries' marginal abatement cost and the developing countries' marginal abatement cost. That will result in a lower global abatement costs to achieve the same emission reductions. And the reduction will be more when there are more big players cap their emissions and participate in the permit trading (Aldy & Stavins 2007, p. 12).

IPT could increase the possibility to achieve the higher target of stabilization level through more participation. Another effect of the different marginal abatement costs in IPT is the attraction to more countries to join the global efforts on climate change mitigation. IPT could attract net-sellers countries through profit-making motives, whereas net-purchaser countries could be tempted to join because of their domestic political interests (Keohane & Raustiala 2008, p. 6). As more countries participate and more ambitious target they can make due to the lower abatement costs (Garnaut 2008b, p. 6), the more global abatements can be expected. In contrast, incomplete participation could reduce the effectiveness, and increase the cost of mitigation (Howes 2009, p. 13). If we just rely only to Annex B of the Kyoto protocol, the GHG concentration in atmosphere will exceed 550 ppm—or leads to more than 3⁰C warming—by the end of this century (Wigley 1998, p. 2288).

IPT is an instrument that can help the creation of global economic convergence as an impact of the emissions convergence in per capita basis. Although developed countries are unlikely to support, developing countries—especially India—have been in the position to argue that equity requires setting quantitative targets at equal amounts per capita (Frankel 2007, p. 40). Indeed, distributing permits based on equal right to emit is the only principle that has some ethical basis (Stiglitz 2007). The best way to achieve equal emission per capita is through 'convergence and construction' approach (Garnaut 2008a, p. xxiv). There are two main steps as reflected in the name of the approach: set-up the stabilization level as the global target, for example 450 ppmv (contraction); share the emission limit among all countries so that per-capita emissions converge by specific date (convergence). There are two key elements to be negotiated and agreed upon: the target atmospheric concentration of GHG and the date (HÖhne et al. 2006, p. 47). This approach will lead to the transfer of resources to the least developed countries through IPT. Without IPT the costs of mitigation in developed countries will be higher and there will be no resources transfer to the developing countries. The resources transfer, which can be in the form of finance or technology or others, could help developing countries to catch up the developed countries which could result in the economic convergence. Interestingly, the sources of financing for developments support in developing countries can be mainly from private sectors in developed countries rather than from public sectors as that in the development aid.

IPT will self-enforce the low-emission development. Once the IPT is there and the caps are set, every participant countries will have strong incentives to work hard to lowering their emission intensity (of GDP) because it is the only way to optimize benefit from the trading. The more they can maintain or increase their outputs but lowering emission at the same time, the more they can sell their permits to other countries or just hold the excess permits for the future developments. It is even possible for them who highly efficient in GHG emissions to use their excess permits as an asset in international political bargaining since permits will be highly valuable. Carbon price can attract investments in low-carbon developments such as investment in green energy. Since IPT increases carbon price in developing countries, it would attract more investments in developing countries in low-carbon development economic activities. The promotion of low-emission development can be more explicit in the case of 'joint implementation' where permit trading is conducted through carbon offset projects. The EU ETS claims the promotion of low-carbon development as one of its successes (Carbon Finance 2010, p. 7).

Domestic trading scheme in developing countries is hardly to be established without IPT. That is because variation of the marginal abatement costs among actors is less in domestic market compared to the global market. This is particularly difficult in developing countries where we can expect to find more sellers than buyers. For example, 180,000 tonnes of voluntary credits in the first auction in Latin America (Brazil) was end up without a single bid (Reuters 2010).

Cons

IPT might reduce future development possibilities of developing countries and might lead to the emission per capita divergence. If one country sells emission permits to another country, the seller country basically transfer its future development possibilities. When every country adopts a cap and the cap is fixed, the cap reflects the future development possibilities. If the cap is equal to current level of emission of one country, the country would be allowed to produce more economic output only if the emission intensity of output of that country is reduced. Reducing emission intensity, however, is not easy. It does not only require investments in new technology, but also need better public governance. For example, reducing emission intensity in forests activities require better forest management, whereas better forest management needs better public governance (Mayers et al. 2006, p. 101). It also depends on the quality of the global trading governance. If the global trading governance is weak, one poor country might sell its permit just because they need revenue (or because the corrupt leaders need quick cash for their political interests), not because the country has reduced its emission intensity. It is just similar to the case where a poor farmer sold his farm land to a mining company just because he wanted to have a motorcycle. At the end, the emission per capita will diverge, not converge. In this case, although the emission reduction might be well-proven, it does not meet ethical standard.

Without a credible government of countries involved in the trade, the IPT might increase the level of GHG and weaken the credibility of the high integrity domestic market scheme. IPT cannot avoid the involvement of government even though the trade might be between private firms. That is because the legal basis of IPT is international agreement which supposed to be made by governments. National government capabilities are needed at least for two important functions: the monitoring, reporting, and verification (MRV) system and the market regulation. IPT requires reliable MRV which not easy to build internationally. The lesson from the successful acid rain program (ARP) in the U.S. points out that the MRV is central to develop the accuracy and maintaining emission data which lead to the development of public confidence in the program, and has resulted in a high compliance rate (Schakenbach et al. 2006, p. 1576). A weak MRV system could end up raising the level of global emissions if the monitoring in the seller's country is ineffective because the emission of the buyer would rise while the seller's emission would remain unchanged (Nordhaus 2008, p. 160). The market regulator function is important to maintain the trust, not only the trust of the sellers and buyers, but also the tax payers in the participating countries. This is particularly relevant in developed countries where their political concern values the integrity of the mitigation measures (Grubb 2003, p. 166). An international trading system implies that governments in all participating countries would perform the functions with similar competence (Victor 2007, p. 143). However, the quality of governments around the world is vary which many of them, particularly in developing countries, are still associated with high corruption. One trading scheme with high integrity might be poisoned by other trading scheme in different countries with low integrity.

IPT might make developing countries (sellers) worse-off. The IPT might lead to the increase of production cost of output which could result in the increased cost consumptions and create reduced real wages. The effects would continue to the reduced labour supplies and would end up with reduced tax revenues. These effects chain called 'tax interaction effect' (Goulder et al. 1998, cited in Babiker et al. 2002, p. 4). Theoretically, the effects can be overcome by cutting other distorting taxes, such as social security taxes and corporate income taxes (Parry 1997, p.1). That could happen if the incomes gained from emission trading exceed the efficiency costs from the tax interaction effect (Babiker et al. 2002, p. 5). That means the benefits of IPT for developing countries depend a lot on the level of the carbon price in the global market.

IPT might harm marginal communities. For example, the high value of carbon could adversely affect indigenous people and local communities when government move them to other place in order to reduce emission from deforestation and forest degradation (Macintosh 2010, p. 2).

IPT might bring 'resource curse' through corruption practices and low productivity. IPT must involve cap which imply the permit limitation and the high value of the permits. That creates scarcity of permits and would invite corruption practices (Cooper 2007: 106). Cap and trade is a rent-creating program which, in the case of weak governments, could easily lead to corrupt practices and low productivity (Nordhaus 2008, p. 159).

Price volatility cannot be avoided totally because of the nature of the permit trading and also because of its link with the stability of global economy and politics. Price volatile caused by the complete inelasticity of the supply of permits along with the highly inelastic demand for permits in the short run (Nordhaus 2008, p. 153). The stability of politic and economic influences the stability of supply and demand which affect the carbon price (Carbon Finance 2010, p. 7). In addition, since EU ETS began in 2005, it is observed that the stability of carbon price correlates with the stability of energy price since there is high correlation between the two (Harvey 2009).

The price volatile phenomenon reflects the inability of any national government, particularly government from small countries, to control global carbon price. This is very important because, as discussed earlier, price is matter. Without sufficient price, developing countries can be worse-off and therefore reduce their incentive to participate.

The success of IPT depends on the quality of the caps, whereas set-up the right caps is difficult. Since IPT requires binding caps, the plan of make a trading might increase the value of the permit during the negotiation time which will make the permit distribution among countries become difficult and sensitive. Giving more permits than required to one country (i.e. hot air) will attract participation of the country but at the same time will harm the participation of all other countries (Barret & Stavins 2003, p. 360). This can lead to a failed negotiation. The errors in allocating caps—e.g. because of the mistake of baseline making such as the 'hot air' phenomenon—could discourage the abatement and even increase the cost of the abatement (CCAP 2007, p. 5; Gilbertson & Reyes 2009, p. 9). The errors in allocating caps could also discourage wide participation especially when it leads to the reduction of commitment of big player countries which might caused by the perception of unfairly treated. The exit of one country could magnify the pressures for others to exit (Victor 2007, p. 142).

My proposal

Considering the pros and the cons, I propose to implement the IPT gradually. That is because the success of IPT requires credible nation state institutions and credible international climate institution. The former is crucial for developing countries, whereas the latter is the main challenge in global level. Institutional development in national and global level is a must to reduce the potential of negative impacts, as well as to optimize the potential benefit, from the IPT.

Although the IPT should not be set-up until we have credible institutions, the emission caps must be agreed soon. We can use the pledges that have been agreed in Copenhagen. As being agreed in previous negotiations, arrangement of the IPT must be based on the 'common but differentiated responsibilities and respected capabilities' principle. It implies that, unlike for developed countries, the caps of developing countries are not immediately binding.

I would copy the way the successful Montreal Protocol did on dealing with emission limit. That is that all countries must have emission limits which immediately binding the developed countries but allowing grace period to developing countries (Barrett & Stavins 2003, p. 361). We can just adopt the pledges made in Copenhagen which—after compared across different metrics—imply significant efforts and considered to be more equal among developed and developing countries; for example the emission per capita differences are smaller (Jotzo 2010, p. 21). In addition, the Copenhagen pledges (if we can get it) brings a solid foundation to bring the emission down to the 450 trajectories which make the 2⁰C target possible to achieve. It is important to note that Copenhagen pledges made in bottom-up nature which allow us to expect a stronger commitment because the promises were made without pressure and were according to individual country's interest. The equal per capita emission must be part of the targets by using the 'convergence and contraction' approach. The converged date must be set by considering the sufficient adjustment time and accepted by developed and developing countries, say, 2050, as suggested by Garnaut (2008a, p. 207).

The gradual implementation of IPT involves three stages: (a) capacity development; (b) IPT implementation that combined with the project based, caps bind developed countries only, but monitored, reported, and verified in developing countries as well (almost similar to the Kyoto), and (c) full IPT implementation which all caps are binding.

The capacity development activities must focus on two targets: (a) developing countries, (b) global regulatory body. The objective of capacity development of developing countries should cover the following issues: low-carbon development; good governance, MRV system, domestic market regulation; market policy making capability e.g. to avoid the tax interaction effect. The global regulatory body capacity development must address the following issues: prioritizing domestic abatement as opposed to trading and offset; market regulation e.g. to avoid human right violation; monitoring and leadership communication to ensure the achievement mitigation target and per-capita basis target; monitor to minimize the price volatility. The costs of capacity building must be paid by developed countries as part, or addition to, development aid. In order to be successful, some lessons from development aid effectiveness can be considered; for example, the three aid effectiveness determinants: the quality of the government of recipient country, the quality of the aid donor, and the way in which aid business is organized (Howes 2011).

The low-carbon development must in line with the nationally appropriate mitigation actions (NAMA). NAMA will likely balance the mitigation and development objective of developing countries. The priority of developing countries is more to bring prosperity to the most of their people, not so much about environmental concern. Therefore government of developing countries are unlikely to cap the economy soon. However, prosperity can be developed under sustainable development approach which includes some elements that support climate mitigation. For example, the policy of government of India called 'perform achieved and trade (PAT)' with the main intention is energy saving, but is contributing to climate change mitigation by reducing or avoiding GHG emissions (Uphadyaya 2010, p. 564). The focus of developing countries in their NAMAs should be on low carbon development strategy which means that they alleviate poverty through low carbon intensity activities.

In the second and third stage, buying permit from other countries is allowed only if the domestic price is too high and could harm domestic economy seriously. In the second stage in particular, selling permit from developing countries must be meet some criteria; for example, the permits to be sold are only that as result from the increased emission efficiency.

References

Aldy, JE & Stavins, RN 2007, 'Introduction: international policy architecture for global climate change', in JE Aldy & RN Stavins (eds), Architectures for agreement: addressing global climate change in the post-Kyoto world, Cambridge University Press, Cambridge, pp. 1-30.

Australian Academy of Science 2010, The science of climate change: question and answers, Australian Academy of Science, Canberra.

Babiker, MH, Reilly, JM & Viguier, LL 2002, 'Is international emissions trading always beneficial?', MIT Joint Program on the Science and Policy of Global Change, Report Number 93, December 2002, Massachusetts Institute of Technology (MIT), Cambridge, MA.

Barrett, S & Stavins, R 2003, Increasing participation and compliance in international climate change agreements, International Environmental Agreements: Politics, Law and Economics, vol. 3, pp. 349-376.

Bosetti, V, Carraro, C, Sgobbi, A & Tavoni, M 2009, 'Delayed action and uncertain stabilisation targets: how much will the delay cost?', Climate Change, vol. 96, pp. 299-312.

Carbon Finance 2010, State and trends of the carbon market 2010, Carbon Finance at the World Bank, Washington, DC.

CCAP 2007, A new framework for Reducing Deforestation in Developing Countries: The Dual Markets Approach, Center for Clean Air Policy, Brussels.

Cooper, RN 2007, 'Alternatives to Kyoto: the case for a carbon tax', in JE Aldy & RN Stavins (eds), Architectures for agreement: addressing global climate change in the post-Kyoto world, Cambridge University Press, Cambridge, pp. 105-115.

Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2nd edn., McGraw-Hill Australia, North Ryde.

Frankel, J 2007, 'Formulas for quantitative emission targets', in JE Aldy & RN Stavins (eds), Architectures for agreement: addressing global climate change in the post-Kyoto world, Cambridge University Press, Cambridge, pp. 31-56.

Garnaut, R 2008, The Garnaut climate change review: final report, Cambridge University Press, New York.

—— 2008b, Emissions trading scheme discussion paper, Garnaut Climate Change Review, Interim Report February-2008.

Gerrad, MB, Sethy, S, Xu, H & Gagliardi, B 2007, 'Climate change: Kyoto's clean development mechanisms in action', New York Law Journal, September.

Grubb, M 2003, 'The economics of the Kyoto protocol', World Economics, vol. 4, no. 3, pp. 143-189

Hansen, JE 2009, Carbon tax & 100% dividend vs. tax & trade, Testimony of James E. Hansen to Committee on Ways and Means, United States House of Representatives, Washington, DC.

Harvey, F 2009, 'Carbon price fall bad for green investment', Financial Times, FT.com, viewed 5 May 2011,

<http://www.ft.com/intl/cms/s/0/3d80d790-f091-11dd-972c-0000779fd2ac.html#axzz1Mhy5Zk00 >.

HÖhne, N, Phylipsen, D, Ullrich, S & Blok, K 2006, Options for the second commitment period of the Kyoto protocol, Ecofys, Cologne.

Howes, S 2009, 'Sustaining growth and mitigating climate change: are the costs of mitigation underestimated?', Crawford School of Economics and Government, Australian National University, paper presented to the East-West Centre-Korea Development Institute Conference on “Climate Change and Green Growth: Korea’s National Growth Strategy”, July 2009.

—— 2011, 'An overview of aid effectiveness determinants and strategies', Discussion Paper 1, Development Policy Centre, Crawford School of Economics and Government, The Australian National University, Canberra.

Gilbertson, T & Reyes, O 2009, Carbon trading: how it works and why it fails, Critical Currents no.7, Dag Hammarskjöld Foundation, Uppsala

IMF 2008, The fiscal implications of climate change, Fiscal Affairs Department, International Monetary Fund, Washington, DC.

Jotzo, F 2010, 'Comparing the Copenhagen emissions targets', CCEP working paper 1.10, Centre for Climate Economics & Policy, Crawford School of Economics and Government, The Australian National University, Canberra.

Keohane, RO & Raustiala, K 2008, 'Toward a post-Kyoto climate change architecture: a political analysis', The Harvard Project on International Climate Agreements, Discussion Paper 08-01, Harvard Kennedy School, Harvard, MA.

Macintosh, A 2010, 'Reducing emissions from deforestation and forest degradation in developing countries: a cautionary tale from Australia', Policy Brief No. 12, The Australia Institute, Canberra.

Mayers, J, Bila, A, Khaukha, K, Opoku, K & Simwela, W 2006, 'Forest governance and social justice: practical tactics from learning group approach in Africa', International Forestry Review, vol. 8, no. 1, pp. 101-109.

McKibbin, WJ, Shackleton, R & Wilcoxen, PJ 2004, The potential effects of international carbon emissions permit trading under the Kyoto protocol, Australian National University, Canberra.

McKibbin, WJ & Wilcoxen, PJ 2007, 'A credible foundation for long-term international cooperation on climate change', in JE Aldy & RN Stavins (eds), Architectures for agreement: addressing global climate change in the post-Kyoto world, Cambridge University Press, Cambridge, pp. 185-208.

National Academy of Sciences 2006, Surface temperature reconstructions for the last 2,000 years, National Academy of Sciences, Washington, DC.

Nordhaus, W 2008, A question of balance: weighing the options on global warming policies, Yale University Press, New Haven.

Parry, I 1997, 'Revenue recycling and the costs of reduction carbon emissions', Climate Economics and Policy Program, Climate Issues Brief Number 2, Resources for the Future, Washington, DC.

