Indonesian courts create unemployment.<\/p>\n
Sebastiaan Pompe
\nIMF Resident Legal Advisor
\nJakarta<\/p>\n
It is accepted theory that reliable law enforcement and legal
\ncertainty are critical for investment recovery. This has been a
\nmantra of international donor organizations for almost a decade.
\nFor Indonesia, it was reiterated recently by prominent
\ninternational journals such as the Asia Wall Street Journal and
\nThe Economist, which in a recent issue says that \"the culture of
\nlegal confusion...is by far the biggest obstacle to investment\".<\/p>\n
It seems that this accepted theory of international agencies
\nis not shared by the Indonesian judiciary. In a recent debate,
\nsome senior judges took the view that courts do not play a role
\nin this \"legal confusion\", and share no responsibility for
\neconomic recovery or employment.<\/p>\n
In their view, economic recovery and employment are a matter
\nof economics, or politics perhaps. To the extent that the law is
\ninvolved at all, it is the legal system broadly speaking, the
\nstatutory framework, the administration, legal professions and so
\non. The courts have a passive role at best and basically just
\nconfirm the situation as they find it, so the judges argued.<\/p>\n
Indeed, some judges said that the judiciary in reality
\nactually protects employment where it can, such as in bankruptcy
\ncases. They argued that since bankruptcy causes unemployment,
\ncourts therefore should apply bankruptcy law restrictively.<\/p>\n
If judges grant bankruptcy petitions, and courts act
\neffectively in liquidating bankrupt companies (or even in debt
\nrestructuring), they stimulate unemployment, and hence go against
\nthe national interest, it is said.<\/p>\n
This view is misguided. Judges play an important part in
\nstrengthening the economic climate and conversely, court failure
\nboosts unemployment. Let me set out some points here,
\nspecifically in relation to bankruptcy.<\/p>\n
o First, effective bankruptcy law helps improve employment.
\nAssuredly, bankruptcy cannot be described as a pleasant affair
\nfor the individual company. It involves a liquidation of assets,
\nwhich is a legal euphemism for a process by which estates are
\nbroken up, assets are divided and sold off, and employees are
\nlaid off.<\/p>\n
For the individual company, the individual manager or
\nshareholder, and notably the individual employee, bankruptcy can
\nbe a nightmare. It is important to keep that in mind,
\nparticularly for courts, and not to rush into bankruptcy
\nimprudently, or grant spurious claims.<\/p>\n
Yet it also is important to lift the perspective beyond the
\nindividual case, and consider how bankruptcy impacts on economic
\nstructures generally. In this broader economic sense bankruptcy
\nis a form of re-distributing assets.<\/p>\n
It is the mechanism by which assets are released from dead-
\nends, which allows them to be invested elsewhere in more
\nprofitable undertakings. This orderly redistribution of assets
\nstimulates economic activity, and supports employment. Effective
\nbankruptcy therefore is a critical ingredient to an efficient
\neconomy in which employment is maximized.<\/p>\n
This helps explain why in countries such as the U.S., Japan or
\nin Europe, economic growth and bankruptcy are not mutually
\nexclusive. Even a small country such as the Netherlands has on
\naverage 630 court-imposed bankruptcies monthly. The Dutch figures
\nare more than 20 times the annual case load in Indonesia. The
\nIndonesian bankruptcy figures are quite outrageous, and point at
\nsignificant institutional and economic inefficiencies.<\/p>\n
o Second, there is in fact a major demand for bankruptcy
\nservices in Indonesia. Some Indonesian judges, pointing at the
\nvery small number of bankruptcy cases filed in 2003, argue that
\ntheir services are no longer required, that they have basically
\ncompleted their job. Some of them even say that the commercial
\ncourt has outlived its usefulness. This misreads the situation
\nentirely.<\/p>\n
The argument ignores official figures that show that a very
\nlarge number of Indonesian companies collapse outside bankruptcy.
\nAccording to the official statistic bureau (BPS) more than 1600
\nofficially registered Indonesian companies (10 percent of the
\ntotal) either scaled down operations dramatically or closed their
\ndoors entirely in 2002. (These are officially registered
\ncompanies, the figure of unofficial unregistered companies is
\nmuch higher.)<\/p>\n
In the slow-motion and often incomplete collapse of these 1600
\ncompanies, their capital more often than not remains tied up in
\nthe company one way or the other. Until it is freed, it cannot be
\nreinvested elsewhere; and it cannot serve to create new
\nemployment.<\/p>\n
The inability of these 1600 companies to go through an orderly
\nliquidation impairs the recovery of capital through for new, more
\nprofitable investment. Employment recovery is handicapped
\naccordingly. Thus, BPS reported that the 2002 company collapse
\ncaused an additional official registered unemployment of 145,000
\npersons; plus possibly half a million indirectly unemployed.<\/p>\n
Unlike asserted by some Indonesian judges, BPS figures
\ndemonstrate that there is in fact a major demand for bankruptcy
\nin Indonesia. The question is why such cases are not brought to
\ncourt. This has everything to do with the failure of the courts
\nto give a reliable, efficient and effective service. The judges
\nare wrong to hold that the problem is out there and that to the
\nextent that it affects them, they have solved it. In reality, the
\nproblem is with the judges themselves.<\/p>\n
o Third, unreliable courts boost unemployment. Courts that
\nare unreliable, inefficient, and ineffective will encourage bad
\nbehavior in society. The worse courts are, the worse debtors will
\nbe also. They will not pay their debts in time, they will default
\nintentionally, and will refuse to discuss alternative ways of
\nresolving disputes -- all because it is so easy and there is no
\neffective sanction. This is damaging to an economy, and to
\nemployment. It is damaging on society at large.<\/p>\n
The European Union some time ago completed a study on the
\nimpact of court efficiency and intentional defaults on
\nemployment. It demonstrates that as court inefficiency increases,
\nso do the number of intentional defaults, resulting in increased
\ncompany collapses and increased unemployment figures.<\/p>\n
This is very much the story of Indonesia in recent years,
\nnamely of how court ineffectiveness has boosted intentional
\ndefault beyond all proportions, and unemployment is shooting off
\nthe charts as a result.<\/p>\n
The misguided judicial focus on protecting debtor companies
\nfails to grasp that this in reality is a damaging and
\ncounterproductive approach: It undermines the enforceability of
\ncontracts, and ends up damaging the entire market. Sound
\nIndonesian companies or Indonesian banks have been dying because
\noutstanding debts are not repaid. As these cannot be recovered
\nthrough the court system, intentional defaults multiply, and
\nemployment dies.<\/p>\n
Despite the large number of company collapses in Indonesia
\nover past years, bankruptcy is little used in Indonesia. The
\nreason is that the courts are unreliable, inefficient and
\nineffective. Capital remains tied down in dead-ends as a result.<\/p>\n
Because it cannot be reinvested elsewhere, the resulting
\neconomic inefficiency increases unemployment. Court
\nunreliability, inefficiency and ineffectiveness encourage
\nintentional defaults, which boost unemployment further. In sum,
\ncourts directly contribute to unemployment in Indonesia.<\/p>\n
The views expressed in this article are his own and do not in
\nany way reflect those of the IMF.<\/p>",
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