The Role of Good Governance in Public Sector in Increasing the Government
Expenditure Efficiency and Performance of Local Government: The Case of Indonesia
Dr. Ratna Wardhani, Universitas Indonesia
Hilda Rossieta PhD, Universitas Indonesia
Dr. Dwi Martani, Universitas Indonesia
Dr. Sartika Djamaluddin, Universitas Indonesia
Abstract
New Public Management (NPM) have an orientation to the outcome and efficiency through
better public management, so that the benefits can be obtained by the improved quality of
services, education, health, welfare, and others. To run the government, the central government
and local governments have budgeted funds in a big amount but it is not accompanied with the
improvement of the quality output of the expenditures. This research aims to analyze efficiency
levels of government expenditure in improving better performance indicators and how public
role in improving governance efficiency government spending and improve the performance
local government. This research provides empirical evidence that the efficiency of the
expenditure of local government in Indonesia is tend to decrease across time. This research
also shows that that the expenditure in education, health, and infrastructure could also increase
the performance of local government. The result shows that the highest effect to performance
comes from expenditure in education. Furthermore, the result indicates that the good
governance will significantly improve the efficiency of the local governance. This research
consistent with Easterly and Levine (1997) and Hauner (2008). The result also shows that the
good governance only moderates variable education expenditure and health expenditure. The
interaction term between GG and infrastructure spending is not significant. This result shows
that the good governance improve the efficiency in government expenditure mainly in the
education and health function.
Key words: Public Sector, Local Government, Efficiency, Government Spending, Good
Governance
I. Introduction
One of the functions of the government is to provide service to the community. To
achieve the goal, the government in the whole world needs to always try to improve the
quality public services. In these efforts, some countries had been done public sector reform
for several decades in the last decade. The government reforms have been associated with the
application New Public Management (NPM) (Pollitt and Bouckaert 2000).
NPM gives emphasis in decentralisation and modernizing service public sector.
Indonesia, as one of the emerging country in Asia has begun to decentralize the power of
central government to local government in 1999. Law No. 2 year 1999 about Local
Government and Law No. 25, 1999 on the Financial Balance of The Central and Local
Governments to start to from the era of fiscal decentralization in Indonesia. Decentralization
means gives the authority to the local government to start regional autonomy in developing
the region except for some of the things that are still in the control of the central government.
Among the authorities that are decentralized includes services to the people, health,
education, and infrastructure development. The Indonesia Government, both central and
regional level has large budgeted funds. Budget for education, health, and infrastructure as an
example, has experienced a significant growth from year to year. Based on data from 2009
until 2014, the educational budget issued through central government and through a transfer to
the region has contribute more than 20 percent of its budget, while the ratio health budget to
the National Budget reached more than 3 percent. However, increase in the budget apparently
is not accompanied with the improvement of the quality output of the expenses. Quality of
education, based on these leading indicators such as the participation good education in formal
and informal programs, the education level that was ended by the people above 15 years old
and above, and high rates of illiteracy show a small growth and sometimes tend to stagnant in
several region. While the output from health expenditures also show that the health quality that
based on several indicators such as number of health infrastructure such as hospitals,
community health centers, health, number of medical doctors, the midwife, and their health
care providers, the number of protein per capita income, high mortality rates (surgery were
predictive rate), and the status nutrition for children under five also experienced insignificant
improvement, and even decreasing in several indicators.
The growth rate of the government expenditures including the education, health, and
infrastructure that are not accompanied by the increase output in quality of education, health
and infrastructure shows that there had been inefficiency in government expenditures.
Furthermore, with the advent of decentralization it is expected for each district to the more
effective in controlling the process of development, but sometimes in the other hand the local
government could doing misuse of the authority and not implement the good governance
principles that culminated in corruption by government officials. Gupta Empire et al (1998) in
Gupta Empire et.al (2002), shows that the policy aimed to reduce corruption can cause
changes
in
the
composition
government
expenditures
thus
becoming
more
productive. Corruption will take away the rights of the nation to get service from the
government. In addition, corruption can also be eased joints that is going to have to economic
downturn in economic growth a country. Good governance will be able to improve
inefficiency in government expenditures. With good governance then there are better
monitoring from many party and accountability of government both the central and regional
level. The good governance implementation the government can increase the efficiency of
government expenditures.
