Fixing business environment is what counts<\/p>\n
Todd Callahan and
\nAndri Manuwoto
\nPT Jasa Cita
\nJakarta<\/p>\n
We are over a month into a new year and Indonesia watchers
\nhave generally given President Megawati Soekarnoputri's
\nadministration a B+ for sound macroeconomic management and
\nimproved fiscal sustainability.<\/p>\n
The government has made substantive progress in reducing its
\ndependence on foreign loans -- its domestic debt situation is a
\ndifferent story -- and looks set to achieve a balanced budget by
\n2005. Inflation, albeit still worrying, is under control and the
\nRupiah-US dollar exchange rate is trading at a fair level without
\nbeing battered by the high level of volatility that has plagued
\nthe currency in the past. These and other macroeconomic
\nattainments are positive and should be applauded.<\/p>\n
Unfortunately, the picture at the micro level is not so
\nencouraging. On this score, Jemal-ud-din Kassum, the World Bank's
\nVP for East Asia and the Pacific, got it right when he made the
\npoint at the recent forum of the Consultative Group on Indonesia
\nin Bali that Indonesia's investment climate is the most
\nsignificant obstacle to accelerating economic growth and reducing
\npoverty and vulnerability.<\/p>\n
Andrew Steer, the World Bank's country representative, aired
\nsimilar concerns this week in Jakarta. The country is seeing
\ndeclining investment as a share of gross domestic product and the
\nWorld Investment Report 2002 (UNCTAD) rated Indonesia 138 out of
\n146 countries in terms of investment attractiveness.<\/p>\n
\"So what?\", some have suggested, \"Indonesia does not need much
\ninvestment. It will follow its own path.\"<\/p>\n
Considering the country's five years of economic crisis, this
\nis an indictable statement. In the end, any decline in investment
\nshould be distressing because business activity is what drives
\ngrowth. If the country's top bureaucrats decide they want
\ninvestment, they have to realize that attracting investment
\ndollars is akin to competing in a beauty pageant because
\ncompanies have options. The leadership must stop the lip service,
\nrole up their sleeves and fix some of the very real problems that
\nare so injurious to the country's image.<\/p>\n
Does this mean the government has to fix everything and fix it
\novernight? Of course not.<\/p>\n
Indonesia is not a car that one can take to the garage, have
\nits spark plugs changed and then pick up the next day. That said,
\nthe administration must do a lot more to at least ensure that
\nhigh profile cases of corporate mistreatment do not occur and
\nmake their way into the domestic and foreign media.<\/p>\n
The following two cases, well known to local and foreign
\nbusiness people, are symptomatic of what is broken and what
\nIndonesia's authorities need to remedy.<\/p>\n
Last year's Manulife case made headlines worldwide after the
\nlocal unit of the Canadian insurance giant was declared bankrupt
\nby three Indonesian judges, who were widely perceived to be
\nacting on behalf of former local shareholders who were
\ndisgruntled they no longer controlled a stake in the firm.<\/p>\n
The case even threatened to jeopardize the bilateral
\ngovernment relationship between Jakarta and Ottawa. The situation
\nappeared to improve when the Indonesian Supreme Court overturned
\nthe bankruptcy ruling and initiated investigations into the
\ndecision of the lower court judges. Case closed? Nope.<\/p>\n
What is new about this case is that last month the three
\njudges were found innocent by the Supreme Court of all charges
\nagainst them. In short, they got off. What kind of message does
\nthis send to the business community? By letting the judges off
\nthe hook, it signals the government's inability, or unwillingness
\nas some have suggested, to punish bad behavior. It also serves as
\na reminder to business people that they live with an increasingly
\npredatory judiciary where judges can turn the law upside-down and
\nget away with it.<\/p>\n
In another example, the failure of successive Indonesian
\ngovernments to tackle vested interests and sell state-owned Semen
\nGresik to Cemex of Mexico is disappointing. Cemex, the world's
\nthird largest cement producer, arrived in Indonesia in 1998 at
\nthe height of the economic crisis and eventually acquired a 25.5
\npercent interest in Semen Gresik. However, due to opposition to
\nthe sale from interest groups, primarily at the Padang, West
\nSumatra unit, Cemex has been unable to acquire a controlling
\nstake in the firm.<\/p>\n
And yet, the Semen Gresik case is not only disappointing for
\nthat reason. As the majority shareholder in Semen Gresik, the
\ngovernment has been unable to exercise its right to hold an
\nextraordinary shareholder meeting at the unruly Semen Padang
\nunit. Until now, the government has been blocked by a local court
\nin Padang from holding the shareholders meeting.<\/p>\n
Like Manulife, the case has become so desperate that the
\ngovernment has had to turn to the Supreme Court to exercise its
\nbasic right to hold a shareholders'meeting. One noted lawyer,
\nTodung Mulya Lubis, has characterized this gaming as a tyranny of
\nthe courts. If the government has to file a case with the
\ncountry's highest court just to stage a shareholders meeting at
\none of its own companies, how optimistic should ordinary business
\npeople feel?<\/p>\n
Unfortunately, cases like these, and there are many of them,
\ndo not provide much cause for optimism. As at least part of the
\nsolution, it seems obvious that bad behavior and judicial
\nshenanigans should be punished when they occur. When judges abuse
\nthe law and declare major multinational insurance firms bankrupt,
\nthey should be sanctioned.<\/p>\n
If it is difficult to dismiss them outright, reassign them to
\nan undesirable posting. When the directors and commissioners of
\nstate-owned firms like Semen Padang misbehave, deal with them
\nswiftly and harshly. If the authorities are weak in dealing with
\nsuch groups, it will only encourage additional challenges that
\ncreate more problems.<\/p>\n
Surely the growth and economic recovery that investment and a
\ngood business environment produce is worth pursuing. It is really
\nthe only way for Indonesia to achieve the level of economic
\ngrowth required to improve the lives and welfare of its people.<\/p>\n
To do this, the government must focus on making the operating
\nenvironment more inhabitable for business people. Before cases
\nlike Manulife and Semen Gresik become national embarrassments,
\nthey must be dealt with and resolved. If the government can do
\nthis, domestic and foreign business activity will increase and
\nthe country will reap the fruits of higher economic growth.<\/p>\n
Todd Callahan works as a Senior Technical Advisor at PT Jasa
\nCita, a Jakarta-based research consultancy affiliated with
\nCastleAsia. Andri Manuwoto works as a Senior Consultant at the
\nsame firm.<\/p>",
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