Pizer, WA 2002, 'Combining price and quantity controls to mitigate global climate change', Journal of Public Economics, vol. 85, pp. 409-434.

Reuters 2010, 'Brazil carbon credit auction ends without bidders', Reuters, viewed 5 May 2011,

Schakenbach, J, Vollaro, R & Forte, R 2006, 'Fundamentals of successful monitoring, reporting, and verification under a cap-and-trade program', Air & Waste Management Association, vol. 56, pp. 1576-1583.

Stern, N 2007, The economics of climate change: the Stern review, Cambridge University Press, Cambridge.

Stiglitz, J 2007, 'Carbon-taxing the rich', Guardian.co.uk., viewed 10 May 2011,

Weyant, JP & Hill, JN 1999, 'Introduction and overview', The Energy Journal, pp. vii-xliv.

Upadhyaya, P 2010, Is emission trading a possible policy option for India?, Climate Policy, vol. 10, pp. 560-574.

Victor, DG 2007, 'Fragmented carbon markets and reluctant nations: implications for the design of effective architectures', in JE Aldy & RN Stavins (eds), Architectures for agreement: addressing global climate change in the post-Kyoto world, Cambridge University Press, Cambridge, pp. 132-160.

Wigley, TML 1998, 'The Kyoto protocol: CO2, CH4 and climate implications', Geophysical Research Letters, vol. 25, no. 13, pp. 2285-2288

Challenges in Indonesia Infrastructure Development

2011-05-27T01:29:00.000-07:00

Introduction

Despite the mixed research findings about relationship between infrastructure and economic growth, the majority concludes that there is a positive and significant link between the two particularly in developing countries (Straub 2008, p. 33). In Indonesia, according to some facts, infrastructure affects economic growth through the level of private sector investment and their business development. Japanese companies operating in Indonesia rank the underdeveloped infrastructure as the main problem in investment in manufacturing and non-manufacturing industries (JETRO 2009, p. 27). This supports the perception of more than 12,000 businesses spread out in about half of Indonesia's districts which confirms that the low quality of infrastructure become the primary constraint of business development (KPPOD & TAF 2008, p. 2). As a result, Indonesia's economic growth during the period of 1990 to 2007 was below the average of developing Asia, and certainly below China and India (Garnaut et al. 2009, p. 90). Economic growth is very important for Indonesia because it is the main driver of human development in the country (UNDP 2010, p. 56).

The five year development plan 2010-2014 states an ambitious infrastructure development plan throughout the country. That requires investments as high as IDR1,429 trillion which is equivalent to nearly one and a half times of the government's annual expenditure (Alisjahbana 2010, p. 5).

Key Issue

The key issue for the national government is the lack of infrastructure funding in Indonesia. The public authorities are faced with the dilemma: either to fully finance the infrastructure facilities—by borrowing more—in order to secure its control, or to attract private financing in order to accelerate infrastructure development.

Indonesia's infrastructure relatively legs behind in terms of quality and quantity in the region. Among the ASEAN five, Indonesia's infrastructure quality is just better than the Philippines but far below Singapore, Malaysia, and Thailand (Schwab 2010, pp. 18-19). However, in terms of quantity, the length of Indonesia's roads per arable land area in 2003 was even below the Philippines as well as other Asian countries such as Lao PDR, Mongolia, and Vietnam (World Bank 2005, p. 15).

There is a great imbalance between the increase of vehicle number and the expansion of road. At national level, the increase of paved road during 1998-2005 was 28 per cent, whereas the rise of motor vehicle number at the same period was 80 per cent (World Bank 2007, p. 77). The situation is even worse in Jakarta. The growth rate of Jakarta roads is 0.9 per cent a year, whereas vehicle growth rate is nine per cent per year. Unless something is done, this would lead to total gridlock in Jakarta by 2014 (Cochrane 2009).

The poor infrastructure facilities are mainly a result of underinvestment in infrastructure particularly after the 1997/1998 Asian financial crisis (AFC). Investment in infrastructure in Indonesia, both private and public including from the state owned enterprises, fell from 5-6 per cent of gross domestic product (GDP) before 1997 to 1-2 per cent of GDP in 2000, and was stable at 3.4 per cent of GDP in 2007 (World Bank 2007, p. 74). The private sector investment in infrastructure has declined sharply before and after the AFC, from 30-40 per cent to less than a quarter of government spending on infrastructure (World Bank 2007, p. 74). The latest figure shows a small increase in the government budget allocation. In 2010, infrastructure budget allocation was close to two per cent of GDP. That is still below the pre-AFC level (as average of the period 1994 to 1997) which was 2.4 per cent of GDP (World Bank 2007, p. 80).

Solution options

Indonesia’s public sector performance is poor relative to private sector counterparts (Arif & Viverita 2004: 22). Therefore, the question is no longer whether private sector should be involved in infrastructure development, but rather which form of private participation suitable in the Indonesian context. This paper is going to outline two possible options.

Option-1: Full state financing

The Indonesian government has fair credibility to borrow money either from domestic financial institutions, foreign countries, or multilateral agencies. Indonesia's sovereign credit rating has been improved over time. The Standard & Poor’s rates Indonesia's sovereign credit for local and foreign currency at ‘BB+/positive’ (Standard & Poor’s 2011), while Moody’s just upgraded the Indonesian government’s foreign and local currency bond rating to 'Ba1' (Moody’s 2011). Improved ratings mean a lower country risk premium and thus reduced costs of financing (Wie & Negara 2010, p. 294). The Indonesian government need not to be concerned about borrowing money because its debt to GDP ratio is 27 per cent at the end of 2010, which is less than the average of G20 countries both for the advanced and the emerging economies (Departemen Keuangan 2010, p. 30). By borrowing money, government will declare the debts clearly in its financial statement as opposed to financing partnership which tempts undervaluing the liabilities by not recording them in the balance sheet (Webb & Pulle 2002, p. ii).

Indonesian government must have strong control over the making and the operation of the infrastructure facilities to secure public value[1]. With the full state financing option, government has better power to control the contractors. It will also mean government has full ownership of the facility which provides it the right to use, to change the form and substance, and to appropriate returns from the facilities (Furubotn & Pejovich 1972, p. 1140).

The state full ownership model is also in line with the traditional democratic structure. If the users (which are also citizens at the same time) want to complain about public infrastructure facilities, they can do so through the existing democracy structure—such as the Ombudsman Commission, the Administration Court, or to their representative in the parliament—in addition to the direct complaint to the facility operator. Those institutions can pressure government who own and control the facility directly. That would lead to a more pressure to government to impose citizens' aspirations to its contractors under a principal-agent relation (Teisman & Klijn 2002, p. 199).

There are several options of mode of delivery of public-private cooperation under the full-state-financing approach. The range starts from construction manager at fee (CM-at fee) to the Design-Build-Operate-Maintain (DBOM) (Pakkala 2002, pp. 10-12). The more works are bundled in the contract the more complexity of the contract and therefore the more difficult for the government—as the principal—to control the contractor (Seddon 2004, p. 23). That is because the contract will not be specific enough in determining the result and conditions due to the bounded rationality which lead to the increase of opportunism (Williamson 1985, p. xiii).

In order to have a strong control over the contract implementation, government must go for the segmented mode of delivery by preparing contract per each work segment and limit the contract period to a relatively short term. That would allow more certainty in predicting the future and therefore reduce the bounded rationality effects. That allows the government to specify results in the contract in order to monitor and control its contractors (Donahue 1989, p. 86). The sharp description on results would simplify the dispute resolution mechanism so that both parties can just rely on court (Williamson 1985, p. 32).

Although government has strong control over the contract implementation in option-1, there is no guarantee it can secure public value. Government will rely on courts in dispute resolution which is often costly and ineffectual (Klein et al. 1978, p. 71). The simple contract may not be helpful because of the bad credibility of Indonesia's justice system (MacIntyre 2003, p. 3). Government is more likely to lose in court because of two reasons: (a) government is strongly requested to behave impeccably (Seddon 2004, p. 14), (b) public officials have less incentive to win the disputes because their private interest will not be much affected.

Option-2: Private Financing Initiative (PFI)

Considering the limitation of fiscal capacity, instead of borrowing more, Indonesian government must go for PFI. Indonesia's public spending is only 17.7 per cent of GDP (Departemen Keuangan n.d, pp. 1-12). Indonesia's tax revenue is among the lowest Asia's non-OECD countries (IMF 2008, p. 11).

Despite some constraints in private sector investment (Kalinova 2010, p. 18; Prasetowo et al 2010, p. 1), various indicators reveal some opportunities. Together with key Asian countries, Indonesia has been constantly registering a more than 30 per cent saving since mid-1980s (Jha et al. 2009, p. 11). The average annual growth of market capitalization in Indonesia's Stock Exchange after the 1997 Asian Crisis is close to 25 per cent (ISE 2010, p. 2). Indonesia gained 10 places in the Global Competitiveness Index rank of 2010-2011 compared to the 2009-2010 rank (Schwab 2010, p. 29). Moreover, high demand to the pay-facilities can be expected due to the improvement of Indonesian prosperity (Euromonitor 2010; Ahniar 2011).

PFI is one among many forms of public-private partnership. In this case the firms should finance all the construction, operation, and maintenance costs in return for payment from the users and—when eligible—from government subsidy. Government must independently do the design and the plan which represent public interests such as user safety and environment standard. The plan must be made by contractor through a design competition. The plan that represent the public interests the most with the least costs requirement for construction and maintenance should be the winner, to be paid by government. Once the plan is ready, government must put it into a transparent tendering process. The private firm who bids with the lowest user charge rate and lowest guaranteed net sales[2] (for the same design of facility) is the most efficient firm therefore should be the winner. The contract between government and the private firm bundles all the building, operation, and maintenance works which will last for 30 to 35 years of the operation before transferring the ownership to government (BOOT).

This partnership approach will allocate the risks efficiently; that is 'to the party that is best able to manage them' (EIU 1999, p. 2). There are three kinds of risk in public private partnership, being construction risk, availability risk, and demand risk (Blöndal 2005, p. 22). The first two risks should be transferred to the partner because private firms are the best in handling them (U.S. Department of Transportation 2007, p. 21). The government must share the demand risk by paying the gap between the actual and the guaranteed net sales when the former is lower than the latter (the subsidy)[3]. In order to attract investments, it is also important for the government to share the pre-construction risk by handling the land acquisition works. At the moment, Indonesia is considered to be high risk in pre-construction which is mainly caused by land acquisition issues (Khan 2009, p. 13; Pisu 2010, p. 5). The public sector can take most of the pre-construction risk because the solution depends more on the political context (Wie & Negara 2010, p. 291).

The level of control of government over the partner under the PFI is not as strong as in option-1. Therefore, there is a potential for the private interests to undermine the public interests (Hodge & Grave 2010, p. s16; Hellowell & Pollock 2010, p. p. s26). One obvious source of the threat is the difficulty to specify results and conditions in a long term contract (Hodge & Greve 2007, p. 549). Partnership needs more flexibility in its contract governance to identify unforseen risks in a sensible way (Seddon 2004, p. 23). It requires private ordering rather than legal centralism (Williamson 1985, p. 31; Birnhack 2004, p. 2). However, the public sector has limitations in doing private ordering due to its unique accountability system compared to private organizations.

Nevertheless, although the power to control the private partner is lower, a long term PFI partnership has the potential to satisfy public value with a lower transaction cost. Partnership is a collaboration process of cross boundary partners where risks and resources are efficiently shared in mutual trust for collective benefit (O'Flynn 2009, p. 115). In collaboration process, instead of using power to control, government must negotiate and persuade its partner (Pollitt 2003, p. 47). Many infrastructure facilities—such as road and water infrastructure—have asset specificity in terms of location and physical; that is the asset that the benefit can be realized only if the partnership is maintained (Williamson 1979, p. 240). Specific asset enhances trust and cooperative behaviours among partner (Lui et al. 2009, p. 1218). The long term reliance and cooperative behaviours—such as exchange information—are examples of relational norms which reduce transaction costs (Artz & Brush 2000, p. 356). The partnership strengthens contractual relationship through interest alignment (Domberger et al. 1997, p. 777). Therefore, in partnership, private firm executive has interest to satisfy the concern of the public sector manager: that is to create public value (Moore 1994, p. 296)

Proposal

By applying two criteria: a) allocative efficiency, and b) value for money, option-2 is chosen to overcome the infrastructure backwardness in Indonesia.

Option-1 puts the entire financial burden to the government. That could accelerate the infrastructure development—as outlined in the five year development plan 2010-2014—only by sacrificing other government programs including the basic services for human development (such as health and education) or by significantly increasing government debts. Both consequences should not happen in current circumstances. Indonesia's human development index (HDI) rank in 2010 is still below 100 and is the lowest of the ASEAN Five countries (UNDP 2010, p. 145). Government debt is highly sensitive in Indonesian politics. This is particularly for foreign debt which embodies sovereignty issue as a result from the Asian crisis experiences when IMF dictated the bad recipe causing the country into a deeper crisis (Radelet & Sachs 1999, p. 14). In contrast, option-2 would allow the government to accelerate infrastructure development neither by disturbing financial support to other important programs nor by putting pressure on the public finance cash flow. That means option-2 not only allocates the risks better but also allocates the resources more efficient than option-1.

In option-1 tax payer money is more likely to be spent for less value either for citizens or clients. That is because in option-1 public funds are used to pay for construction and operation which involves huge risks before the users can really get benefit from the facilities. In contrast, in option-2 government only pays for value: that is to pay the top-up of the rate paid by the clients who gain benefit from the infrastructure facilities. One may argue that option-2 will just satisfy the client/user (private value) but not the citizens (public value). The argument is not convincing because of two reasons: (a) citizens who need but cannot access the facility still enjoy a better access to the ordinary facility—such as public roads (not the toll road)—because less users can be expected, whereas citizens who do not need the facility still enjoy the better economic development as the impact of better infrastructure; (b) Public value concerns such as externalities, public safety and transparency—as commonly argued by scholars (Flinders 2005, p. 232; Hodge & Greve 2007, p. 551; Erridge 2003, p. 94)—still possible to be achieved in option-2 because the private firms have a long term interest for their current and future investments. Therefore, they will have incentive to build good image and therefore to align their interest into public interest.

In short, option-2 allocates public resource and risks efficiently and provides better value against public money both for users and citizens. Therefore option-2 is recommended.

References

Ahniar, N 2011, 'Jumlah orang kaya melonjak, RI makin makmur' (Number rich people shoot up, do Indonesians more prosper?', Vivanews, viewed 20 March 2011,

Alford, J & O'Flynn, J 2009, 'Making sense of public value: concepts, critiques and emergent meanings', International Journal of Public Administration, vol. 32, no. 3, pp. 171-191.

Alisjahbana, A 2010, 'Indonesia’s public‐private partnerships policy regime and framework', paper presented to the Asia Pacific Ministerial Conference 2010, Jakarta, 15 April.

Arif, M & Viverita 2004, Corporate performance of Indonesian public and private sector firms: financial and production efficiency, Monash University, Victoria.

Artz, K & Brush, T 2000, 'Asset specificity, uncertainty and relational norms: an examination of coordination costs in collaborative strategic alliances', Journal of Economic Behavior & Organization, vol. 41, no. 4, pp. 337–362.

Birnhack, M 2004, Principle of private ordering, Israeli Internet Association (ISOC-IL)., Petach Tikva.

Blöndal, J 2005, International experience using outsourcing, public-private partnerships, and vouchers, IBM Center for The Business of Government, Washington, D.C.

Cochrane, J 2009, 'Too many vehicles, too few roads', Jakarta Globe, viewed 18 March 2011,

< http://www.thejakartaglobe.com/jammedjakarta/too-many-vehicles-too-few-roads/337363>.

Crocker, K & Masten, S 1991, 'Pretia ex machina? prices and process in long-term contracts', Journal of Law and Economics, vol. 34, no. 1, pp. 69-99.

Departemen Keuangan, see Ministry of Finance.

Domberger, S, Farago, S & Fernandez, P 1997, ‘Public and private sector partnering: a re-appraisal’, Public Administration, vol. 75, pp. 777-787.

Donahue, JD 1989, The privatization decision: public ends, private means, Basic Books, New York.

EIU 1999, Vision 2010: forging tomorrow’s public private partnerships, Economist Intelligence Unit, New York.

Erridge, A 2003, 'Contracting for public services', in AG Bovaird & E Löffler (eds), Public Management and Governance, Routledge, London, pp. 89-99.

Euromonitor 2010, 'Emerging focus: rising middle class in emerging markets', Euromonitor International, viewed 20 March 2011,

Flinders, M 2005, ‘The politics of public-private partnership’, British Journal of Political and International Relations, vol.7, no.2, pp. 215–239.

Furubotn, E & Pejovich, S 1972, 'Property rights and economic theory: a survey of recent literature', Journal of Economic Literature, vol. 10, no. 4, pp. 1137-1162.

Garnaut, R, Howes, S, Jotzo, F & Sheehan, P 2008, 'Emissions in the platinum age: the implications of rapid development for climate-change mitigation', Oxford Review of Economic Policy, vol. 24, no. 2, pp. 377–401.

Hellowell, M & Pollock, A 2010, 'Do PPPs in social infrastructure enhance the public interest? evidence from England’s national health service', The Australian Journal of Public Administration, vol. 69, no. S1, pp. S23–S34.