This research aims to investigate the efficiency of local government expenditures in
Indonesia and evaluate the role of good public governance in improving the efficiency of the
local government expenditures. This research contributes the literature in several ways. First,
this research develops the construct and measurement of Good Public Governance for local
government in Indonesia. Second, this research considers the role of good governance in
increasing the efficiency of government expenditures. The role of good governance in
increasing the efficiency of local government expenditures has not been consider in the
previous research especially using the emerging country context.
II. Previous Research and Hyphoteses Development
Efficiency in the government expenditure has become an issue that is currently widely
studied in the area of finance public. In the country with high economic growth, the level of
efficiency of the government expenditure is issue to handle the attraction of differences interest
between opposition and tax payer (Heller and Hauner, 2006). A number of previous studies
measuring public sector efficiency wich link between government expenditures with some
socio-economic indicators such as education, the number of mortality ratio baby, the number
of infrastructure, and others (Afonso, Schuknecht, and Tanzi (2005), Gupta Empire and
Verhoeven (2001) and Tanzi and Schuknecht (1997, 2000)
Pritchett and Filmer (1999) study the impact of public health and non-health factors
expenditures (economy, education, culture) to the mortality of the children under age of 5
years. The research results to empirical evidence that public health expenditures have had
little impact in reducing the number of mortality under age of 5. Gupta et.al (2002) studies on
the effectiveness of the health and education expenditures with samples of 50 developing
countries. The research provides empirical evidence that public expenditures in the field of
education have a positive impact in improving basic education in school participation (primary
and secondary school). The increase 1 percent in health expenditures can reduce mortality rate
under 5 years around 3 per 1000 births. Allocation for expenditures to education and health can
improve the economic growth and increase the welfare, so that every developing countries
need to give special attention to allocating expenditures education and health expenditures.
Rajkumar and Swaroop (2008) doing research about the relationship between public
expenditure and outcome in 91 countries. Their research show that public expenditures often
do not produce the expected increase to the outcome. Empirical evidence from this research
shows that there a difference effectiveness of public expenditure due to quality good
governance. Public health expenditures reduce the number of mortality under 5 years old in
countries with good governance. That is also the case with basic education expenditures to be
more effective in countries with good governance principles. Instead in the country with bad
governance, the expenditures for the health sector and public education almost does not affect
the outcome.
Some other research also shows the determining factor of efficiency government
expenditures.
Easterly and Levine (1997) said that good governance is the aspects that are
crucial in pursuing high economic growth. Hauner (2008) test the determinant of the expenditures
efficiency in Russia. His research shows that the higher of the government expenditure efficiency
tends to be associated with higher per capita incomes, lower transfer from central government to
regional governments, the better vission, control procedures that are stronger on democracy.
Based on the literatures which was delivered in the previous chapters, the hypothesis proposed
research in this research is as follows:
H1: government expenditures in the education sector, health, infrastructure, and other
influential positively with high performance
H2. Efficiency government expenditures in improving performance reinforced with more good
governance local government
III. Research Methodology
The purpose of this research is to see if government expenditures can efficiently to enhance
performance. This research evaluates all local government, districts and cities in Indonesia
during 2009 to 2012. The year of 2009 is chosen as starting year because the detail evaluation
of performance is starat to be effective in this year. The level of performance for year of 2013
is not released yet by the ministry of internal affair. To know how the influence of government
expenditures public sector to the performance, especially local government, the model used in
this research test the effect of local government total expenditure and expenditure in the
education, health, and infrastructure on the performance. To see the influence, this research to
develop two models. Model 1 is a model that is used to test the influence of the local
government expenditures to the performance and a model 2 is to test the influence
expenditures in the education sector, health, and infrastructure to the performance of the local
government.
