RI country risks remain high<\/p>\n
Johanes L. Sitanggang, Jakarta<\/p>\n
A modicum of political stability has returned to Indonesia.
\nHowever, the long-term outlook remains clouded in uncertainty as
\nthe country's transition to a transparent and stable democracy
\nfaces numerous obstacles, ranging from powerful vested interests
\nof the previous and current regimes to an immature party system
\nand the centrifugal forces of separatism.<\/p>\n
The specter of religious militancy looms ever larger over the
\ncountry, despite the fact that the vast majority of Indonesians
\nare moderate. Deadly terror attacks in Bali and Jakarta provided
\ntragic evidence of the potent security risks potentially faced by
\nU.S. and Western interests.<\/p>\n
Investor confidence has also been dented by a persistent
\ncorruption problem at all levels of officialdom and severe
\ndeficiencies in the legal system.<\/p>\n
Economic reforms have been followed up slowly and unevenly,
\nwith Indonesia failing to realize its true growth potential to
\nabsorb the over 2.97 million new entrants into the labor market
\nyearly, which has increased the number of unemployed to over
\n11.66 million in 2004, plus another 40 million who are
\nunderemployed.<\/p>\n
More effective policies on infrastructure development and
\npoverty reduction for the more than 39 million officially
\nclassified poor people and 25 million near-poor are urgently
\nneeded, in line with the UN Millennium Development Goals on
\nPoverty Reduction. In addition, the country's legal framework
\nrequires an overhaul and the tax framework is in need of reform.<\/p>\n
Indonesia is still recovering from the financial crisis of
\n1997\/1998, with per capita income now at US$710, far from the
\n$1,110 before the crisis. There has been some progress in terms
\nof consolidation, but the structural problems that precipitated
\nthe crisis have not been sufficiently addressed. Political and
\nlegal uncertainty continue to deter the return of foreign
\ninvestors.<\/p>\n
A conspicuous lack of deregulation and financial transparency
\nhave combined with political issues and the weak legal framework
\nto hamper growth, despite an extremely rich endowment of natural
\nresources.<\/p>\n
High levels of domestic corporate debt exposure obstruct
\ninvestment and the resurrection of a viable financial sector.
\nVested interests and corruption impede progress on economic
\nreform and development. However, Indonesia's geostrategic
\nimportance ensures the commitment of donors, despite the failure
\nof successive governments to make good on their promises of
\nreform. Donors are unable to control corruption by central,
\nprovincial and district government officials, despite improved
\nprocurement procedures.<\/p>\n
Indonesia's legal framework did not keep pace with the
\nimprovements in the economic environment prior to the financial
\ncrisis and it is a difficult country in which to do business. The
\nregulatory and legal environment can be tangled, incoherent and
\ntime-consuming. After a long period of vacillation, the
\ngovernment has finally prioritized the modernization of the legal
\nsystem, and numerous elements of the legal framework are likely
\nto undergo a major overhaul.<\/p>\n
However, entrenched business practices and deficiencies in law
\nenforcement could be much harder to remedy than weaknesses in the
\nfabric of the legal system.<\/p>\n
The tax system was already failing to keep pace with economic
\ndevelopments before the crisis. Reforms in early 2001 were a
\ntentative first step toward an urgently needed overhaul of the
\nsystem, but further reforms are required. Corporate tax rates are
\nhigh by regional standards. The system relies quite heavily on
\nwithholding taxes, reflecting the government's difficulties in
\ntax collection. Decentralization since 2001 has resulted in a
\ngreater risk that extra taxes will be levied at the provincial
\nand district levels.<\/p>\n
Endemic official corruption continues to blight business
\nactivity in Indonesia. Overall government attitudes toward
\nforeign investment are positive, but the same cannot be said
\nabout all key political figures and the bureaucracy, which --
\nparticularly at the provincial and district levels -- can be
\nanything from cumbersome to antagonistic.<\/p>\n
The quantity and quality of infrastructure in Indonesia lags
\nbehind other Asian countries, and is in urgent need of
\ndevelopment. The August 2003 car bomb attack on the JW Marriott
\nhotel in Jakarta provided tragic evidence that the terror threat
\nin Indonesia has not receded since the October 2002 Bali
\nbombings.<\/p>\n
Several unresolved small-scale attacks in the Jakarta area
\nhave also highlighted persistent dangers to foreigners. The
\nmajority of Indonesians are moderate, but the scope of terrorist
\ncells is uncertain and Islamic militant groups may have shifted
\ntheir focus away from local conflicts to economic terrorism. The
\nrisk of further terrorist attacks on the interests of the U.S.
\nand its allies must therefore be taken seriously due to mounting
\nanti-U.S. and probably anti-Western sentiments. Several provinces
\nare experiencing secessionist violence.<\/p>\n
Politically motivated violence could erupt in Jakarta and
\nother large cities. The police force and the legal system are
\nstretched thin. Indonesian waters have the highest frequency of
\npiracy in the world and the Strait of Malacca is thought to be a
\npotential target for bin Laden's terrorist networks in Indonesia.<\/p>\n
The writer (kljs@indo.net.id) is an economic and financial
\nanalyst at KLEMENS Economic Development and Corporate Advisory.<\/p>",
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