Hodge, G & Greve, C 2007, 'Public – private partnerships: an international performance review', Public Administration Review, vol. 67, no. 3, pp. 545-558.

—— 2010, 'Public-private partnerships: governance scheme or language game?', The Australian Journal of Public Administration, vol. 69, no. S1, pp. S8–S22.

IMF 2008, Tax administration reform and fiscal adjustment: the case of Indonesia (2001-07), International Monetary Fund, Washington, D.C.

ISE 2010, Buku panduan indeks harga sahan bursa efek Indonesia (Guide book of stock price index in Indonesia stock exchange), Indonesia Stock Exchange, Jakarta.

JETRO 2009, Country report: Indonesia, Japan External Trade Organization, Tokyo.

Jha, S, Prasad, E & Terada-Hagiwara, A 2009, Saving in Asia and issues for rebalancing growth, Asian Development Bank, ADB, Manila.

Kalinova, B, Palerm, A & Thomsen, S 2010, OECD’s FDI restrictiveness index: 2010 update, Organisation for Economic Co-operation and Development (OECD), Paris.

Khan, K 2010, 'Leveraging private financing for infrastructure development', paper presented to the 2010 Public Private Partnership Forum, Melbourne, 9 February.

Klein, B, Crawford, R & Alchian, A 1978, 'Vertical integration, appropriable rents, and the competitive contracting process', Journal of Law and Economics, vol. 21, no. 2, pp. 297-326.

KPPOD & TAF 2007, Local economic governance in Indonesia: a survey of businesses in 243 regencies/cities in Indonesia, Komite Pemantaun Pelaksanaan Otonomi Daerah (Regional Autonomy Watch) & The Asia Foundation, Jakarta.

Lui, S, Wong, Y & Liu, W 2009, 'Asset specificity roles in interfirm cooperation: reducing opportunistic behavior or increasing cooperative behavior?', Journal of Business Research, vol. 62, no. 11, p. 1214–1219.

MacIntyre, A 2003, 'Institutions and the political economy of corruption in developing countries', paper presented to the Workshop on Corruption at Stanford University, Stanford, 31 January-1 February.

Ministry of Finance 2010, Perkembangan utang negara: pinjaman luar negeri dan surat berharga (Government debt development: foreign debt and government security), Ministry of Finance of Republic of Indonesia, Jakarta.

—— n.d., Data pokok APBN 2005-2011 (Data base of national government budget plan of 2005-2011), Ministry of Finance of Republic of Indonesia, Jakarta.

Moody’s 2011, Moody’s upgrades Indonesia's sovereign ratings to Ba1; outlook stable, Moody’s Investor Service, Singapore.

Moore, MH 1994, “Public value as the focus of strategy.” Australian Journal of Public Administration, vol. 53, no. 3, pp. 296-303

O’Flynn, J 2009, 'The cult of collaboration in public policy', The Australian Journal of Public Administration, vol. 68, no. 1, pp. 112-116.

Pakkala, P 2002, Innovative project delivery methods for infrastructure: an international perspective, Finnish Road Enterprise, Helsinki.

Pisu, M 2010, Tackling the infrastructure challenge in Indonesia, Organisation for Economic Co-operation and Development (OECD), Paris.

Pollitt, C 2003, 'Joined-up government: a survey', Political Studies Review, vol. 1, no. 1, pp. 34-49.

Prastowo, N, Prasmuko, A & Chawwa, T 2010, Sources of economic financing in Indonesia: a survey approach, Bank Indonesia, Jakarta.

Radelet, S & Sachs, J 1999, What have we learned, so far, from the Asian financial crisis?, Center for International Development at Harvard University, Cambridge, MA.

Schwab, K 2010, The global competitiveness report 2010–2011, World Economic Forum, Geneva.

Seddon, N 2009, Government contracts: federal, state and local 4th ed., Federation Press, Annandale, N.S.W.

Standard & Poor’s 2011, 'Sovereign ratings and country T&C assessment', Standard & Poor's, viewed 9 April 2011,

Straub, S 2008, Infrastructure and growth in developing countries: recent advances and research challenges, The World Bank, Washington, D.C.

Teisman, G & Klijn, E 2002, 'Partnership arrangements: governmental rhetoric or governance scheme?', Public Administration Review, vol. 62, no. 2, pp. 197-205.

U.S. Department of Transportation 2007, Case studies of transportation public-private partnerships around the world: final report, U.S. Department of Transportation, Washington, D.C.

UNDP 2010, Human development report 2010, United Nations Development Programme, New York.

Webb, R & Pulle, B 2002, Public private partnerships: an introduction, Department of the Parliamentary Library, Canberra.

Wie, TK & Negara, SD 2010, 'Survey of recent developments', Bulletin of Indonesian Economic Studies, vol. 46, no. 3, pp. 279–308.

Williamson, OE 1979, ‘Transaction-cost economics: the governance of contractual relations’, Journal of Law and Economics, vol. 22, no. 2, pp. 233-261.

—— 1985, The economic institutions of capitalism: firms, markets, relational contracting, Free Press, New York.

World Bank 2005, EAP infrastructure at a glance: benchmarks and comparisons, The World Bank, Washington, D.C.

—— 2007, Spending for development, making the most Indonesia’s new opportunities: Indonesia public expenditure review 2007, The World Bank Office Jakarta, Jakarta.

[1] Despite the need to distinguish ‘public value’ and ‘public interest’ (Alford & O’Flynn 2009, p. 176), for the purpose of this paper the two phrases will be used interchangeably.

[2] That is the annual net sales that guaranteed by the firm. That means the private firm cannot claim subsidy when the actual net sales are equal or exceed the guaranteed level. Government must have power to determine the user charge rate in order to achieve certain level of citizen access over the facilities.

[3] The rate charged to the users is fixed, but the rate paid to the partner depends on the actual demand which affect to the net sales. If the net sales less than the guaranteed level, government will pay the gap which basically the top-up of the rate paid by the actual users. This kind of flexibility is required in such a long term contract (Crocker & Masten 1991, p. 96)

SRES Have Passed Their Use-by Date

2011-03-23T12:41:00.000-07:00

Introduction

The Special Report Emission Scenarios (SRES) was developed by the Intergovernmental Panel on Climate Change (IPCC) since 1996 and was published in 2000. They were made as an input to the 2001 IPCC Third Assessment Report and also to the wider groups such as policy community and scientists on assessing alternative mitigation and adaptation strategies.

The unique of the SRES compare to its predecessors is its 'open process' (Nakicenovic et al. 2000, p. 1). This creates a more variety of the scenarios capturing extra (but also relevant) future possibilities and suit the latest reality through a new set of driving forces ranges. Compare to only six scenarios of IS92 (the latest IPCC scenarios before SRES), SRES comprise of 40 scenarios which were built from the six scenario groups under four story lines. The 40 scenarios capture the characteristics of factors drive the future emission growth; for example: economic growth, global population development, energy efficiency, and the gap of development between developed and developing countries (Nakicenovic et al. 2000, pp. 4-5).

Despite the strengths of SRES as noted above, this paper will argue that SRES have passed their use-by date. This is because the recent development trend reveals that SRES underestimate two important things; they are: the economic development and emission intensity in key Asian countries and the role of land use changes and deforestation (especially from peat land) in increasing emissions and reducing the land absorptive ability upon emission. Furthermore, because of the characteristic of China and India—the main driving forces—the deviation from the SRES will not only for a short term period, such as 2030, but most likely to be happened along the SRES period.

Economic development and emission intensity

The average of annual globaleconomic growth of the early of last decade—that is from 2004 to 2007—was more than 5 per cent which exceeded the average of annual economic growth during the 'golden age' from 1950 to 1973 (Garnaut & Huang 2007, p. 9; IMF 2006, p. 2; Callen 2007). The development—which then called 'the platinum age'—was contributed mainly by developing countries particularly China and India. The 'platinum age' development is a new path. Not only because the key Asian countries are the centre of the global output growth, but also because the growth is associated with energy intensive economic activities which fuelled mainly by coal (Sheehan 2007, p. 1).

The global energy intensity (of GDP) increased in 2000 to 2005 compare to the 1990s (Garnaut et al. 2008, p. 83). That may influenced by the increasing trend of manufacturing industries which require more energy for the same level of output (Sandu & Petchey 2009, p. 14). The recent trends of India's economic growth has been associated with the increase of manufacturing industries relative to the overall growth (Sheehan 2007, p. 7), whereas in China the increase of manufacturing industries is in line with the rapid expansion of foreign-invested firms (Chen 2007, p. 214). As a result, the elasticity of energy use to GDP in China was more than one for 2000-2005 which higher compare to that before 2000 (IEA 2007, p. II4-II36).

The recent development of world emission intensity (of GDP) is even worst. It is higher not only compare to the 1990s but also to the 1970s and 1980s (Garnaut et al. 2008, p. 83). That is mainly because of the increase of use of coal. Coal’s carbon content is almost double of that of natural gas and about 26 per cent higher than oil (EIA 1998, p. 39; Abrams 2009, p. 9). Although coal represented only one-quarter of the total energy used in 2008, it is responsible for 43 per cent of the global CO₂ emission (IEA 2010, p. 18). The demand on coal from non-OECD countries —which mainly from China—has been more than half of the total global demand since 2000 and predicted to be about three-quarter of the global demand by 2030 (IEA 2008, p. 125).

Those trends led to the recent emission trend. The annual growth rate of the global fossil-fuel carbon emissions between 2004 and 2006 has exceeded what has been presumed in IPCC scenarios (Garnaut 2007, p. 4). By 2008, the energy-related CO₂ emissions from non-Annex I countries overtake those of the Annex I countries (IEA 2010, p. 7). That affect to a higher projection of developing countries contribution to the global emission (Garnaut 2011, p. 2).

Land use change and deforestation

The land use destructions and deforestation play two important roles in emission flow and carbon cycle; they are: to increase GHG emissions (Hurtt et al. 2009, p. 7), and decrease the land ability to absorb GHG emission (Australian Academy of Science 2010, p. 10; Pittock 2009, p. 226; Stern 2008, p. 22).

The GHG emission from the land use changes and deforestation are more extensive than thought earlier; that is because the emission from the peat land just being considered (Garnaut et al. 2008, p. 394). The total CO₂ emission from peat land is around 8 per cent of global emission from fossil fuel (Hooijer et al. 2009, p. 29), whereas the 1997 peat land fire in Indonesia release around 13 to 40 per cent of the average annual global emission from fossil fuel (Page et al. 2002, p. 61). That leads to a significant contribution of emission from land use change and forests (LULUCF) to the global GHG emissions which in 2004 was around 17 per cent (Rogner et al. 2007, p. 104).

The absorptive functions of land and forests have been seriously damaged. Around 42 to 68 per cent of the land surface has changed since 300 years ago (Hurtt et al. 2009, p. 6). The deforestation between 1990 and 2005 was around 13 million hectares per year (FAO 2005, cited in UNFCC n.d.). As a result, the CO₂ emission that remains in the atmosphere each year has increased about 40 to 45 per cent which caused by a decrease of emission absorption by land, forests and ocean (le Quéré et al. 2009, p. 831). The combination of the increase of the emission and the decrease of the absorption ability of the land will accelerate the GHG concentration in the atmosphere significantly.

Short term versus long term projection

Van Vuuren and Riahi argues that the recent trend will not make the long term trend of emissions deviate from the SRES range (2008, p. 246). Among others, their most interesting argument is the ‘catch-up process’. They argue that China and India economic growth will be decline—just like South Korea and Japan—after they complete the catch-up process (van Vuuren & Riahi 2008, p. 244)[1]. Although their argument is relevant, they fail to consider the significant difference of the size of population of China and India compare to that was of Japan and South Korea. At 1971—the latter catch-up period of Japan and the earlier period of South Korea—Japan and South Korea population was 2.8 and 0.9 per cent of global population respectively, whereas now China and India have 19.9 and 17 per cent of global population (IEA 2010, pp. 83-85). The more population the county have the longer the catch-up process. Garnaut Review predicts the peak point of China’s growth will be around 2030 while India will be around 2080 (Garnaut 2008, p. 61). Other scholars predict the growth of energy demand of China will peak between 2030 and 2050 (Rout et al. 2011, p. 8).

While the short term and long term prediction may need to be distinguished, the question is how long the ‘short term’ and the ‘long term’ are. Considering the slow effect of climate processes and the nature of path-dependent in energy economy, a century period of time may not be considered as a long term projection.

Conclusion

Despite the strength of the SRES on its open process making and its wider scenarios variety capturing relevant future possibilities, the scenarios have passed their use-by date. That is mainly because the recent developments on economic growth and emission intensity (of GDP) higher than what expected by the SRES. In addition, the disturbance to the land use and forests create a significant impact, not only by increasing the GHG emissions but also by reducing the ability of the land and forests to absorb the GHG emissions. The combination of both will increase the GHG concentration in the atmosphere more than the most pessimistic scenario of the SRES—that is the A1F1—either for the short period up to 2030 or for the longer period up to the end of this century.

References

Abrams, C 2009, America’s biggest polluters: carbon dioxide emissions from power plants in 2007, Environment Oregon Research & Policy Center, Portland.

Australian Academy of Science 2010, The science of climate change: question and answers, Australian Academy of Science, Canberra.

Callen, T 2007, World economic outlook: IMF forecasts slower world growth in 2008, IMF Research Department, Washington, D.C., viewed 20 March 2011,

Chen, C 2007, 'Foreign direct investment in China: trends and characteristics after WTO accession,” in R Garnaut & L Song (eds), China linking markets for growth, ANU E Press, Canberra, ACT, pp. 197-224.

EIA 1998, Energy information administration natural gas 1998: issues and trends, U.S. Energy Information Administration, Washington, D.C.

Garnaut, R 2011, Global emissions trends, Garnaut Climate Change Review, Canberra.

—— 2008, The Garnaut climate change review: final report, Cambridge University Press, New York.

—— 2007, 'Will climate change bring an end to the platinum age?', paper presented at the inaugural S.T. Lee Lecture on Asia & The Pacific, Australian National University, Canberra, 29 November.

Garnaut, R & Huang, Y 2007, 'Mature Chinese growth leads the global platinum age' in R Garnaut & L Song (eds), China linking markets for growth, ANU E Press, Canberra, ACT, pp. 9-29.

Hooijer, A, Silvius, M, Wösten, H & Page, S 2006, Peat-CO₂assessment of CO₂emissions from drained peatlands in SE Asia, WL Delft Hydraulics, Delft.

Hurtt, G, Chini, LP, Frolking, S, Betts, R, Feddema, J, Fischer, G, Goldewijk, KK, Hibbard, KA, Janetos, A, Jones, C, Kindermann, G, Kinoshita, T, Riahi, K, Shevliakova, E, Smith, S, Stehfest, E, Thomson, A, Thornton, P, van Vuuren, D & Wang, YP 2009, 'Harmonisation of global land-use scenarios for the period 1500–2100 for IPCC-AR5', ILEAPS Newsletter, no. 7, pp. 6-8.

IEA 2010, CO₂ emissions from fuel combustion: highlights, International Energy Agency, Paris.

—— 2008, World energy outlook, International Energy Agency, Paris.

—— 2007, CO₂ emissions from fuel combustion: 1971-2005, International Energy Agency, Paris.

IMF 2011, World economic outlook: update, International Energy Agency, Paris.

—— 2006, World economic outlook: financial system and economic cycle, International Monetary Fund, Washington, D.C.

Nakicenovic, N, Davidson, O, Davis, G, Grübler, A, Kram, T, La Rovere, EL, Metz, B, Morita, T, Pepper, W, Pitcher, H, Sankovski, A, Priyadarshi, S, Swart, R, Watson, R & Dadi, Z 2000, IPCC special report emissions scenarios: summary for policymakers, Intergovernmental Panel on Climate Change, Geneva.

Page, SE, Siegert, F, Rieley, JO, Boehm, HV, Jaya, A & Linim, S 2002, 'The amount of carbon released from peat and forest fires in Indonesia during 1997', Nature, vol. 420, no. 6911, pp. 61-65.

Pittock, AB 2009, Climate change, 2nd edn, CSIRO Publishing, Collingwood.

Rogner, H, Zhou, D, Bradley, R, Crabbé, P, Edenhofer, Q, Hare, B, Kuijpers, L & Yamaguchi, M 2007, 'Introduction', in B Metz, O Davidson, P Bosch, R Dave, & L Meyer (eds), Climate change 2007: mitigation, Contribution of Working Group III to the fourth assessment report of the Intergovernmental Panel on Climate Change, Cambridge University Press, New York, pp. 97-115.

le Quéré, C, Raupach, MR, Canadell, JG & Marland, G 2009, 'Trends in the sources and sinks of carbon dioxide', Nature Geosciences, vol. 2, no. 12, pp. 831-836.

Rout, UK, Vob, A, Singh, A, Fahl, U, Blesl, M & Gallachóir, BPO 2011, Energy and emissions forecast of China over a long-time horizon, Energy, vol. 36, pp. 1-11.

Sandu, S & Petchey, R 2009, End use energy intensity in the Australian economy, Australian Bureau of Agricultural and Resource Economics, Canberra.

Sheehan, P 2007, The new global growth path: implications for climate change analysis and policy, Centre for Strategic Economic Studies: Victoria University, Melbourne.

Stern, N 2008, 'The Economics of Climate Change', The American Economic Review, vol. 98, no. 2, pp. 1-37.