Model 1 and 2 are as follows:
Performance it = α 0 + α 1 TotSpend it + α 2 – α 8 Controls it + ε it
(1)
Performance it = β 0 + β 1 EduSpend it + β 2 HealthSpend it + β 3 InfraSpend it + β 4 – β 10 Controls it +
ε it
(2)
Where:
Performanceit : The level of performance of the local government i in year of t based on
measuring result of the regional government performance indicator (IKD).
This measurement include performance aspect in terms of Financial
Management, the Fiscal Performance, the service quality , the Economic
growth and the investment climate, and the performance per function. The
score range from 0 to 4.
TotSpendit
: Total government expenditures at a level regional government i in t
EduSpendit
: Government expenditures education in local government level I in t
HealthSpendit : Government expenditures health at a level regional government i in t
InfraSpendit
: Government expenditures infrastructure at a level regional government i in t
More over, to test the effect of Good Governance in public sector in improving the efficiency
government expenditures this research use Model 3 and 4 as follows:
Performance it = γ 0 + γ 1 TotSpend it + γ 2 GG it + γ 3 TotSpend*GG it + α 4 – α 10 Controls it + ε it
(3)
Performance it = γ 0 + γ 1 EduSpend it + γ 2 HealthSpend it + γ 3 InfrasSpend it + γ 4 GG it +
γ 5 TotSpend*GG it + α 6 – α 12 Controls it + ε it
(4)
Where:
GGit
: Good Governance is the quality of Governance in Local Government i in year
t
Model 1 to Model 4 using a couple of variables controls the per capita incomes (INCCAP)
which is measured by the number of revenue shared with number of people, population density
(POPD) that is measured in density of the population a region, decentralization (DECENT)
which is measured by using the dummy namely 1 when the area was recently separated
themselves for less than five years, and 0 when other, the performance of previous years
(PERFORMANCE t-1), Dummy Regional level (DGOV), Dummy of (DYEAR).
The measurement of the Good Government is develop by using Focus Group of Discussion
between researchers and several parties including the local government representatives,
government auditors, ministry of internal affair directorate of regional autonomy, and
academician. The result of the incdicators and measurement of Good Government is based on
the following principles:
1. Democration: Government administration based on the element of participation,
recognition of differences of opinion and the embodiment of the public interest
Sub Principles: (i) Democration in election proces measured by the rasio of voters to
number of population, party composition in the legislatives, the existence of independent
candidate of regional mayor, whether the mayor is incumbent or not, whether the coalition
party pros to the mayor in the election. (ii) People aspiration measured by whether the local
government has hotline or complained hotline. (iii) People participation measured by the
number of non government organization.
2. Transperency: Government administration that contains elements of disclosures and
provision of information that adequate and easily accessible by the stakeholders.
Sub Principles: (i) information accessibilities measured by the internet reporting score. (ii)
implementation of e-government, measured by whether the local government implement at
least one e-government system.
3. Accountability: Government administration that contains elements of clarity in function
whitin the organization and the way to account the responsibility of the function.
Sub Principles: (i) audit quality which measured by audit opinion and number of audit
findings. (ii) follow up of audit recomendation measured by the number of audit
recommendation implementation. (iii) audit findings regarding internal control.
4. Law culture: Government administration that contains elements of law enforcement
explicitly indiscriminate and obedience of the law by society based on awareness.
Sub Principles: (i) integrity measured by number of corruption case by local government.
(ii) commitment to ethical value measured by whether the local government has the ethical
aspect in their vision and mission. (iii) respecting the law measured by level of criminality
based on ratio of number of law case reported to number of population. (iv) law product
measured by number of law product produce during the year. (v) enforcement measured by
the ratio of law case handled to number of population.
5. Fairness and equality: Government administration that contains the element justice and
equity so that in its implementation can be realized equal treatment of stake holders in a
responsible manner.
Sub Principles: (i) Fairness in budget allocation measured by ration of budget in education
expenditures, health expenditures, and infrastructure expenditures to total budget. (ii)
gender equality measured by propotion of woman government officer to total government
officer and woman legislative to total legislative member.
