Fri, 11 Mar 2005

Every time the government raises domestic fuel prices closer to their real economic costs businesspeople always cry havoc, urging the government to firmly deal with the old problems of red tape, illegal levies, corrupt tax and customs services to offset the additional burdens of businesses.

That was also the case soon after the March 1 fuel price hikes. Most businesses have argued they will not be able to remain competitive under the new environment of higher fuel prices if the government does not act immediately to cut down other costs related to government regulations and public services.

The Riau chapter of the Indonesian Employers Association notified economics ministers last week that 24 more foreign investment companies on Batam island had threatened to pull out due to the worsening business climate and the uncertainty about the free-trade status of that island.

The investor complainants are not skittish investors who demand special facilities or preferential treatment. Their grievances are simply legitimate as they have found that their international competitiveness is being eroded by inimical business climate. Now the new fuel price policy is imposing additional burdens.

The government should have fully realized why our economic competitive edge has steadily been declining. Many studies and researches have diagnosed the problems and made policy recommendations. But the leadership and political will of the new government seem not as strong as the political mandate it got in last year's presidential election.

Indonesia has performed very poorly in all international ratings of economic competitiveness and always ranks much below all other founding members of ASEAN. The 2004 Economic Freedom of the World Report, which was issued by Canada's Fraser Institute last July, ranked Indonesia only the 86th out of 123 countries measured in terms of good governance, access to sound money, freedom to trade internationally, regulations of credit, labor and business, legal structures and security of property rights.

Indonesia also ranked very low in both indices of the Global Competitiveness Report 2003 which was prepared and issued by the Geneva-based World Economic Forum. It was rated the 66th out of 102 countries surveyed in the growth competitiveness index and 58th in the business competitiveness index.

Overall, businesses in Indonesia shoulder almost twice as much the administrative costs and have to struggle through twice as arduous bureaucratic procedures as their counterparts in other ASEAN countries.

The higher business risks and gross inefficiency in Indonesia can, among other things, be noted from the much higher terminal handling charges (THC) for container boxes charged by foreign shipping companies at Indonesian seaports than other ports in ASEAN countries. For example, THC for 20-feet container box at Indonesian ports was set at US$150, as against $110 in Singapore, $100 in Malaysia and a mere $60 in Thailand, latest data at the Far Asia Eastern Shipping Conference showed.

The government should take a more strategic view of all the weak aspects of our economy, realign its list of top priorities with a focus on sound business environment to woo new domestic and foreign investment.

Pointless regulations foster corruption. The more irksome the rule, the greater the incentive to bribe officials not to enforce it. that red tape is one of the chief obstacles to growth in almost all poor countries.

There is much that governments can do to promote reform even when lacking a clear mandate for wide-ranging action, let alone the current government which possesses so strong a political mandate.

Moving ahead in areas where the ground for reform has been best prepared and laying the groundwork for further reform by setting out to shape, or reshape, popular understanding of the issues would inspire business confidence about the direction of the economic management.

Laggards sometimes argue that reforms would be difficult and costly to enact. But what could be simpler than scrapping a stupid rule? Simplifying procedures is harder, but not too hard. There are plenty of examples to learn from.

An economy can never be competitive if its business units are not highly productive but the productivity of businesses is inter-wined with the quality of the investment climate.