UNFCC n.d., 'Reducing emissions from deforestation in developing countries', United Nations Framework Convention on Climate Change, viewed 20 March 2011,

van Vuran, DP & Riahi, K 2008, ‘Do recent emission trends imply higher emissions forever?’, Climate Change, vol. 91, pp. 237-248.

World Coal Institute 2009, Coal facts: 2009 edition with 2008 data, World Coal Institute, London.

[1] Their argument on catch-up process is mixed with their prediction of slower growth as the effect of the latest global financial crisis. This argument is clearly not proven since China’s growth in 2009 and 2010 was 9.2 and 10.3 per cent respectively, while India was 5.7 and 9.7 per cent respectively (IMF 2011, p. 2).

Citizenry vs Customer Centric Approach in Public Management

2011-02-26T14:08:00.000-08:00

(This paper was made as a response to a case called 'The busted DMV')

Dear Mr. Chief Minister,

I would like to thank you for your trust by reappointing me as the Director of Division of Motor Vehicle (DMV) of the ACT. I understand that my greatest challenge is to please all stakeholders and citizens of the DMV. The immediate concern that I have to deal is the various complain from different stakeholders; for example: the length of queue line and the unpleasant officers on handling the angers of our customers and citizens. These have been attracting media attentions and led to some political issues.

My assessment concludes that one important weakness at the moment is the quality of our communication to our stakeholders. We have been good so far with technological innovations such as information technology and credit card payment which have been running well. Although they were useful for customers, they did not entirely resolve the problems. Our core work, however, is human-to-human interactions which require different kind of innovation.

The key issue here is how we identify our stakeholders and define their values. The weakness in communication will never resolved unless we understand to whom and for what we should interact. Similarly, we will never make everybody happy except we know who they are and what would make them fulfilled.

Stakeholders are those outside of but are affecting or can affect the organization (Freeman 1991, p. 5). A public organization, such as the DMV, must deal with different kinds of stakeholders with 'very different statuses in terms of their moral right to make claims' (Moore 1994, pp. 300-301). A failure on understanding the DMV stakeholders would lead to a mishandling. For example, those who supposed to be the highest status to make claims—i.e. either because they sacrifice their liberty and privacy for government/public or because they have authority to make the claims—become the least to be listened. This may induce some ethical issues.

In the quest of maximising values, any organizations must satisfy the interests of its stakeholders (Jensen 2000). But for public organizations 'safeguarding interests' is not enough, they must 'adding values' actively (Alford & O'Flynn 2009, p. 176).

In short, understanding stakeholders is a key to be able to deliver values for stakeholders and citizens. But there are many kinds of them with different kind of preferences. The ability to distinguish them in creating values is crucial for improving the DMV's performance.

In response to the key issue, there are two alternative solutions:

Option-1: The DMV must focus to customer. I should perceive 'customer' as citizens the DMV encounters as its business end (Moore 1995, p. 37). Therefore, the motorists are the customer. In more precisely, they are our ‘client’ because they are ‘paying customers’ (Alford 2002, p. 340).

I will start by doing a client survey to understand the motorists’ preference of what things they would value. The survey should cover information on client’s current perception to the DMV’s performance, and what things should be achieved or done for improvement. I will also ask our clients to compare the DMV’s performance with other similar organization in other states or country. This is called ‘two-dimensional survey’ to benchmark our performance with respect to our “competitor” (Jablonski 1992, p. 113).

The understanding on the DMV’s clients that gained from the survey will be used to redefine our strategy. The strategy should cover vision statement and goal, policy, and operational plan which includes communication plan (Allison 1982, p. 17; Jablonski 1992, pp. 75-83). The strategy must guarantee the achievement of client satisfaction. The change in strategy should lead to the adjustment of the internal organizational components. This should include, when necessarily, the changes in organization structure (units and positions), procedure, and staffing (Allison 1982, p. 17). I will reassess our business processes to find out how we can make it shorter and simpler but still able to achieve our clients’ desires. That would change our working procedures which may lead to a modification of units and positions. I will review the staffing to ensure that all job descriptions and the staff capability support our clients’ expectation and to make it in line with the new organization structure. These changes should shorten the processing time to cut the lengths of the queue line. The improved staffing and provision of needed trainings will create capable staffs to handle the angers' clients. Parallelly, I will review our financial plan to secure the implementation of the new strategy and the changes in the internal organizational components. Finally, I will figure out if I need more authority and budget from the ACT government.

Although this option looks likely will lead us to have better client satisfaction, I will rely on you to resolve any bottleneck I may find such as need for more authority and fund.

Option-2: The DMV must focus to the citizenry. The fundamental difference with the first option, in terms of actions, is on redefining the strategy and managing the external constituency. Instead of doing client survey, I will do an integrated stakeholder communication. This should include citizens who do not need any DMV’s products and services. That is because government, particularly public manager, must help stakeholders and citizens at large to define and produce values (Moore 2000, p. 190). But the values must be in the form of 'shared values', rather than an aggregation of individual self-interests (Denhardt & Denhardt 2000, p. 555).

In the communication with all motorists in the ACT, I should understand how they can be more motivated to register their motor vehicles and making—or renew—their license in timely manner beside the fact that they are obliged to do so by law. It is also important to understand how they can cooperate better by being well-prepared for the required paperwork and payments before coming to the DMV office. Customers in public sectors are often clients and obligatees at the same time where we need their support not only for their compliance but also for their cooperation (Alford 2002, p. 341). In addition, the complaint-handling system must be improved to be more proactive and transparent.

I will talk to the Police Department to make them aware that their enforcement function is very important for the DMV. The motorists would have more motivation to comply their obligation on registering their vehicles and updating their license if the Police Department enforce the rules properly. I must advocate that to be the value of the Police Department. In social exchange theory, the coercion transaction—such as what happened in the DMV—will be more effective when the punishment administered contingently and consistently (Molm 1997, p. 269).

Tax payers, politicians and media are also important stakeholders to be engaged with. For example, if the only solution to improve the satisfaction required more resources and authority, instead of relying on you, I will take a role to convince them to provide support. For example, citizens may need to sacrifice their liberty more by bestowing their private money for taxes. Alternatively, I would ask for legitimacy from politicians, citizens and media to increase the payment rate of our service to be charged to our clients. This is my role, as a public manager, to mediate the collaborative efforts to achieve the shared values (Denhardt & Denhardt 2000, p. 555).

All of these efforts—on improving the management of external constituency to gain more supports and legitimacies from more stakeholders other than clients—will help to redesign the DMV's strategy and reshaping the internal component of the organization. The actions to do should be similar to the option-1, the difference is that the basis of the redesigning strategy and reshaping the internal organizational components should not based only on the clients' aspiration, rather according to different stakeholders and citizens at large as elaborated earlier.

Although this approach would be more successful due to the better civically engagement (Putnam 1995, p. 66), this will increase the potential of organizational instability due to the wider exposes to the outsiders.

Assessing the two solution options by applying the following criteria: (a) political equality, and (b) time-wise, option-2 is the most plausible solution.

The DMV, as a government organization, must not only provide private value to its customer but also public value to the citizens (Alford 2002, p. 340). The client-focus approach will create private value only. Moreover, public organizations must create both instrumental and intrinsic values (Moore and Braga 2004, p. 4). The instrumental value is more meaningful for citizens. For example, Although citizens without motor vehicles do not served directly by the DMV, they still expect the DMV acts justly to its customers. Citizens do not only concern to their self-interest but also to the ‘concern for the whole’ (Denhardt & Denhardt 2000, p. 552). Customer-oriented approach applied by government may lead to increased political inequality (Fountain 2001, p. 54); that is because the clients are the only to be served (as external constituency) while other stakeholders are mistreated. Option-2 could create a better political equality because the DMV will engage more stakeholders in defining and creating the shared-values.

Option-2 is more possible to resolve the DMV's problem within one year period. The citizenry-focus would attract more cooperation from the clients. They will be well-prepared as they come to the DMV office, for example. That could happened not only because they aware that they are obligatees but also because the DMV communicate better to clients and citizens (which includes motorists who have not become the DMV's client yet). Other stakeholders, such as the general citizens, media, and politicians, would be more fulfilled—at least for some instrumental values—because they engaged on defining values to be created by the DMV.

In conclusion, by applying option-2, we will make the stakeholders and citizens fulfilled through the improvement of our communications and other operational capabilities and a better management on external constituencies.

Sincerely yours, Ade Cahyat

References

Alford, J 2002, 'Defining the client in the public sector: a social-exchange perspective', Public Administration Review, vol. 62, no. 3, pp. 337-346.

Alford, J & O'Flynn, J 2009, 'Making sense of public value: concepts, critiques and emergent
meanings', International Journal of Public Administration, vol. 32, no. 3, pp. 171-191.

Allison, G 1982, 'Public and private management: are they fundamentally alike in all unimportant respects?', in FS Lane (ed.), Current issues in public administration, St. Martin's Press, New York, pp. 13-33.

Denhardt, RB & Denhardt, JV 2000, 'The new public service: serving rather than steering', Public Administration Review, vol. 60, no. 6, pp. 549-559.

Fountain, J 2001, 'Paradoxes of public sector customer service', Governance, vol. 14, no. 1, pp. 55-73.

Freeman, RE 1992, Business ethics: the state of the art, Oxford University Press, New York.

Jablonski, JR 1992, Implementing TQM: competing in the Nineties through total quality management, 2nd ed., Pfeiffer, Amsterdam.

Jensen, M 2000, 'Value maximization and stakeholder theory', HBS Working Knowledge, viewed 21 February 2011,

Molm, LD 1997, Coercive power in social exchange, Cambridge UniversityPress, Cambridge, UK.

Moore, MH 2000, “Managing for value: organizational strategy in for-profit, nonprofit, and governmental organizations.” Nonprofit and Voluntary Sector Quarterly, vol. 29, no. 1, pp. 183-204.

——1995, Creating Public Value: Strategic Management in Government, Harvard University Press, Cambridge, Mass.

——1994, “Public value as the focus of strategy.” Australian Journal of Public Administration, vol. 53, no. 3, pp. 296-303.

Moore, MH & Braga, A 2004, “Police performance measurement: a normative framework.” Criminal Justice Ethics, vol. 23, no. 1, pp. 3-19.

Putnam, R 1995, “Bowling alone: America's declining social capital.” Journal of Democracy, vol. 6, no. 1, pp. 65-78.

New Public Management vs Public Value Management

2011-02-18T12:58:00.000-08:00

(This paper was made as a response to a case called 'The education of the police police commissioner')

Introduction
The most obvious result to be expected from a police department is to have a reduced number of crimes. That was also what expected by the President to Mayerbeer who appointed to become the new Chief Executive Officer (CEO) of the National Police Force (NPF) in 1997. In addition, the new country's constitution demanded for improvement of political accountability of the NPF and to make it subject to government and civilian oversight.
Mayerbeer brought his knowledge and experiences from his previous assignment in a brewery company called NAB which was moving to be the second largest brewery in the world. The new assignment was a great challenge for him, not only because he came from private sector but also because the NPF was in a transition of a major organizational reforms. Unfortunately, at the end of his term in office, he was end up with a failure. Number of serious crime was significantly increased. But the most shocking one is that he even failed to improve the operational capacity of the NPF. Many police stations were running with insufficient facilities and resources such as pen and papers and patrol cars. Operational capacity is something that Mayerbeer should have as his strength as a former CEO of a success big company.

Critical issue

The critical issue of the failure of the NPF under Mayerbeer's leadership is a lack of public sector management and leadership approach.

The public administration has been evolved from the ancient kingdoms with increasing demand for reorganizations following the changes on jurisdiction, functions, and political civilization which led to the transformation from the kingship to the traditional model of government administration in the 19th century (Caiden 1982, pp. 7-11). In the early 1980s, the bureaucracy reform began and developing what we now know as New Public Management (NPM) (Hughes 2003, pp. 2-4). Among of major characteristics of the NPM are performance based and customer-centred (Stoker 2006, p. 50; Borins 2002, p. 191).

Over the last decade or so, the NPM has been under serious attack from many scholars. Jouke de Vries concludes that NPM, although not really dead, is in trouble (2010, p. 5).
The latest, and still developing, idea on public management and leadership is public value management (PVM). One major characteristic is that the PVM encourage more public organizations and managers to get exposed to political marketplace (Moore 1994, p. 297). The aim is to maintain support and legitimacy which would help to create public value directly as well as indirectly through the improvement of the public organization operational capability (Moore 1995, pp. 22-23). Another difference is that under the PVM public manager required to be more adaptive in terms of determining the means to achieve the broader ends of public organization; that is public value (O'Flynn 2007, p. 360-363).

The pressure to public organizations to be more effective and efficient has been increasing in line with the growing of public sectors size and better quality of democracy. But at the same time people have bad perceptions on public bureaucracies such as red-tape seeker, unpleasant officials, poor service and corrupt practices (Caiden 1991, p. 74). By contrast, the private sector performance is considered to be better than public sector (Vigoda-Gadot & Kapu 2005, p. 261).

Alternative solutions

Option-1: Apply the NPM model

Mayerbeer should focus on the NPF's customers. The most obvious ‘customers’ for a police department such as the NPF are those who seek for the police assistance (Moore & Braga 2004, p. 6). He would talk to elected politicians but only to the senior ones, included the President as his boss, to help him to set the NPF’s performance targets. In order to make the targets easy to be measured, he must prefer to have outputs rather than outcomes .
Mayerbeer should concentrate on management to achieve his performance target with the available resources and authority permitted by the elected politicians. He must concern on things outside of his organization, but it should be limited to their customers, competitors and things that would shift their customer’s value in the future time (Moore 1995, p. 65-7)
Mayerbeer should charge some of the NPF’s products which are excludable, such as the driver license, to his customers. This must provide the NPF economic profit and help the NPF to get financial surplus.
He must ensure all standard procedures and expenditure plans are set to achieve the performance target. Flexibility might be possible to some extent but certainly not to anticipate the change in the political environment. All managers under him must be committed to cost-efficiency. Therefore, the structure of the organization must be slim as much as it can.
Although this approach could produce a neat strategic plan, it would lead the NPF to create things valueless to the public. Moreover, there is no guarantee at all that all activities will be implemented and all outputs will be achieved. Without sufficient political support and legitimacy, the NPF would suffer with limited resources.

Option-2: Apply the PVM model

Mayebeer must manage the NPF to provide values to the citizens of his nation. He should not limit his work in internal component of his organization, rather to expose himself to the political context of his organization. He must continuously interact not only with politicians in different levels but also with citizens from different interest groups. The interaction aims to understand what things citizens would value most—both for individual desires and political aspiration—which the NPF could or should achieve, and also to gain supports and authority for the NPF to act on behalf of the nation.
Mayerbeer must concern on performance targets of the NPF, but they must be on outcome level which meaningful for citizens. The performance target must be subject to change according to the changing environment.
Mayerbeer must define carefully who the customers, clients, subjects and different kind of stakeholders of the NPF . He should not work for citizens who seek for the NPF assistance only, but also with those who have obligations to contribute to the creation of a safe environment as well as to understand the political aspiration of the general citizens. He thus set a stakeholder management strategy to maintain an effective network to to achieve citizens' desired values.
When necessary, Mayerbeer should be able to convince citizens to pay more taxes and advocate politicians to provide more resources and authority if he believes that what currently available do not sufficient to create public values in the most efficient way the NPF could do. He must be able to make citizens understand that they still would get higher value compare to the money they should pay for taxes. It is also important to ask support from citizens to be able to sacrifice some part of their liberty and privacy for the achievement of public value.
In regard to a the driver license service, as an example, he should concerns more on the objective to have a safe traffic environment rather than number of driver licenses they produce and amount of money they collect. Therefore, he should make sure that the driver licence service works effectively which should assure that all people with the license will most likely behave well on the roads. Time to spend of license processing is important, but that is not the ultimate objective. There is no point of the NPF to produce a license for every 15 minutes, for example, if most of the drivers with license drive crazy on the roads.
Although the interactions with citizens and political actors are more intensive in this approach, the possibility of the NPF lost its way is still there. This option requires more flexibility in planning and performance targets. Therefore, without capable managers on applying an adaptive management approach, the NPF would go everywhere and will not achieve public values.

Proposal

By applying the following criteria: (a) possibilities to meet public expectation; (b) resiliency on dealing with democracy and management at the same time, option-2 is more plausible to make the NPF works better.
The first criterion is important because the aim of public management is to meet public expectation. As a public organization, the NPF acts on behalf of public, consuming public resources, and the benefits or the losses they made would directly affect public (Rainey 1991, p. 24). Option-1 may achieve their performance targets, but it does not necessarily meet public expectation. That is because in option-1, the NPF would work mostly on its own way without continuously consulting to its stakeholders. By contrast, option-2 would have more possibilities to be in line with citizens’ aspiration because the NPF maintain the network to achieve the public expectation. The network would not only help the NPF work on the right direction but also to help the NPF to strengthen its operational capacity.
The second criterion is crucial and unique to public management. And it is particularly important because the NPF was on the process of a major organizational reforms which involve different interest groups included ethnicity. In order to achieve its objective, public management must be succeeded on dealing with both democracy and management at the same time. Option-1 tends to work very minimal in politic. This could make the NPF either as a victim of politicians (if the NPF weaker than the politicians) or take control the politicians for its own interests. Option-2 would make the democracy and management go hand in hand through maintaining the stakeholder network to achieve public values and strengthening the operational capacity of the NPF. In short, option-2 would make the NPF more effective and efficient.