In order to be able to summing the score in developing the index for good governance based on
above measurement we converted into score based on following criteria:
-
If the measurement is a continous variable, we classify the local government as good (score
3), fair (score 2), and poor (score 1). Score 3 if the local government is in the first quarter
of score among all the local government. Score 2 if the local government is in the second
and third quarter. Score 1 if the local government is in the forth or lowest quarter. First
quarter represent highest group of good governance and the forth quarter represent lowest
group of good governance.
-
If the measurement is dummy variable we classify the local government as score 3 (good)
if it has the value of 1, and score 0 (poor) if it has the value of 0.
IV. Analysis of research results
IV.1. Descriptive Statistics
The average performance of local governance is 2.2804, 2.4524, 2.4819, and 2.2360 for year of
2009, 2010, 2011, and 2012 respectively. The average total spending of the local governance is
249 trilion rupiah, 252 trilion rupiah, 327 trilion rupiah, 377 trilion rupiah for year of 2009,
2010, 2011, and 2012 respectively. Based on the descriptive statistic analysis, the movement of
the average total spending tends to significantly increased during year 2009 to 2012. On the
other hand the levels of performance for local governments (districts and cities) tend to slightly
decreasing. This indicates that during the period the efficiencies of government expenditures are
decreasing. For governance score the average score is 1,1, 1,0, 1,2, and 0,9 respectively for year
2009, 2010, 2011, and 2012.
Figure 1 and 2 describes the local government spending and performance during the year of
2009 to 2012. Figure 1 and Figure 2 gives an overview on the movement of government
spending which increase significantly during the period of 2009 to 2012, but the increasing
trend of the spending are not followed by increasing performance.
Figure 1.
Local Government Spending
Figure 2
Local Government Performance
IV.2. Analysis of Regression Results
The result of model 1 shows that the coefficient of α 1 is positive significant at 1% level. This
result that the total spending could increase the performance of local government. This result is
consistent with hypothesis 1. This indicates that the local government performance is determine
by the amount of government expenditures. The separate year testing shows that the coefficient
of α 1 is tend to decreasing across year of 2009 to 2012.
The result of model 2 shows that the coefficient of β 1 and β 2 is positive significant at 1% , and
β 3 is positive significant at 5%. This also indicates that expenditure in education, health, and
infrastructure could also increase the performance of local government. The result shows that
the highest effect to performance comes from expenditure in education.
Regarding the control variables, both Model 1 and Model 2 provide similar result. The results
show that variable INCCAP, POPD, and PERFORMANCEt-1 is significant at 1%, 5%, 5%
respectively. The variable DECENT, DGOV, and DYEAR is not significant.
The result in Model 3 and 4 provide the hypothesis testing for H3 and H4. The result shows that
when there is the GG and the interaction term of GG and TotSpend, the variable of TotSpen is
no longer significant. The coefficient of γ 3 is positive statistically significant at 5%. This
indicates that the hypothesis 3 is accepted. The result indicates that the good governance will
significantly improve the efficiency of the local governance. This research consistent to Easterly
and Levine (1997) and Hauner (2008).
Based on Model 4 testing for hyphothesis 4, the result shows that the good governance only
moderates variable education expenditure and health expenditure. The interaction term between
GG and infrastructure spending is not significant. This result shows that the good governance
improve the efficiency in government expenditure mainly in the education and healt function. The
not significant result in the infrastructure expenditure might be cause by the regulation of public
private partnership in providing infrastructure. In the PPP scheme, the project is conduct by the
private party that usually has already conducted their own governance mechanism.
V. Conclusion
This research provides empirical evidence that the efficiency of the expenditure of local
government in Indonesia is tend to decrease across time. This research also shows that that the
expenditure in education, health, and infrastructure could also increase the performance of local
government. The result shows that the highest effect to performance comes from expenditure in
education.
Furthermore, the result indicates that the good governance will significantly improve the
efficiency of the local governance. This research consistent to Easterly and Levine (1997) and
Hauner (2008). The result also shows that the good governance only moderates variable education
expenditure and health expenditure. The interaction term between GG and infrastructure spending
is not significant. This result shows that the good governance improve the efficiency in government
expenditure mainly in the education and healt function.
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