Fri, 11 Mar 2005

Old problems, new burdens

Every time the government raises domestic fuel prices closer to their real economic cost, businesspeople always raise a rumpus, urging the government to deal firmly with the old problems of red tape, illegal levies, and corrupt tax and customs services to offset the additional burden on business.

This was also the case after the March 1 fuel price hikes. Most businesses argue 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 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 investors on Batam island had threatened to pull out due to the worsening business climate and the uncertainty over that island's free-trade status.

The complainants are not skittish investors who are demanding special facilities or preferential treatment. Their grievances are legitimate as they have found that their international competitiveness is being eroded by an inimical business climate. Now, higher fuel prices are imposing additional burdens on them.

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

Indonesia consistently performs abysmally in all international surveys of economic competitiveness and invariably ranks far below all of the other founding members of ASEAN. The 2004 Economic Freedom of the World Report, which was prepared by Canada's Fraser Institute last July, ranked Indonesia 86th out of the 123 countries assessed in terms of good governance, access to sound money, freedom to trade internationally, regulations on credit, and 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 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 in 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, for example, be seen from the much higher terminal handling charges (THC) for containers charged by foreign shipping companies at Indonesian ports than at other ports in ASEAN countries. For example, the THC for a 20-foot container in an Indonesian port is set at US$150, as against $110 in Singapore, $100 in Malaysia and a mere $60 in Thailand, the latest data from the Far Eastern Shipping Conference shows.

The government needs to take a more strategic view of all the weaknesses of our economy, and realign its list of priorities with the focus on creating a sound business environment so as 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. 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 such a strong a political mandate.

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

Laggards sometimes argue that reforms are 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.

It needs to be remembered that it's a vicious circle -- an economy can never be competitive if its businesses are not productive, while its businesses will never be productive if the investment climate is not supportive.