References

Alford, J & O'Flynn, J 2009, 'Making sense of public value: concepts, critiques and emergent
meanings', International Journal of Public Administration, vol. 32, no. 3, pp. 171-191.

Borins, S 2002, 'New public management, North American style', in K. McLaughilin, S.P. Osborne, & E. Ferlie (eds), New Public Management: Current Trends and Future Prospects, Routledge, London, pp. 181-194.

Caiden, GE 1982, Public administration, Palisades Publishers, Pacific Palisades, Calif.

—— 1991, Administrative reform comes of age, W. de Gruyter, Berlin, New York.
Hughes, OE 2003, Public management and administration: an introduction, Palgrave, New York.

Mintzberg, H 1996, 'Managing government, governing management-balancing the private and public sectors', Harvard Business Review, vol. 74, no. 3, pp. 75-83.

Moore, MH 1995, Creating public value: strategic management in government, Harvard University Press, Cambridge, Mass.

—— 1994, 'Public value as the focus of strategy', Australian Journal of Public Administration, vol. 53, no. 3, pp. 296-303.

Moore, MH & Braga, AA 2004, 'Police performance measurement: a normative framework', Criminal Justice Ethics, vol. 23, no. 1, pp. 3-19.

O'Flynn, J 2007, 'From new public management to public value: paradigmatic change and managerial implications', Australian Journal of Public Administration, vol. 66, no. 3, pp. 353-366.

Rainey, HG 1991, Understanding and managing public organizations, Jossey-Bass, San Francisco.

Stoker, G 2006, 'Public value management', The American Review of Public Administration, vol. 36, no. 1, pp. 41 -57.

Vigoda-Gadot, E & Kapun, D 2005, 'Perceptions of politics and perceived performance in public and private organisations: a test of one model across two sectors', Policy and Politics, vol. 33, no. 2, pp. 251-276.

de Vries, J 2010, 'Is new public management really dead?', OECD Journal on Budgeting, vol. 2010, no. 1, pp. 1-5.

Oil Price Forecast (made in May 2010)

2010-12-24T01:28:00.000-08:00

The world economy is highly dependent on oil as the main energy source. Level of accessibility to oil sources determines the strength and weakness of a nation in domestic and international sphere. Not all countries are able to produce all the oil they need. There are only thirty-two net-exporters (countries) most of which are member of Organization of the Petroleum Exporting Countries (OPEC) (Nationmaster n.d.; OPEC n.d.). Both importers and exporters depend on trading for selling and buying, and price is a key component of trading. This is because price has rationing and allocating function of the scarce resources. This paper will argue that by the end of 2010 the price of oil will reach US$83 per barrel.

Price is determined by demanded and supplied quantity and non price determinants. The non price determinants of demand are: income, buyer preference, price of substitutes, price of complement, price expectation, and number of buyers. In terms of income, the response of price depends on the type of good whether it is normal or inferior good, this paper assumes that oil is a normal good. The non price determinants of supply are: price of production factors, technology, number of producers, price expectation, and change in weather particularly for agriculture (Frank et al. 2009, pp. 74-77). While a change in quantity demanded and supplied will change the price along the demand and supply curve, a change in non price determinants will shift the demand and supply curve either to left or right depending on the circumstances. Shift right means quantity demanded or supplied is higher at any level of price, while shift left means at every price the quantity demanded or supplied is lower than before. In the market of one particular product such as oil, however, there will be only one price at one quantity level at a particular time; that is known as equilibrium price and quantity.

In addition to non price determinants, the price elasticity of the demand and supply curve will determine the magnitude of change in price and quantity. Price elasticity reflects the response of buyer (quantity demanded) and producer (quantity supplied) to a change in price for particular products (Frank et al. 2009, pp. 92). In the case of oil, although there is an indication that demand is elastic (The Economist 2008a), stronger evidence from an academic research shows that both oil demand and supply are price inelastic (Hamilton 2009, p. 218; Askari & Krichene 2010, p. 2013); that is what this paper will assume.

In this paper, the relationship between price (P) and demanded and supplied quantity (Q) of oil illustrated on supply (S) and demand (D) curve. The curves represent the global oil market situation during December 2008 to December 2010 where all (potential) buyers and sellers and other influencing actors have been interacting with each other. The curves assume that except oil price and relevant non-price determinants (which will be identified later), other factors that could affect the quantity demanded and supplied of oil stay the same (ceteris paribus).

The equilibrium price and quantity in the last quarter of 2008 was at E, which the price was US$54.8 per barrel (EIA 2010) at Q barrel per day. That situation is illustrated in diagram 1.

The average oil price and quantity during the first six months of 2009 fell because OPEC, which supplies around 40 per cent of world oil production, realized their intention to cut production. At the same time, the combination of the (then) current economic crisis and the growing environmental concern led to a decrease in oil demand (The Economist 2008a; The Economist 2008b; Musante 2009). The economic crisis decreased people's income, while environmental concerns had change people's preference and then consumed less petrol. This shifted the demand curve left (D'). The production cut by OPEC, because of price expectation (The Economist 2008b), shifted the supply curve left (S') which led to a new equilibrium at E'. It was where price was US$49.8 per barrel (EIA 2010) and quantity was Q' barrel per day. This change is illustrated in diagram 2.

The oil demand and supply during the last six months of 2009 was rose. The increase in demand happened because of the improvement in economy in the U.S. and China (The Economist 2009a). This increased people's income which led the demand curve shifted right (D''). Meanwhile, the supply side was relatively secured because of the sea (tanker) storage and OECD stock which was equal to 62 days of consumption. Other important factors were the fall in price of production costs and a new oil field in Saudi which will increase OPEC's spare capacity to about 8 per cent of oil world consumption (The Economist 2009a). This shifted the supply curve right (S") which led to a price increase to US$70.7 per barrel (EIA 2010) and a quantity increase to Q'' (a new equilibrium at E"). This change can be seen in diagram 3.

During all of 2010, the demand and supply of oil will keep increasing. The world economy will keep growing following the improvement of the U.S. economy (Businessweek 2010). The crisis in Greece will not spread because European Union member countries have agreed on 600 billion Euro loan (Toyer & Wissenbach 2010). This will increase global oil demand because the income of people will be increasing. As a result, the demand curve will shift right (D'''). Meanwhile, on supply side, there are two factors which will increase supply: the fall of production cost and failure of Copenhagen climate agreement (The Economist 2009b). These will shift the supply curve right (S"'). By the end of 2010, the new equilibrium will be at E"'. Oil price will reach US$83 per barrel at Q"' barrel per day. This can be seen in diagram 4.

In conclusion, oil price is determined by demanded and supplied quantity and non-price determinants. Both demand and supply of oil are price inelastic. While the increase of demand will increase the price significantly, there will be a smaller increase in quantity. This is because the magnitude of change in demand will greater than supply, and also because of the price inelastic. The increase of demand since mid 2009 happened mainly because of the improvement of world economy particularly in the U.S., after the global financial crisis. The increased of supply secured mainly because of the fall of production costs and additional production from the new oil field. This paper predicts that oil price will reach US$83 per barrel by the end of 2010.

References

Askari, H & Krichene, N 2010, ‘An oil demand and supply model incorporating monetary policy’, Energy, no. 35, pp. 2013-2021.

Businessweek 2010, ‘U.S. economy: unemployment unexpectedly falls to 9.7% (update3)’, Businessweek (online edition), 5 February, viewed 20 May 2010,

EIA 2010, ‘Weekly all countries spot price FoB weighted by Estimated export volume (dollars per barrel)’, U.S. Energy Information Administration, viewed 20 May 2010, .

Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2^nd ed., McGraw-Hill Australia, North Ryde.

Hamilton, J 2009, ‘Causes and consequences of the oil shock of 2007-08/comments and discussion’, Brookings Papers on Economic Activity, no. 1, pp. 215-283.

Musante, K 2009, ‘Oil rises as OPEC cuts production’, money.cnn.com, viewed 20 May 2010, .

Nationmaster n.d., ’Energy statistics oil exports net(most recent) by country.” NationMaster.com. viewed 20 May 2010,

OPEC n.d.,’Member countries’, OPEC.org, viewed 20 May 2010,

The Economist 2008a, ‘Down it goes’, The Economist.

The Economist 2008b, ‘Plumbing the depths’, The Economist.

The Economist 2009a, ’Meek oil’, The Economist.

The Economist 2009b, ’Oil to spare’, The Economist.

Toyer, J & Wissenbach, I 2010, ‘EU to fend off market "wolves" in Greek crisis’, Reuters, viewed 20 May 2010,

<http://www.reuters.com/article/idUSTRE6400PJ20100509>.

World Bank, Chad Oil Project, and Resource Curse

2010-11-12T14:18:00.001-08:00

Introduction

Chad is one of the poorest countries in the world with income per capita in 1985 only $120 per year (Day-Viaud & Joffe 1995, p. xvii). A consortium of oil companies discovered oil field with the reserves of 917 million barrels to be last until 2032. Considering the high risk investment in the country, the consortium will not sponsor this project unless the World Bank involved providing political risk protection (Esty 2006, pp. 1-5). This indicates that both the Chad government and the consortium are highly dependent on the Bank. This is a great opportunity for the Bank to control the loan contract negotiation by enforcing conditionality to ensure the oil windfall will bring welfare to Chadians.

Key issue

The key issue is how to create and maintain economic growth during and after the oil windfall. While oil mining will increase government revenues dramatically, many evidences suggest resources-abundance countries have stagnated in economic growth and underperform the resource-poor countries. This phenomenon called ‘resource curse’ (Auty 1993, p. 1; Sachs & Warner 1995, p. 2).

Chad has serious growth impediments both in economic and institution aspects. Chad has low capital investment and improvement, low productivity labours and lack of skill improvement opportunities, low technological input, lack of physical and human capital development, inconsistent economic policies, and ‘anti-development fiscal policy’ (Azevedo 1988, pp. 68-73).

Chad's political institution is not conducive for investment. The president has excessive power with ability to control the legislative and judicative (Kneib 2007, p. 32). This is a highly concentrated decision-making power which create uncertain and potentially volatile policy environment that bad for the welfare of citizens and investors (MacIntyre 2003, p. 29). Natural resources economy without good quality institution will create negative effect on growth (Sala-i-Martin & Subramanian 2003, p. 12).

Solution options

Option-1: Non-mining industries development

The Bank must direct its loan conditionality to support the non-mining sector. The sustainable development of natural resources economies lies in successful diversification into non-mining sector (Auty 1993, p. 258).

The oil revenue allocation and economic policy should be strictly designed to stimulate the non-mining sector. The revenue management plan (RMP) must give specific details regarding permissible expenditures to prioritize improvements on growth drivers; they are: saving and investment, physical and human capital, and technological improvement (Helpman 2004, pp. 10-12). For example, Chad government must develop transportation infrastructures, free basic and vocational education and job training to be linked and matched with the need of non-mining industries. Valuable incentives must be given to private sectors to improve their productivity through technological change such as free import tax for machineries. Incentives to start-up the non-mining firms such as temporary energy subsidy, efficient entry licence, and employee trainings support would attract domestic entrepreneurs and foreign direct investments.

The non-mining industries development should focus on areas where Chad has (potential) comparative advantages—for example from the availability of raw materials, labour's characteristic and geographical position—and relatively simple to begin.

While this option could create some results in a relatively short-term period, its success rely on the commitment of Chad leaders to implement the RMP and the economic policy. However, as economic improvement will increase the president's popularity, the president would have intrinsic motivation to support.

Option-2: Change the institutional architecture

The Bank must maximize the use of its strong power during the negotiation phase by forcing the Chad leaders to democratize its state's institution and promote good governance. The combination of democracy and good governance is a significant determinant of total factor productivity (Rivera-Batiz 1999, p. 32).

The conditionality must force the Chad leaders, particularly the president, to change their constitution to balance the power structure by creating constraint on executive government and improve the bureaucracy efficiency. This will improve the credibility of the government on ensuring the quality and certainty of its policies. This can be done, for example by, (a) strengthening the power of the National Assembly to be able to monitor the president and to have more power on legislation making, (b) making the Supreme Court independent from the president, (c) preventing the involvement of military forces in civil war and politics, and (d) promoting transparency and some initial measures on bureaucracy reform. However, the idea is not to swing from the severely concentrated to the severely dispersed, rather to make it in the middle of the range. For example, the president should still have a space to respond to policy challenges which require an immediate action. Country with political power structure located in the centre of the decision-making power ranges is unlikely to suffer from significant governance problems (MacIntyre 2003, p. 36).

Although this option has potential to improve Chad's government credibility, there is no significant constraint for the president to revoke the agreement. The president will still able to maintain his strong power after the agreement and bring back the old constitution. The political leaders renege on promises once the aid is delivered and their problems are resolved (Smith 2005, p. 566).

Proposal

By considering the following criteria, (a) time to see impact, and (b) resources availability, option-1 is the most plausible solution

Time to see impact is crucial to maintain the motivation and spirit of the Chadian on supporting the solutions. Option-1 would provide tangible and visible improvements faster than option-2 because option-1 will directly increase the quality of life through better livelihood by creating more jobs and other opportunities. If the improvement takes so long, or not really tangible and visible, people will get frustrated with the reform which lead to the increase of social and political problems, and end up with lower growth.

Resource availability is a precondition to make the solution work. Chad has resources to support option-1, at least for the start-up phase. For example, Chad's productivity on cotton production has been increasing from time to time (Azevedo 1998, p. 30). This is an excellent resource to start the textile industry serving the African region. By contrast, option-2 requires relatively strong human freedom—that is the individual freedom to effectively shape his/her own destiny (Sen 1999, p. 11)—which Chad is lack of. Chad's human development index in 1995 was only 0.324 which give the country a rank of 175 out of 182 countries (UNDP 2009). It is difficult to have strong institution without human freedom because most of individual tend to rely his/her life on other person rather than on the rule of law. Human freedom development takes more times because it is not just about skills to work in a factory. Therefore, option-2 is more potential to create and maintain economic growth during and after the oil windfall.

References

Auty, RM 1993, Sustaining development in mineral economies: the resource curse thesis, Routledge, London.

Azevedo, MJ 1998, Chad: a nation in search of its future, Westview Press, Boulder, Colo.

Day-Viaud, V & Joffe, G 1995, Chad, Clio Press, Oxford.

Esty, B 2006, The Chad-Cameroon petroleum development and pipeline project, Harvard Business School, MA.

Helpman, E 2004, The mystery of economic growth, Belknap Press of Harvard University Press, Cambridge, Mass.

Kneib, M 2006, Cultures of the world: Chad, Marshall Gavendish Benchmar, New York.

MacIntyre, AJ 1003, The power of institutions: political architecture and governance, Cornell University Press, Ithaca.

Rivera-Batiz, F 1999, 'Democracy, governance and economic growth: theory and evidence', paper presented at the conference: Democracy, Participation and Development, New York City, sponsored by the Program in Economic Policy Management at Columbia University, April 1999, viewed 29 October 2010,

Sachs, JD & Warner, AM 1995, Natural resource abundance and economic growth, National Bureau of Economic Research, Cambridge, MA.

Sala-i-Martin, X & Subramanian, A 2003, Addressing the natural resource curse: an illustration from Nigeria, National Bureau of Economic Research, Cambridge, MA.

Sen, A 1999, Development as freedom, Knopf, New York.

Smith, A 2005, 'Why international organizations will continue to fail their development goals', Perspectives on Politics, vol. 3, no. 3, pp. 565-567.

UNDP 2009, 'Human development index trends', Human Development Reports, viewed 30 October 2010,

Transformational leadership

2010-11-12T14:12:00.000-08:00

Introduction
This is a review of a paper by Janet Denhardt and Kelly Campbell titled 'the roles of democratic values in transformational leadership' published in the Administration & Society journal, volume 38, year 2006. The paper starts with reviewing the development of transformational leadership theory. The review compares the original concept of transformational leadership as set forth in Burns (1978) with the recent concepts that mostly influenced by Bass (1985). Denhardt and Campbell argue that the recent transformational leadership concept narrowed to ‘transformational as change’ which create problematic in its application in public sector (2006, p. 559). This led them to build an alternative model according to the Burns’s conception of transformational leadership as moral elevation and combined with normative public administration theories which include democratic values (Denhardt & Campbell 2006, pp. 567-568). I will argue that the public transformational leadership model introduced by the authors could: (a) contribute to a better public management, and (b) more relevant to a complex situation. At the end, as I learn from the model, I will suggest that effective leaders need strong relations and changes behaviours orientation, in addition to moderately strong task-oriented behaviours.

