RI's economy hinges on drifting legal framework<\/p>\n
Umar Juoro, Jakarta<\/p>\n
In every discussion about the main obstacles to doing business
\nin Indonesia, the problem of the legal framework is almost always
\nat the top of the list. However, the implication of this is
\ndifferent from one case to another. From the administration and
\nHouse of Representatives (DPR) point of view, this means more
\nlaws and more regulations should be enacted. While, from the
\nbusiness point of view, generally, this means certainty and
\nreliability. For the court system, this means making decisions in
\nits own way based on their own interpretation of laws or even the
\nConstitution.<\/p>\n
During the Soeharto era, practically the entire administration
\nunder his strong leadership was the sole institution to interpret
\nthe Constitution, and the main actor in drafting and passing the
\nlaws. The House was a rubber stamp body. Meanwhile, the legal
\nsystem was also under his direct control.<\/p>\n
Nevertheless, in that situation, the legal framework at the
\ntime was able to give certainty to businesspeople. Business
\ndisputes were resolved, not through the legal process, but by the
\nheavy handed state apparatus, whether bureaucracy or security
\nforces. Certainly from a democracy and human rights point of view
\nthis measure is hardly acceptable, but for development, this
\napproach was accepted as a way to propel high economic growth.<\/p>\n
In the current reform era, things have been changing
\ndrastically, especially after the amendments to the Constitution.
\nThe House and the People's Consultative Assembly have more say,
\nnot only in drafting and passing the laws, but also in changing
\nthe Constitution. The creation of the Constitutional Court makes
\nthis body the sole interpreter of the legality of the
\nConstitution.<\/p>\n
Unlike the Soeharto era, where laws guiding economic
\nactivities were interpreted in order to accommodate economic
\nliberalization, without necessarily amending the Constitution,
\nnow, the laws considered too liberal, such as opening to
\ncompetition certain economic sectors, such as electricity and
\noil\/gas, can be annulled or asked to be revised by the
\nConstitutional Court if they are not consistent with the spirit
\nof the Constitution.<\/p>\n
Judging from that situation, one may be pessimistic that a
\nreliable legal framework can be secured before doing business in
\nthis country. Just an example, the recent presidential decree on
\nland acquisition for infrastructure projects was immediately
\nchallenged by several non-government organizations. They claim it
\nis against the agrarian law that guarantees property and human
\nrights in general. This case may go to the Constitutional Court
\nand the court might annul the decree, thereby jeopardizing the
\ninvestor interest in infrastructure development, which is
\ndesperately needed in this country.<\/p>\n
In general, the legal framework will drift in the direction
\ndepending on which institution is involved in it.<\/p>\n
This factor, in a very open sociopolitical environment, keeps
\nthe legal framework adrift, creating a high degree of
\nuncertainty.<\/p>\n
Under these circumstances, the bureaucrats, judges and state
\npolice, tend to make decisions that are most suitable to their
\nown interpretations of certain laws and regulations and to their
\ninterests. They know that the government cannot intervene. This
\nis why bureaucrats often do not even abide by decrees or
\nregulations on reform measures made by the President and his
\nministers.<\/p>\n
However, this does not mean business cannot flourish in
\nIndonesia. Though there has not been much improvement in the
\nlegal framework, the economic growth in the first quarter of 2005
\nwas 6.35 percent (year-on-year) spurred by investment, which
\nexpanded by around 15 percent.<\/p>\n
When we look further into the base of this relatively high
\ngrowth, it turns out that it was the sectors that do not rely on
\nan extensive legal framework that have flourished, such as
\ntelecommunications (mainly wireless), construction (especially
\napartments, housing and malls), and trade (especially retail).<\/p>\n
The financial sector also grew robustly, even though banks and
\nfinancial institutions are heavily regulated, because the
\nactivities were mainly on the consumer and retail side that are
\nmuch less regulated.<\/p>\n
The sector that requires a solid legal framework, such as
\nmining and oil\/gas, suffered from disappointing downturns.
\nFurthermore, we can infer that the less a sector requires solid
\nlegal framework or the less regulated is a sector, the better the
\nperformance, and vice-versa, a sector that relies on solid
\nregulation will continue to languish.<\/p>\n
We can also see the situation from the origin of investors.
\nThe domestic and other Asian investors, especially from
\nSingapore, Malaysia and China, are able to understand the
\nsituation very well, realizing that the opportunity for business
\nis large and the expectation is high, despite the existence of a
\nweak and unreliable legal framework.<\/p>\n
As long as their local business partner is reliable and well-
\nknown and prefers to resolve disputes out of court, high returns
\nare guaranteed from the investment that they jointly make.
\nHowever, for North American and European investors in general,
\nand to some extent Japanese, that rely more on solid legal
\nframework for investment, the situation is not yet attractive.<\/p>\n
They need more time to decide on significant investment and
\nwill wait until the legal framework is reliable, except for
\nshort-term portfolio investors. So it is no wonder that the elite
\nbusiness and government people are starting to pay more attention
\nto Chinese investors, especially in infrastructure and natural
\nresource projects.<\/p>\n
The question becomes, is that situation going to be
\nsustainable? The answer is likely no. Simply tapping the
\nopportunity and high expectation without a solid legal framework
\nwill eventually lead to severe difficulties to resolve disputes
\nbecause of economic or political reasons that might come later
\non.<\/p>\n
The three branches of government should work together for a
\ncommon interest of the greater long-term welfare of the people.
\nThey should not pretend to be independent of each other while
\nundermining each function in practice.<\/p>\n
The writer is the Chairman of CIDES (Center for Information
\nand Development Studies) and a Senior Fellow at the Habibie
\nCenter.<\/p>",
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