Indonesia's 1999 decentralization law gave local governments in Indonesia an unprecedented opportunity to adopt pro-development policies. In this paper we study whether decentralization has in fact generated improved economic performance in Indonesia. Using a synthetic case control methodology, we argue that that Indonesian decentralization has had no discernable effect on the country's national-level economic performance. To explain why not, we use subnational data to probe two political economy mechanisms-interjurisdictional competition and democratic accountabilitythat underlie all theories linking decentralization to better economic outcomes. Our findings suggest that extreme heterogeneity in endowments, factor immobility, and the endogenous deterioration of local governance institutions can each undermine the supposed development-enhancing promises of decentralized government in emerging economies such as Indonesia.

Sri Mulyani's resignation as finance minister in May disturbed markets and aroused concern about the government's commitment to reform. This concern was partly alleviated by the appointment of two well-respected individuals as finance minister and deputy finance minister. Further progress with reform will depend heavily on this new team and other key officials. Strong presidential support will also be needed to resist attempts by parliament to interfere excessively with the finance ministry's work. The economy continued its steady recovery from the impact of the global financial crisis (GFC), but the recovery could still be jeopardised if sovereign debt concerns in Europe persist and block the rebound in global trade and commodity prices. Inflation continues to accelerate, suggesting little room for complacency on monetary policy. Fiscal policy, on the other hand, remains conservative. The higher deficit in the revised 2010 budget is not excessive, and is unlikely to be realised in any case. The real budget challenge is to spend budgeted amounts fully and well. The new five-year plan is also conservative and does little to clarify spending priorities, including for the president's 'connectivity' agenda. Despite the GFC, poverty continued to decline, thanks largely to the uninterrupted expansion of GDP and to cash transfers to the poor. Unemployment also continued to fall, although particular groups suffered slight increases in unemployment (young workers 15-25 years old) and somewhat larger reductions in working hours (urban, non-poor, and male-headed households). Nevertheless the large and sustained deceleration of manufacturing growth and the closely related dramatic shift of employment from the formal to the informal sector provide cause for concern. Distortionary labour market policies may help to explain both. A new mining law significantly alters the legal environment for firms in this industry, and also introduces long discredited policies intended to 'increase value added' by requiring the domestic processing of minerals. A new law on local government taxes attempts to reduce uncertainty for citizens and investors, but the nature of overall spending by local governments is of much greater importance for the investment climate. The central government has recently been seeking to restore the role of the 'missing intermediate' level of government and to boost the centre's indirect control over local governments through provincial governments and governors. This strategy is unlikely to succeed, but it highlights the conflicting requirements for provincial governors to act as agents of the central government while also being accountable to their provincial electorates.

We study how inequality, democracy and economic development affect institutions in a dynamic panel model using data for 78 countries from 1984 to 2006. We suggest a model that assumes the sluggish adjustment of institutional quality and the interplay between the key explanatory variables. We find that democracy has a non-linear effect on government stability and military involvement in politics. This effect depends on inequality and GDP per capita. Inequality matters for law and order and has a nonlinear effect as well. However, the results for wealth effect are mixed. I IntroductionA number of studies show that good institutions deliver economic prosperity and good long-run development. Meanwhile, what actually shapes the quality of institutions remains open to question. The theory of endogenous institutions contends that institutions are endogenously determined and not exogenously given, by showing factors that affect the quality of such institutions.While the study of endogenous institutions has been prevalent since 1940s (see, for example, Myrdal, 1944;North, 1990), the theoretical literature linking political democracy, distribution of wealth, and economic welfare to institutions has been fairly recent. Chong and Gradstein (2007) characterise a dynamic system in which institutions and inequality can simultaneously adjust over time. Acemoglu (2008) suggests the evolution between distribution of resources and institutions. However, Acemoglu (2006) and show that institutions can be inefficient and persistent, and economic policies can be chosen favouring an elite despite democratic political structure. Savoia et al. (2010) assert that inequality affects the quality of economic institutions (defined as a set of rules constraining incentives) directly through persistent rentseeking policies and indirectly through democracy. That is, the inequality effect on institutions may be lower in a more democratic country because democracy grants poorer people, who may demand redistribution and better public institutions, equal voting rights. Similarly, the effect of inequality depends on the country's economic wealth. The authors emphasise that democracy, inequality and economic development affect institutions together and call for further empirical studies.A number of empirical studies have been carried out on this subject to date. One study on the effect of both inequality and democracy on

This paper reviews some major works of Thee Kian Wie, one of Indonesia’s most distinguished economic historians, that spans from the Colonial period until the post-New Order period. His works emphasize that economic history can guide future economic policy. Current problems in Indonesia were resulted from past policy failures. Indonesia needs to consistently embark on open economic policies, free itself from "colonial period mentality". Investment should be made in rebuilding crumbling infrastructure, improving the quality of health and education services, and addressing poor law enforcement. If current corruption persists, Indonesia could not hope to become a dynamic and prosperous country.

We study how poor quality of institution, such as corruption in public procurement auction, could hurt welfare. We show how competition effect could improve the cost-efficiency but not the quality of a public procurement auction with corruption. In fact, no incentive mechanism can be efficient in this auction if qualities are non-contractible. An empirical study suggests that increasing the number of bidders does increase the percentage cost efficiency albeit at a decreasing rate and decreases the percentage cost efficiency after it reaches a certain number of bidders.