Contribute to a better public management
The paper emphasizes the importance of addressing the democratic values and, therefore, strengthening the role of citizen and the assertion of public interest (Denhardt & Campbell 2006, p. 562). This suggestion could overcome the weakness of the market-oriented government approach that being promoted through the new public management (NPM).
New public management could fail to create public value because it tends to leave some people behind the development. While NPM improve the efficiency and performance-focus of public organizations (OECD 2005, p. 10), it has resulted in an emergence of a "new poor" in some developing countries (Batley & Larbi 2004, cited in Haque 2007, p. 182). Efficiency and performance are two important NPM's doctrine that could be achieved, for example, by imposing the performance based finance management. However, the performance focus in NPM heavily associated with “service user” or “customer” as contrast to “citizen” which cover ‘unwilling customers’ (Borins 2002, p. 191). That is because citizens play a multi-function role in society. NPM approach could exclude non-customer citizens (such as tax payers who are not directly benefit by public service) from the attention of a public sector leader. This shortcomings could be sustained because NPM 'hinders any return to substantive democracy and limits the degree to which citizens can meaningfully affect policy and administration’ (Box et al. 2001, p. 613).
Democratic values are essential for public transformational leadership in the process of creating public value. In their search for performance, public sector leaders seek for public value rather than narrowing at 'customer' value. To achieve public value, they cannot just rely on the feasibility of their operation and administration, they must be legitimate and politically sustainable (Moore 1995, p. 71). The legitimacy and the operational capability can be simultaneously achieved if public leaders apply a 'substantive democracy'; that is the democracy which involves the revitalization of the role of public administrator and citizen in shaping the future (Box et al. 2001, p. 611). Democracy in internal would empower the public servants, while democracy in external would empower as well as gaining legitimacy from the citizens.

More relevant to a complex situation
In a complex situation, public leaders could not focus only on managing their administration. Indonesian public sector is a good example for a complex situation. Indonesian government is strong in terms of its authority power given by the constitution where government almost could or should do anything related to people’s life. However, Indonesian government has limited resources to implement its wide-range authority. For example, the ratio of tax revenue to GDP was only 9.9 per cent compared to an average of 14.0 per cent among non-OECD countries in Asia (IMF 2008, p. 11). This situation forces Indonesian government to encourage private sectors to contribute to public services including social welfare program. In this situation, public leaders should manage different stakeholders with different interests and different level of power, and also to ensure that the powerless have opportunity to contribute to the process of creating public value.
Public transformational leadership model introduced by the authors is more relevant in the complex situation. The authors argue that transformational leadership is not only about creating a change, but also to ensure that the process of change should involve moral elevation; that is a normative model of public leadership based on democratic values, citizenship, and service in the public interest (Denhardt & Campbell 2006, p. 558). The model will force the public leaders to create changes in participatory way by involving all important stakeholders. The process of changes is equally, if not more, important than the change itself. This will create a sustainable change in the complex situation because all stakeholders own the idea and the result which will make them committed to maintain and continuously improve the change in the future. In “transformation as change” model, by contrast, the leader would just focus on the effectiveness and efficiency of the change which can be done through unilateral way, but the impact would not sustainable.

Overall learning from the article
This paper shows me the comparison of two different model of transformational leadership; those are the ‘transformation as change’ and ‘transformation as moral elevation’. The two categories could be related to the current discussion about public sector model which can be contrasted to “market-oriented” and “public value-oriented”. The moral elevation model which preferred more by the authors has more potential to work to create public value in a complex situation.
The comparison of the two models generates idea about leadership behaviours for effective leaders in a complex situation. Yukl introduces a ‘metacategories’ of leadership behaviours into three dimensions: they are: task-oriented, relations-oriented, and changes-oriented behaviours (2010, pp. 117-130). As I learn from the paper, I argue that the moral elevation model of public transformational leadership requires strong relations-oriented and changes-oriented behaviours, and moderately strong need for task-oriented behaviours. This is because the process of change equally, if not more, important than the change itself. My argument is in line with Yukl’s argument on traits characteristic of effective manager; that is high socialized power orientation, a moderately strong need for achievement, and a relatively weaker need for affiliation (Yukl 2010, p. 74).

References

Bass, BM 1985, Leadership and performance beyond expectations, Free Press, New York.

Borins, S 2002, 'New public management, North American style', in K. McLaughilin, S.P. Osborne, & E. Ferlie (eds), New Public Management: Current Trends and Future Prospects, Routledge, London, pp. 181-194.

Box, RC, Marshall, GS, Reed, BJ & Reed, CM 2001, ‘New public management and substantive democracy’, Public Administration Review, vol. 61, no. 5, pp. 608-619.

Burns, JM 1978, Leadership, Harper & Row, New York.

Denhardt, JV & Campbell, KB 2006, ‘The role of democratic values in transformational leadership’, Administration & Society, vol. 38, pp. 556-572.

Haque, MS 2007, 'Revisiting the new public management', Review of The changing role of government: the reform of public services in developing countries by R. Batley and G. Larbi, Public Administration Review, Jan-Feb, pp. 179-182

IMF 2008, 'Tax administration reform and fiscal adjustment: the case of Indonesia (2001-07)', IMF Working Paper WP/08/129, International Monetary Fund, Washington, D.C., viewed 10 October 2010,
.

Moore, MH 1995, Creating public value: strategic management in government, Harvard University Press, Cambridge, Mass.

OECD 2005, Modernising government: the way forward, Organisation for Economic Co-operation and Development, Paris.

Yukl, GA 2010, Leadership in organizations, 7th edn, Pearson, Upper Saddle River, N.J.

Managing Government Performance in a Changing Environment

2010-11-12T14:02:00.000-08:00

Introduction

Any organization exists because society needs its service function. Therefore, an organization must regularly reshape its system to adjust to the continuously changing society. Governments, similar to other organizations, are organs of society (Drucker 1973, p. 39). Although society's expectation in general is to have wellness, perception of wellness is changing over time. And factors influencing wellness are also changing. If the government wants to perform, which means fulfilling society's expectation, its organization must be open to changes to be adaptive to its environment. The performance supports the continuity, which is important to balance the change. Innovation is required to make the resources work efficient in achieving high performance. Indeed, innovation creates resources from something valueless (Drucker 1993, p. 30), it is the one that makes one society more productive and richer than another (Helpman 2004, pp.36-46). Peter Drucker, in many of his works, emphasized the importance of well performing government. This paper will argue that organization can perform in changing society if they manage their capacity to be adaptive to the changing organization's environment.
Government Organization

Peter Drucker had many critics. He argues that government organizations, in general, lack performance, are inefficient and ineffective, budget rather than performance oriented, are managed by less capable people (compared to the private sector), and are unclear in result orientation (Drucker 1973, pp. 137-147; Drucker 1988, pp. 131-141; Drucker 1992, pp. 212-218). He applied that argument not only to developing countries, but also developed countries particularly the United States where he spent most of his life. He believes that government is an organ of society, and should not be an end in themselves. The objectives and results of government must lie in its customer in society, outside of organization (Drucker 1973, p. 158; Drucker 1988, pp. 56-57; Drucker 1999, p. 29;38).

Elements of Institutional Capacity
Every government has functions to be delivered to society and its environment. It is the institutional capacity which enables government organizations to perform. As society and the environment are continuously changing, government must manage their capacity to be adaptive. Managing capacity requires an understanding of capacity elements. Capacity elements are factors, within and outside organizations, which work interactively to build the institutional capacity of the organization. Institutional capacity is more than personnel capacity. A government with high skill and knowledge of people will not be able to perform its function without stakeholder support and effective leadership. That means capacity elements must extend beyond skill and knowledge of people. This essay will suggest seven capacity elements; they are: stakeholder support, strategic cycle, job and organization structure, work procedures, facilities and information systems, competency and motivation of people, and leadership.

Stakeholder support
Stakeholders' needs, preferences, and priorities are the basis of how government should adapt their capacity. Changes in perception, mood, and meaning are a source of innovation (Drucker 1993, p. 35). Similar to an organism, government interacts with the stakeholders in its environments, who can influence or are influenced by the achievement of government objectives (Freeman 1984, p. 46). In order to ensure the achievement of its objective, government must define who its stakeholders are. Government's stakeholders are not limited to citizens although citizens are legitimate stakeholders who play a multifunction role in society, either as the owner or the customer of the state. Those who have no legitimacy but hold power and possess urgency are also stakeholders with a range of different qualities (Mitchell et al. 1997, pp. 854-874). Ignoring any stakeholder would result in government's failure to achieve their objectives. Government must manage each of its stakeholders in a correct manner according to their interests and potential impact on the objective's achievement. Therefore, customer focus does not mean the customer is the only concern. Without support from all stakeholders, with various importance levels depending on their characteristics, the objective of government will never be achieved.

Strategic cycle
Strategy defines the 'theory of business' of government—such as customers and customer expectations, objectives, and results—and plans to convert that into performance (Drucker 1999, p. 43; Drucker 1973, p. 122). Defining 'theory of business' is important to identify the scope of the government business. This is because government should not do everything. Some public issues can be done better by other institutions in society. The main role of government is to 'govern', not to do. Some functions can be better implemented if 'decentralized' to other institution (Drucker 1992, p. 233-5).

Once the scope is clarified, the next step is to develop an action plan (as part of the strategic plan). That will determine programs and services necessary to achieve government's objectives and results. Results must be about change, and describe how government wants a better society in the future. Result formulation must consider opportunities to innovate. Drucker mentions seven sources for innovative opportunity, they are: the unexpected, the incongruity, the process need, changes in industry or market structure, changes in demographics, changes in perception, mood, and meaning, and change in knowledge (1993, p. 35). In order to make a judgment about results achievement, the strategic plan must be equipped with a set of performance indicators. These indicators should help reveal the extent of achievement (effectiveness) and also show how many resources will be used when delivering the program or services (efficiency) (Palfrey et al. 1992, p. 86; Department of Treasury and Finance 2003, pp. 9-10). Organizations can be efficient but do the wrong thing. They can also be effective but do things incorrectly resulting in cost (Drucker 1988, p. 44). Drucker suggested that a strategic plan should not avoid risk because higher risk means higher performance (Drucker 1973, p. 125). However, it is important to identify the risks and to have a plan to overcome these risks. Another important element of the strategy is a budget plan. The budget plan must be integrated and fully coordinated with the action plan. Similarly, the action plan must adjust to financial objectives, such as target on fiscal deficit/surplus.

There is no fixed plan for the future that will be valid forever. Any strategic plan must be treated as an adaptive plan. Regular evaluation and re-planning is necessary. Drucker argues that service institutions need a discipline of 'planned obsolescence' and 'planned abandonment' (1988, p. 149). Therefore the performance indicators are important, and this is why this essay calls the capacity element 'strategic cycle' rather than strategic package.

Job and organization structure
The structure of jobs and organization must fully support the strategy. Strategy follow mission and structure follow strategy (Drucker 1999, p. 8). When a strategy has been defined, organization divisions, job titles, and number of jobs can be identified. A good design of jobs and divisions will provide the correct size organization; not too big and not too small. Government organizations must develop their own structure according to their strategy and conditions to be effective and efficient. Effectiveness could be achieved if all required tasks are allocated to all jobs. Efficient structure is indicated by clear job description and optimum work load in all positions. This will also ensure that each job is unique and no unnecessary task overlap.

The concern on effectiveness and efficiency also applies to divisions. Division is required to decentralize the management within an organization. This is useful to implement a number of different services or functions to produce different outputs or products. Management should be decentralized into autonomous units such as departments or agencies. This is what Drucker calls 'federal decentralization' (1954, p. 207). Decentralization helps organizations shorten the decision making span and reduce the possibility of miscommunication. It will also eliminate resistance from employees and lower level managers over management decisions. Decentralization improves effectiveness through shaping organization resources to accomplish particular tasks and achieve particular results within autonomous units. Therefore, each unit must be responsible and authorized to manage their resources, design and implement their strategy, and also accountable to achieve their results as contribution to the total government. The right size and appropriate description of jobs and divisions of a government organization determines the success of its strategy implementation.

Because the strategy is subject to change, job and organization structure must be adaptive. There is no one right organization structure (Drucker 1999, p. 11). It is necessary to conduct regular evaluations in order to fully support the organization's changing strategy. However, it is also important to guarantee certainty to a certain extent to allow people to have good orientation about their organization. This is because change and continuity need to be balanced (Drucker 1999, pp. 90-93).

Work procedures
Any government organization, as a service institution, needs to clarify and publish the work procedure of all services they deliver. Procedure clarification and transparency is not only important for creating effectiveness and efficiency, but also important to disseminate the service information as the basic right of customers. Each particular service must be equipped with standard operating procedures (SoP). SoP determines the process chain within the service. One link is one unit of processing. It describes how output is produced from input. Each link involves materials, equipment, people, and other resources over a certain time period. Inputs are delivered by people from the previous link, while outputs are delivered to people in the next link.
The people who provide inputs and receive outputs could be from inside or outside the organization. This process will clarify who to coordinate with, for what and when. The end output is the result of the autonomous division and will contribute to the overall government objectives.
By capturing the work process in SoP, each government division could assess their efficiency or productivity by calculating how much output they get per input, or how much output per time or per employee. This is also a way to create service delivery standards such as cost, time and quality of service. Governments from different states who deliver identical services could compare their efficiency and effectiveness. This is a chance to create competition among service institution which could boost their innovation. For example, in business permit services, all 584 local governments in Indonesia could compete on the time needed to process one business permit. Government should regularly update their procedures with new knowledge and technology (innovation) to improve efficiency. This means procedure should not make government organization static—by limiting themselves only to follow the procedure (Drucker 1992, p. 231). Procedure must be treated as a tool to develop sustainable innovation.

Facilities and information system
Without support of appropriate facilities, even organizations with the most knowledgeable peoples may achieve results, but certainly will not be efficient. Therefore, it is important for any organization to catch up with the latest technology which can boost their efficiency. Otherwise the organization must find their own innovation to compete with others who better equipped. The reason for being equipped is to be efficient, nothing more than that. Worker with facilities and equipment must prove that they are able to produce results with appropriate quality faster than those who do without. Facilities must be provided appropriately. For example, it is not necessary for the boss to be equipped with an expensive computer suitable for graphic design when she/he only has a need to monitor numerical data and create written reports. Conversely, the cost of providing overhead projectors to teachers which can be significantly help students understand the lecture, should not be a deterrent when compared to length of teaching time would suitable enhancing equipment. The challenge here is to be able to identify appropriate facilities for each job.

Information systems (IS) are a type of work facility. IS enables government organizations to interact well both within their organization and with stakeholders outside. This facility is a necessary requirement to maintain the adaptability of government organization against the changing environment. 'Continuous work on information' is a requirement 'to balance the changes and the continuity' (Drucker 1999, p. 91). Moreover, IS also helps government to decentralize their functions (Dean et al. 1992, p. 220). IS is not just a facility, it is a compulsory organ of government organization.

Competency and motivation of people
Good government requires more than personnel management. Government will only perform if people in the organization are recognized as human resources. They must be seen as assets rather than liabilities. That is what Drucker calls "people management" (Drucker 1973, p. 108). Among other things in people management, managing people's competency and motivation is critical to an organization's performance. Competency is about ability which consists of knowledge, skill and attitude. Motivation enables that ability to work and perform functions.

The aim of managing the competency of people is to ensure that all jobs that are required in order to execute the strategy are filled by the right people. This involves performance and competence evaluation, competency development, and promotion. Recruitment must be well-planned. The manager must know the required qualifications of people for a particular
job. Performance and competence evaluation will identify who is performing and who is not and what the issues are. When there are competency issues, the manager could improve the competency or replace the person by moving the person to a more suitable job. The purpose of organization in people management is to utilize the strength of the people and to make their weakness not relevant (Drucker 1973, p. 307).

Government has a unique characteristic compared to private institutions in terms of managing motivation. Unlike the private sector whose income is derived from the willingness of customers to purchase their products or services, governments gain their revenue mainly from taxes. They are a budget-based institution (Drucker 1988, p. 135). This is a challenge to make them performed. The challenge is how to create motivation in institutional and personnel level. At institutional level, a stable open society and democratic government would help to create motivation. This will enable smooth but critical interaction between society and government. Bad policy will be criticized and good policy will be supported. Motivation at institutional level influences the motivation at individual level. However, that is mainly at upper managerial level. Creating motivation in lower managerial levels, and in the front line employees, is a tricky thing. 'Carrot and stick' is not only insufficient but can be dangerous. It is insufficient because people are not motivated only by reward and punishment, but also by values and culture. It could be dangerous because for knowledge employees, the fear from the 'stick' becomes a demotivator (Drucker 1973, p. 176). 'Carrot' (reward) is important, but defining the most valuable and lowest at cost reward is even more important. This could be different things for different people. Creating motivation for government institution and public servants is not only about increasing salary; it must also be managed in a systemic approach which includes organization culture, leadership, quality and openness of society, and transparency of government.

Leadership
Good leadership will make all capacity elements and their interaction work to build institutional capacity. The focus of leadership is performance of function which is intended to overcome any of society's major issues. Therefore, managers require specific skills such as the ability to communicate within the organization, make decisions under conditions of uncertainty, and undertake strategic planning (Drucker 1973, p. 17). Communication skills are essential in leadership to motivate people to achieve their results. It is also important to gain stakeholders support particularly when the organization needs resources and political support from outside. Managers must also be able to make decisions in a changing environment. Managers must lead to find opportunities for innovation from symptoms assessed within and outside organization (Drucker 1993, pp. 30-129).

Good government leaders will not spend all their time behind the desk, assessing finance and writing report. Controlling the organization's resources is important, that is indeed the manager's responsibility. However, managing performance is more than that. Leaders must divide themselves between organization and society. This is how they will be able to identify the 'right changes' (Drucker 1999, p. 73).

Conclusion
'The only thing that is constant is change'. That expression was written about 100 years before Plato (thedailyphilosopher n.d.). All government organizations are in the middle of a changing environment and changing society. However, at the same time, they require continuity which will be achieved if the government performs well. Managing performance in a changing environment requires understanding of capacity elements; that is all the factors which interact to build institutional capacity. Innovation is essential in most of the elements to improve the value of resources which are often limited, and also to exploit any opportunities which often not seem important for common people. This essay has discussed seven institutional capacity elements. Any government organization which systematically employs these elements and ensures their effectiveness will be able to manage performance in a continuously changing environment and society.

References
Dean, JW, Se Joon Yoon & Susman, GI 1992, 'Advanced manufacturing technology and organization structure: empowerment or subordination?', Organization Science, vol. 3, no. 2, pp. 203-229.
Drucker, PF 1954, The practice of management, Harper & Brothers Publishers, New York.
—— 1973, Management: tasks, responsibilities, practices, Heinemann, London.
—— 1988, Management: tasks, responsibilities, practices, Butterworth-Heinemann, London.
—— 1992, The age of discontinuity: guidelines to our changing society, Transaction Publisher, New Brunswick.
—— 1993, Innovation and entrepreneurship: practice and principles, 1st edn, Harper Business, New York.
—— 1999, Management challenges for the 21st century, Butterworth-Heinemann, Oxford.
Department of Treasury and Finance 2003, Outcome based management: guideline for use in the Western Australian public sector, Department of Treasury and Finance, Government of Western Australia, Perth.
Freeman, RE 1984, Strategic management: a stakeholder approach, Pitman, Boston.
Helpman, E 2004, The mystery of economic growth, Belknap Press of Harvard University Press, Cambridge, Mass.
Mitchell, RK, Agle, BR & Wood, DJ 1997, 'Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts', The Academy of Management Review, vol. 22, no. 4, pp. 853-886.
Palfrey, C 1992, Policy evaluation in the public sector: approaches and methods, Avebury, Aldershot, Hants, England.
Thedailyphilosopher n.d., Essay: the only thing that is constant is change, viewed 3 August 2010,
.

Indonesia and Trans-Boundary Haze

2010-11-12T13:59:00.000-08:00

Introduction

Transboundary haze pollution (THP) in Southeast Asia—which mainly caused by Indonesia—is a regional recurring environmental problem (Qadri 2001, p. 54; Orangutanfoundation 2010). The THP can be resolved if there is support and cooperation of international stakeholders. Members of Association of Southeast Asian Nations (ASEAN) countries signed the 2002 Agreement on Transboundary Haze Pollution treaty ('The Treaty'). One of the principles in the treaty is to get support and cooperation among key stakeholders in domestic and international level (ASEAN Secretariat 2002, a. 3)

Key Issue

The key issue to end this recurring problem is how to create incentive for international stakeholders to cooperate and support Indonesia. The common cause of transnational problem is self-interested pursuits (Sandler 1997, p. 2). Nevertheless, 'cooperative solution' is still possible to be reached even if the stakeholders assumed to have individually rational behaviour (Finus 2001, p. 11). The key determinant to make the transnational public good achieved is the proper incentive for the individual contributors (Sandler 2004, p. 98). Indeed, the main reason of why Indonesia would not ratify the treaty is the lack of economic incentive which associated with the inadequacy of resources at the local level to address the challenges of haze pollutions (Tacconi et al. 2008, pp. 6-9). The adequate resources are very important for Indonesia to create alternative solutions for local stakeholders; for example: alternative technology for oil palm and logging companies in doing land clearing, or to provide alternative livelihood for local people.

The proper incentive for international stakeholders is to have good quality air and environment (collective good) and/or to meet their international commitment. This will never be achieved unless all parties cooperate. The cooperation is important because Indonesia needs economic resources from international stakeholders, while international stakeholders need Indonesian commitment. This meets characteristic of 'assurance game'; that is the benefit will only flow if both parties contribute to the cooperation (Sandler 1997, p. 35; Finus 2001, p. 32).

Solution options

Option 1: Isolate the cooperation within ASEAN

Indonesia should isolate the cooperation within ASEAN. This is because the affected countries of THP are ASEAN countries (Quah 2002, p. 429). The most effective way to resolve transboundary environmental problem such as THP is by involving the affecting and affected countries (Uitto & Duda 2002, p. 365). Indonesian leadership is important because Indonesia plays a dominant role both in ASEAN as well as in the THP (Tay 2002, p. 61). Leadership is a key to get an optimal outcome in an 'assurance game' (Sandler 2004, p. 27).

Indonesia must provide commitment to ratify and implement the treaty. This will send a strong signal of incentive for other ASEAN countries which will attract them to cooperate. In return, Indonesia should demand ASEAN members to contribute to the Transboundary Haze Control Fund (Haze-Fund) that has been initiated since 2007 (ASEAN Secretariat 2007).

Although the Haze-Fund is potential as resources for alternative solutions for Indonesian domestic stakeholders, it is difficult to get sufficient amount of it. As per October 2008, the ASEAN members were still struggling to achieve their initial target of $500,000 (ASEAN Secretariat 2008). That target is far from sufficient for alternative solutions of THP problem which involve large economic activities.

Option 2: Enlarge the cooperation to global level

Indonesia must relate the haze issue to the climate change. This will enlarge the scope of the cooperation into the global level. Effective collective action is more likely to be achieved by addressing global exigencies simultaneously (Sandler 1997, p. 19; Finus 2001, p. 2). Besides being a major contributor to the THP, the 1997 Indonesian peat-land fire released carbon to the atmosphere which estimated equivalent to 13-40 per cent of the mean annual global carbon emissions from fossil fuels (Page et al. 2002, p. 61). Addressing haze production from the peat-land fire will create global benefit in mitigating climate change (Tacconi et al. 2008, p. 2). This is a window to get more resources from global partnership through Reducing Emissions from Deforestation and Degradation (REDD) scheme.

The incentive for international stakeholders is the possibility to use the partnership as a source of offsets to meet their emission reduction target as promised in the Kyoto Protocol (Fogarty & Creagh 2010). In fact, there are two global partnerships that have been running so far; they are: cooperation with Australia on Kalimantan Forests Climate Partnership with a value of $30 million (Australian Government 2009), and cooperation with Norway on Norway-Indonesia REDD-Plus Parnership with a value of $1 billion (Norway Embassy-Jakarta 2010). The ability to provide alternative solutions allows Indonesian government to gain support from domestic stakeholders to implement the treaty.

While this option can create strong incentive for international stakeholders and support of domestic stakeholders to implement the treaty, it depends a lot on the global economic stability. The stability of global economy enables industrialized countries to contribute to the global emission reduction efforts.

Proposal

By applying the following criteria: (a) the cost to Indonesia, and (b) the perception of responsibility, option-2 is the most plausible one.

The cost to Indonesia is an important criterion because Indonesia needs fund for its development and economic activities to create jobs. The best THP solution is the one that create little economic cost to Indonesia. Option-1 is likely will end up with low amount of Haze-Fund. If Indonesia committed to apply the treaty, Indonesia must pay most of the costs. And if government decides to close oil palm and logging companies who unable to find solutions to their land clearing but burning (because of a lack of alternative solution such as appropriate technology), Indonesian economy will suffer. This is a disincentive for domestic stakeholders to support the treaty. Option-2 is more promising because it could attract more resources from international stakeholders which enable Indonesian government to find more alternatives for solutions to manage the interests of domestic stakeholders.

The perception of responsibility drives the incentive to cooperate which is central to achieve optimal outcome in an assurance game. In the THP issue frame (option-1), ASEAN countries (other than Indonesia) do not have strong responsibility of the issue because THP is a unilateral externality where Indonesia is the the main cause. By contrast, in climate change issue frame (option-2), almost all countries contribute to the greenhouse gas emissions (multilateral externality) where the industrialized countries are among the main cause. This explains why ASEAN countries have weak incentive to cooperate (option-1), while industrialized countries at global level have a stronger incentive (option-2) although both of them have similar interest to the collective good. Therefore, option-2 is more potential to make the international cooperation happen.

References

Australian Government 2009, 'Indonesia-Australia forest carbon partnership', Australian Government Agency for Overseas Aid Program (Ausaid), viewed 14 October 2010, .

ASEAN Secretariat 2002, ASEAN agreement on transboundary haze pollution, Association of Southeast Asian Nations (ASEAN), viewed 29 September 2010,

—— 2007, 'Joint media release of the ASEAN ministerial meetings on transboundary haze pollution', ASEAN Environment, Association of Southeast Asian Nations (ASEAN), viewed 14 October 2010,

<http://environment.asean.org/index.php?page=media:jps:haze>.

—— 2008, '11th Informal ASEAN ministerial meeting on the environment', ASEAN Transboundary Haze Pollution Control Fund, Association of Southeast Asian Nations (ASEAN), viewed 30 September 2010,

Finus, M 2001, Game theory and international environmental cooperation, Edward Elgar, Cheltenham.

Fogarty, D & Creagh, S 2010, 'REDD forest offset demand 3-7 years away', Reuters, 11 October, viewed 19 October 2010, .

Norway Embassy-Jakarta 2010, 'Norway-Indonesia REDD+ partnership—frequently asked questions', Royal Norwegian Embasssy Jakarta, viewed 19 October 2010, .

Orangutanfoundation 2009, 'Fires still burn in Borneo', Orangutan Foundation. Viewed 28 September 2010,

<http://orangutanfoundation.wildlifedirect.org/2009/10/08/fires-still-burn-in-borneo/>.

Page, SE, Siegert, F, Rieley, JO & Boehm, HV 2002, 'The amount of carbon released from peat and forest fires in Indonesia during 1997', Nature, vol. 420, no. 6911, pp. 61-65.

Qadri, S 2001, Fire, smoke, and haze: the ASEAN response strategy, Association of Southeast Asian Nations (ASEAN) and Asian Development Bank (ADB), Manila.

Quah, E 2002, 'Transboundary pollution in Southeast Asia: the Indonesian fires', World Development, vol. 30, no. 3, pp. 429-441.

Sandler, T 1997, Global challenges: an approach to environmental, political, and economic problem, Cambridge University Press, Cambridge.

—— 2004, Global collective action, Cambridge University Press, Cambridge.

Tacconi, L, Jotzo, F & Grafton, RQ 2008, 'Local causes, regional co-operation and global financing for environmental problems: the case of Southeast Asia Haze pollution', International Environmental Agreements: Politics, Law and Economics, vol. 8, no. 1, pp. 1-16.

Tay, S 2002, 'Fires and haze in Southeast Asia', in PJ Noda (ed), Cross-Sectoral Partnerships in Enhancing Human Security, Japan Center for International Exchange, Tokyo, pp. 53-80.

Uitto, JI & Duda, AM 2002, 'Management of transboundary water resources: lessons from international cooperation for conflict prevention', The Geographical Journal, vol. 168, no. 4, pp. 365-378.

G-20 and Global Financial Crisis

2010-11-12T13:58:00.001-08:00

Introduction

The recent global financial crisis (GFC), mainly caused by the U.S. subprime crisis, is the deepest recession since World War II (IMF 2009, p. xvi). The global growth is now recovering (IMF 2010a, p. xi), but the next crisis is always on its way. Rapid globalization increases the risk of a new financial crisis globally because of the high economic interconnection among countries. One fundamental problem is the imbalance between reach of markets and their supporting institutions at the global level (Rodrik 2009). The global growth recovery and financial stability can be achieved only through an international coordination. That is the essence of the 2008 Washington Action Plan, hereafter called "collective action", which was agreed on by the G-20 leaders during the 2009 London Summit.

Key Issue

The key issue to enact the international coordination is how to ensure all G-20 member countries implement the collective action. While all members have common interest to recover the global growth and to have global financial stability, hereafter called "collective good", the rational individual members tend to maximise their own benefit which can act contrary to the group's interest (Olson 1965, p. 9). This is commonly known as "free rider" problem. The potential for free riding can be found, for example, in the agreement to strengthen the financial regulation (G-20 2008). Although strengthened regulations could create financial stability, this also could hamper capital inflow especially from the high risk investors. A country with a need of high capital inflow could disobey the action plan. If this is the case, an excess supply of capital might occur in the free rider country which could lead to asset bubble and could end up with another GFC (Stiglitz 2002, p. 101).

Solution Options

Option-1: Internalize the externality

The G-20 should internalize the externality of the collective action by forming sub-groups in regions. That is the collective action that carried out by, and affected only, the members in the region (the subset) (Coleman 1972, cited in Liao 1994, p. 52). For example, if East Asia is a subgroup, economic resources and financial exchanges must be localized in East Asia only. Therefore, when East Asian members commit to the collective action they are the one who will benefit the impact. Similarly, when they are, or any one of the member is, not committed to the action plan, it is only them who will suffer. There will be no contagion effect because the economic exchange is localized.

Besides internalizing the externality, this approach also reduce the size of the group. In a small group, any member will receive larger fraction of the total group benefit which lead to the increase of reward for any group-oriented action (Olson 1965, p. 48). Smaller group tends to increase individual member's influence on shaping the collective goods which lead to a stronger incentive to contribute to the collective action (Olson 1982, p. 24).

The combination of smaller size and localizing the impact will raise the incentive for all members in the region to implement the collective action accordingly. Not only because each of them worry about the impact, but also because they will be more active to look after each other.

While this option can overcome the free rider problem, this will disrupt the global growth (as part of collective good) because of the exchange restriction. Global growth requires external openness in trade and economic exchanges (IMF 1997, p. 84; Stiglitz 1998, p. 36).

Option-2: Selective incentive

The G-20 must apply a selective incentive. That is an additional gain, beside the collective good, that applies only to the member that contribute to the provision of the collective good (Olson 1982, p. 23). Selective incentive could stimulate a rational member to support the collective action (Olson 1965, pp. 133-134).

The source of selective incentive could come from the IMF's loan and technical assistance (the IMF facilities). The G-20 leaders pledged to increase the IMF's lending capability to serve their members (Alfaro & Kim 2009, p. 5). IMF and the G-20 leaders must agree that any G-20 member who fully supports the action plan has a special access to the loan and technical assistance.

There is a concern that IMF facilities may not so attractive because of the experiences during the late 1990s Asian crisis (Alfaro & Kim 2009, p. 5). However, the fact shows that number of IMF member countries keeps increasing. As of now, member of IMF is 187 countries (IMF 2010b).

In order to make the IMF facilities become more attractive for the G-20 members, IMF must loosen the loan conditions while in the same time improve its credibility on its advisory function.

Furthermore, the selective incentive must be extended to non G-20 countries once the collective action among the members runs well. The extension is important to prevent a threat of global financial stability from non G-20 countries. Once the coverage is extended, the IMF lending capacity must be enlarged. This is because the incentive diminishes as the group size increases (Olson 1982, p. 31).

Proposal

By applying the following criteria: (a) individual-group interest alignment, and (b) in line with the collective good achievement, option-2 is the most plausible one.

The alignment of the individual and group interest is central to eliminate the free riders. The more alignment, the less free riding practices will happen. Option-1 creates the alignment by increasing pressure to each member through localizing the impact of the collective action. Option-2 improves the alignment by providing the committed member a special access to the IMF facilities. It can be argued that option-2 will improve the alignment better because the IMF facilities are valuable enough for G-20 members to direct the rational individual interest to be aligned with the group interest. Option-1 creates strong alignment as well. However, the alignment is based on the region. Since the region is so independent, it is quite possible the region will change the collective action to meet their interest. This means the alignment to the G-20 as a (mother) group is uncertain.

There is no doubt that option-1 will secure the financial stability. However, it could impede the global growth because of the restriction of financial and resources exchange. Whereas option-2 does not limit the globalization and in the same time support the global financial stability through reducing the free riders. In short, option-2 is more in line with the collective good achievement.

Reference

Alfaro, L & Kim, R 2009, The first global financial crisis of 21st century, Harvard Business School, Boston.

G-20 2008, Washington action plan, viewed 3 September 2010, .

IMF 1997, World economic outlook October 1997, International Monetary Fund, Washington, D.C.

—— 2009, World economic outlook April 2009: crisis and recovery, International Monetary Fund, Washington, D.C.

—— 2010a, World economic outlook April 2010: rebalancing growth, International Monetary Fund, Washington, D.C.

—— 2010b, Tuvalu joined the IMF on June 24, becoming the institution’s 187th member, viewed 7 September 2010,

Liao, T 1994, “A theoretical framework of collective action for the evaluation of family planning programs.” Population Research and Policy Review, no. 13, pp. 49-67.

Olson, M 1965, The logic of collective action: public goods and the theory of groups, Harvard University Press, Cambridge, Mass.

—— 1982, The rise and decline of nations: economic growth, stagflation, and social rigidities, Yale University Press, New Haven.

Rodrik, D 2009, Capitalism 3.0, LSE Space for Thought Lecture Series 16 June 2009, The London School of Economics and Political Science, viewed 7 September 2010, .

Stiglitz, JE 1998, Towards a new paradigm for development: strategies, policies,
and processes, 1998 Prebisch Lecture, UNCTAD, Geneva.

—— 2002, Globalization and Its Discontents, Penguin Books, London.

Corruption and Anti-Corruption

2010-11-11T12:49:00.000-08:00

Introduction
History is full with story about corruption scandals but the academic study of corruption is mainly a twentieth century phenomenon (Doig & Williams 2000, p. ix). The academic study on corruption which started since 1950s/1960s revealed negative impacts of corruption particularly as they become significant development impediments. In addition to the traditional recipes, this paper will argue that anti-corruption measures must put serious attention on the promotion of personal intrinsic value that support anti-corruption measures.

Why corruption is bad?
Although there are many logical explanations rationalize the negative correlation between corruption and economic growth, the data analysis lead to a puzzle. Analysis of investment, economic growth and corruption (bureaucracy efficiency) data from 67 countries shows that corruption found to lower investment and thereby lowering economic growth (Mauro 1995, p. 705) . However, the subsequent analysis with updated data conducted by Svensson suggests that at macro level corruption does not affect growth (2005, p. 39). One possible explanation of this puzzle is that the type of patron-client network within which the corruption located influences the effect of corruption to growth (Khan 1998, p. 15).
Apart of the puzzle of corruption-economic growth relationship, economic growth is not the only thing that matters for society (Rose-Ackerman 2006, p. xvi). Other important aspect for society apart of economic growth, for example, is inequality. Corruption is clearly bad for equality. Income inequality has expanded most in corrupt countries (World Bank 2000, p. 21). This could happen because corrupt bureaucracy tends to neglect the poor and the powerless who cannot offer material benefit to bureaucrats and politicians. One concrete example from Indonesia shows there were 71 per cent of service users indicate differences treatment from service providers at the service units (KPK 2009, p. 55). Other negative impacts of corruption include increasing poverty (Kaufmann & Dinino 2006, p. 15; World Bank 2000, p. 20), reduce the government credibility (Rose-Ackerman 1999, p. 26; World Bank 2000, p. 23), and reduction of government expenditure on education (Mauro 1998, p. 277).

Why anti-corruption?
Public sector must fight corruption even it is costly. This is because public sector business involved tax payers’ money and public mandate. Petty corruption is still bad in morality and could reduce government's credibility which could end up with something much more serious impact such as public disobedience to public rules. In public sector, bureaucrats and politicians are demanded not only to be effective, but also to be clean (Harris 2003, p. 201).

Analysing corruption

Behavioural approach
People could be tempted to corrupt when they perceive they are not treated equally. Societies with more economic inequality are less trusting which lead to high corruption (Uslaner 2004, p. 14). However, what Uslaner means with trust is a general trust as contrast to in-group trust. In-group trust supports corrupt conducts thorough the establishment of bonds of reciprocity (Uslaner 2004, p. 9). This explains why corruption is associated with multiculturalism particularly when it comes to 'affirmative action' program (Larmour 2008, p. 235). Equity issue brings to the concern on the role of low incomes in causing corruption (see, for example, Montinola & Jackman 2002, p. 147; Banfield 1975, p. 600; World Bank 2007, p. 104; Kaufman & Dininio 2006, p. 16).
Corruption conducts happen because rational calculation suggests to do so. Corrupt practices in public service units in Indonesia are associated with low anti-corruption measures (KPK 2009, p. 55). The major considerations of political corruption are the likelihood of apprehension and the penalty if caught (World Bank 1997, p. 104; Harris 2003, p. 202)
Culture plays important roles in social acceptance. That is because culture influences people's decision (Larmour 2008, p. 237). Culture is a standard values and a pattern of shared assumption which influence the group members of their perception, thinking, and feeling towards their behaviour (Schein 1993, pp. 373-374). Corruption survey in Indonesia shows 59 per cent of public service unit clients stated that giving additional charges was a common practice in procuring services (KPK 2009, p. 55).

Organizational approach
The bigger the government means the higher corruption risk because of more transactions. However, research findings are inconclusive; see for example Montinola & Jackman (2002, p. 147) and Gerring & Thacker (2005, p. 233). One possible explanation is that the small government has fewer resources which would bids up the ‘decision price’ and increase corruption temptation (Rose-Ackerman 1997, p. 41). Another possibility is that reducing government size that made through not-credible-privatization will increase corruption (Black et al. 2000, p. 1747).
Organization with unclear line of responsibility or lack of sufficient monitoring increases corruption risk. That is because the loose monitoring creates opportunity. This may explain why decentralization and federation has positive correlation with level of corruption (Goldsmith 1999, p. 879; Kunicova and Rose-Ackerman 2005, p. 597). The decentralization and federation have a fragmented organization; this support corruption conducts because the potential corruptor needs to influence only a segment of the government, and because in fragmented system there are fewer centralized forces on monitoring and enforcement (Banfield 1975, p. 600).
The corruption risk is higher in an organization where its work processes are ambiguous or not clearly understood. This is because employee may be able to manipulate the process for his/her own benefit particularly in a high risk job such as procurement. Unclear procedure could be used by the public servants to delay the service time, which then attract the clients to bribe (Rose-Ackerman 2006, p. xviii).

Political approach
The politic institution architecture and the quality of policy and regulations determine the corruption risk. The more power the public officials have, the more space for discretion, the higher risk for corruption (Klitgaard 1998, p.75). One characteristic of political corruption is the dominant of executive that combined with weak of judiciary (Harris 2003, pp. 202). Quality of policy and regulation are also important determinant. Corruption is more prevalent in countries with highly distorted policies (World Bank 1997, p. 103). Country with complicated regulation has high corruption risk because complicated regulation requires interpretation which leads to centralization of power to person in charge rather than to the regulation itself.
Democracy is like two-sided sword. On one hand it forces the politicians (agent) to follow the interest of their principal (the citizen) (Lambsdorff 2006, p. 10), on the other hand election requires resources which could force the politicians to corrupt (Moe 1984, p. 762). Therefore, democracy will only inhibit corruption in country with complete democratization which reflected by the nature of the election and the effectiveness of the elected legislators (Montinola & Jackman 2002, p. 147). Complete democratization may require experiences. Country with long exposure to democracy predicted lower corruption (Treisman 2000, p. 399).

Anti-corruption framework

1. Promote intrinsic anti-corruption values
This is a foundation of all anti-corruption measures. The obsessively admiration to wealth is one inner factor that support corrupt behaviour of individual (Watson 2006, p. 50). Economists and criminal sociologist believe that human being is a rational actor who making choice according to cost and benefit analysis (Keel 2005). Therefore some scholars have ideas to apply penalties (cost) and rewards (benefit) in order to prevent people commit in corruption conducts (Rose-Ackerman 1997, pp. 46-50; Harris 2003, p. 202; Klitgaard 1998, pp. 69-71). While this "carrot and stick" approach makes sense according to the rational choice way of thinking, that will not sustainable in the long run. That is because the value of rewards will be diminished from time to time and people will learn how to use certain tactics to avoid detection and "stick”. Explicit incentives schemes may sometimes backfire because it undermines people's confidence (Bénabou & Tirole 2003, p. 516).
For a long term effect, it is important for everyone in a nation to embrace certain values which in line with anti-corruption. The individual must embrace the value as intrinsic value; that is something that could make particular attitude conducive and productive (Lemos 1994, p. 5). The idea is how to make personal values are more than just materialistic things.
Anti-corruption measures must convince people to embrace anti-corruption values. This must be beyond religion. Some religions will not succeed on promoting intrinsic values because they apply "carrot and stick" approach (external force) by threatening bad people with hell and awarding good people with heaven. The promotion must be laid on the basis of self-determination. Self-determination can effectively create intrinsic motivations (Choi et al. 2010, p. 967). Self-determination can be created through promoting rationality (high internal locus of control) behaviour, improving competency, and relatedness (Ryan & Deci 2000, p. 68). Those self-determination drivers could be achieved through improving the quality of education, public services, and national leaderships.

2. Political institutionalization
The state institution architecture must be sufficiently power-balanced, not too dispersed but also not too concentrated. The credible institution is most likely found in the country whose political architecture is located toward the center of the dispersal decision making range (MacIntyre 2003, pp. 32-36). Horizontal accountability is important which can be created by making institutional restraints through creating the separation and independence of the three branches of power i.e. executive, legislative, and judicative (Kaufmann & Dininio 2006, p. 19). In addition, vertical accountability is also important. This can be developed through the strengthening of civil participation and watchdog institutions, whistleblower protection, freedom of information, and strengthening the role of media (World Bank 1997, pp. 106-108; Macdonell & Pesic 2006, pp. 111-116; Kaufmann & Dininio 2006, p. 19).
The regulations must be streamlined and clarified and avoid conflict among them. It must be allow some flexibility but also effective to restrain corruption. Anti-corruption measures are often creating a multi-layer monitoring which not only increase inefficiency but also make the monitoring itself not effective (Anechiarico & Jacobs 1996, p. 28). 'The fundamental challenge is to devise institutional arrangements that sustain a workable balance between flexibility and restraint' (World Bank 1997, p. 108).
A series of check and balance procedures must be established. Code of conducts must be applied to all public officials. An experience from the House of Commons in the United Kingdom shows the effectiveness of code of conduct application in reducing corruption (Mawer 2006, p. 212). Asset declaration is also important to enable public to watch the development of personal assets of public officials during their period of power. Reversal of the burden of proof is another idea to overcome the issue of the difficulty to proof corruption crime (GTZ 2007, p. 10).
Political parties must strengthen their membership. They must rely on their members, rather than depending on the lobbyists, for their financial need. The legislator and party members must apply ethical standard and code of conduct on campaign fund raising through party institutionalization (Pelizzio 2006, p. 181)

3. Bureaucracy reform
Bureaucracy reform must be conducted in integrated way. Three pillars from the Ministry of Finance of Indonesia can be used as a reference; they are: organizational restructuring, business process improvement, and human resources development (MoF 2010).
The aim of organizational restructuring is to make the organization structure fully support the the strategic of the organization. The structure must be efficient by slashing all positions that irrelevant to the strategic. This may help to cut unnecessary authority which would reduce corruption risks.
Business process improvement aims to clarify all the work processes particularly of those with high corruption risks such as procurement. Analysing work process and creating standard operation procedure (SoP) would increase certainty on procedure and clarify responsibility, not only for the public officials but also for the clients. Automatization of some particular work processes (e.g. through computerizing) would help to reduce corruption risks (Perrow 1979, p. 23; KPK 2006, p. 82).
Human resources development aims to increase competency and motivation of agents and reducing corruption motivation. This can be done through education and training. However, for public officials in developing countries where the salary is usually low compare to private sector, education and training would not be sufficient. Apart of intrinsic value promotion as suggested before, improvement of salary/income is also important to reduce corruption risk. The rise of income must be combined with performance assessment and credible monitoring (KPK 2007, p. 49; World Bank 1997, p. 104)

4. International support
Corruption is part of economic issues which cannot be separated from globalization. The characteristic of corruption in natural resources abundance countries is associated with multi-national corporations who work on extraction business. The money laundering practices and international drug trafficking are few examples of why corruption cannot be viewed simply or even mainly as bounded by the nation state (Harris 2003, p. 199). The availability of international lenders with integrity would help to provide alternative sources of financing for free-corruption international business (Rose-Ackerman 1997, p. 53). And finally, the presence of international anti-corruption campaigner, such as Transparency International, helps to break the circle of corrupt power. The idea is not to force the country by external power such as loan conditionality, rather to pursue the country and to create self-determination on anti-corruption measures (Larmour 2006, p. 96; Bukovansky 2006, pp. 91-92).

References
Anechiarico, F & Jacobs, JB 1996, The pursuit of absolute integrity: how corruption control makes government ineffective, University of Chicago Press, Chicago.

Banfield, EC 1975, ‘Corruption as a feature of governmental organization’, Journal of Law and Economics, vol. 18, no. 3, pp. 587-605.

Benabou, R & Tirole, J 2003, ‘Intrinsic and extrinsic motivation’, The Review of Economic Studies, vol. 70, no. 3, pp. 489-520.

Black, B, Kraakman, R & Tarassova, A 2000, ‘Russian privatization and corporate governance: what went wrong?’, Stanford Law Review, vol. 52, no. 6, pp. 1731-1808.

Choi, J, Mogami, T & Medalia, A 2010, ‘Intrinsic motivation inventory: an adapted measure for schizophrenia research’, Schizophrenia Bulletin, vol. 36, no. 5, pp. 966-976.

Doig, A & Williams, R 2000, Controlling Corruption, Edward Elgar Pub, Cheltenham, U.K.
Gerring, J & Thacker, SC 2005, ‘Do neoliberal policies deter political corruption?’, International Organization, vol. 59, no. 1, pp. 233-254.

Goldsmith, AA 1999, ‘Slapping the grasping hand: correlates of political corruption in emerging markets’, American Journal of Economics and Sociology, vol. 58, no. 4, pp. 865-883.

GTZ 2007, The UN convention against corruption and development cooperation - corruption prevention by more efficient law enforcement?, The Deutsche Gesellschaft fur Technische Zusammenarbeit/German Technical Cooperation (GTZ), Eschborn.

Harris, R 2003, Political corruptio : in and beyond the nation state, Routledge, London.

Husted, B 1999, ‘Wealth, culture, and corruption’, Journal of International Business Studies, vol. 30, no. 2, pp. 339-359.

Kaufmann, D & Dininio, P 2006, ‘Corruption: a key challenge for development’, in R Stapenhurst, N Johnson, & R Pelizzo (eds), The role of parliament in curbing corruption, WBI development studies, World Bank, Washington, D.C., pp. 13-25.

Keel, R 2005, ‘Rational choice and deterrence theory’, University of Missouri, viewed 1 November 2010,

Khan, M 1998, ‘Patron client relations and the economic effects of corruption in Asia’, European Journal of Development Research, vol. 10, no. 1, pp. 15-39.

Klitgaard, RE 1988, Controlling corruption, University of California Press, Berkeley.

KPK 2006, Memahami untuk melayani (Understanding to serve), Corruption Eradication Commission (KPK), Jakarta.
—— 2009, Indonesia's public sector integrity 2008: facts of corruption in public sector, The Corruption Eradication Commission (KPK), Jakarta.

Kunicova, J & Rose-Ackerman, S 2005, ‘Electoral rules and constitutional structures as constraints on corruption’, British Journal of Political Science, vol. 35, p. 573.

Lambsdorff, J 2006, ‘Causes and consequences of corruption: what do we know form a cross-section of countries?’, in S Rose-Ackerman (ed), International Handbook on the Economics of Corruption, Edward Elgar, Cheltenham, UK, pp. 3-51.

Larmour, P 2006, ‘Civilizing techniques: Transparency International and the spread of anti-corruption’, in B Bowden & L Seabrooke (eds), Global standards of market civilization, Routledge, New York, pp. 95-106.

—— 2008, ‘Corruption and the concept of 'Culture': evidence from the Pacific islands’, Crime Law Soc Change, vol. 49, pp. 225-239.

Lemos, NM 1994, Intrinsic Value: Concept and Warrant, Cambridge University Press, Cambridge [England].

Macdonell, R & Pesic, M 2006, ‘The role of media in curbing corruption’, in R Stapenhurst, N Johnson, & R Pelizzo (eds), The role of parliament in curbing corruption, WBI development studies, World Bank, Washington, D.C, pp. 111-127.

MacIntyre, AJ 2003, The power of institutions: political architecture and governance, Cornell University Press, Ithaca.

Mauro, P 1995, ‘Corruption and Growth’, The Quarterly Journal of Economics, vol. 110, no. 3, pp. 681-712.

—— 1998, ‘Corruption and the composition of government expenditure’, Journal of Public Economics, vol. 69, no. 2, pp. 263-279.

Mawer, S 2006, ‘Case study of the house of commons: how can parliamentary codes and registers of members' interests help?’, in R Stapenhurst, N Johnson, & R Pelizzo (eds), The role of parliament in curbing corruption, WBI development studies, World Bank, Washington, D.C., pp. 207-213.

Moe, TM 1984, ‘The new economics of organization’, American Journal of Political Science, vol. 28, no. 4, pp. 739-777.

MoF 2010, ‘Reformasi birokrasi kementrian keuangan (Bureaucracy reform in the Ministry of Finance), Ministry of Finance of Republic of Indonesia, Jakarta, viewed 3 November 2010,
.

Montinola, GR & Jackman, RW 2002, ‘Sources of corruption: a cross-country study’, British Journal of Political Science, vol. 32, no. 1, pp. 147-170.

Pelizzio, R 2006, ‘“Political parties’, in R Stapenhurst, N Johnson, & R Pelizzo (eds), The role of parliament in curbing corruption, WBI development studies, World Bank, Washington, D.C., pp. 175-184.

Perrow, C 1979, Complex organizations: a critical essay, 2nd edn., Scott, Foresman, Glenview, Ill.

Rose-Ackerman, S 1999, Corruption and government: causes, consequences, and reform, Cambridge University Press, Cambridge.

—— 2006, International Handbook on the Economics of Corruption, Edward Elgar, Cheltenham, UK.

Ryan, R & Deci, E 2000, ‘Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being’, American psychologist, vol. 55, no. 1, pp. 68-78.

Schein, E 2001, ‘Defining organizational culture’, in JM Shafritz & JS Ott (eds), Classics of Organization Theory, Wadsworth/Thomson Learning, Australia, pp. 389-376.

Svensson, J 2005, ‘Eight Questions about Corruption’, The Journal of Economic Perspectives, vol. 19, no. 3, pp. 19-42.

Treisman, D 2000, ‘The causes of corruption: a cross-national study’, Journal of Public Economics, vol. 76, pp. 399-457.

Uslaner, E 2004, ‘Trust and corruption’, University of Maryland-College Park, MD.

Wei, S 1997, How taxing is corruption on international investors?, National Bureau of Economic Research, Massachusetts.

World Bank 1997, The State in a changing world, Published for the World Bank [by] Oxford University Press, Oxford, [England].

—— 2000, Anticorruption in transition: a contribution to the policy debate, World Bank, Washington, D.C.