Economic opportunities in Indonesia

Economic opportunities in Indonesia

This is the last of two articles by Roderick Brazier,
the director of economics programs of the Asia Foundation in
Jakarta, on removing barriers to economic opportunities in
Indonesia. He identifies nine key areas to open access. In the
earlier article he discussed the questions of economic growth,
health, education, security, gender issue and physical
infrastructure.

7. Legal and regulatory environment

Here discussion needs to focus not just on the laws of
greatest relevance, but the process of making those laws.
Indonesian laws and regulations have suffered from being
formulated in a vacuum, without any input from those most
affected.

Policy tends to have been drafted with the interests of the
drafters in mind, not the interests of the governed. For growth
to be effective in reducing poverty, the poor need to have access
to, and fair returns for, their assets and products.

To this end, legislators and bureaucrats need to incorporate
the poor's views on issues like management of land and the
natural resource base in their communities.

In the case of SMEs, policy-makers have made wrong assumptions
about their needs for years. We are only just beginning to learn
that most SMEs see little benefit in the policies the government
has been pursuing and have made suggestions for alternative
policy prescriptions.

One of SME owners' top concerns is the very unsupportive and
corrupt bureaucracy. A solution to this problem is the
establishment of 'one-stop service' centers for obtaining
government permits.

SMEs benefit greatly from a simplified and transparent
licensing process, as demonstrated in Gianyar, Bali, where
Indonesia's first 'one-stop service' was established.

The 'one-stop service' in Gianyar helped increase local tax
revenues by over 330 percent in the first five years of its
operation and has also seen the number of registered businesses
increase from just under 16,000 to just over 21,000.

Though mandated by a decree from the ministry of home affairs
to establish one-stop services, only 20 percent of
kabupaten/kotamadya governments have done so.

Competition policy is of concern not just to business owners
but to all consumers (including the poor). A competition policy
should aim to create access to a competitive environment by
eliminating all artificial barriers to the entry of any business
entity into the economy.

The availability of low-cost inputs and undistorted markets
may be one of the most important determinants overall of general
access to markets. Put another way, access to market
opportunities is the natural state of affairs, and so policy
distortions, even while creating some opportunities, close many
more.

Take, for example, the Indonesian petrochemicals industry. No
competitive industry could likely exist in Indonesia without
protection, so the government subsidizes the industry and erects
tariff walls around it.

Both jobs and markets are created, but the real cost is in the
denied access to markets for manufacturers who use plastics as an
input and to consumers who must pay higher prices for plastic
products.

The increased costs may deny manufacturers access to overseas
markets where they may have been competitive had they been able
to sell at a lower price.

Are exemptions to the anti-monopoly law wise? The exemption
of SMEs and co-operatives was applauded by some but on closer
examination does not seem to help at all. More than anything else
the exemption probably indicates a strong and misplaced bias in
the minds of those who framed the law.

Of more concern is the possible loophole for state-owned
enterprises (SOEs) contained in article 51 of the law. Many SMEs
buy their inputs from monopolist SOEs. Micro-enterprises, in
particular, tend to be poor and sell to other poor. If prices are
artificially high owing to the protection of SOEs, entrepreneurs
and the poor can suffer.

Other areas of the law which are of great concern include
property rights. Title records are said to be in a scandalously
disorganized condition. Several deeds may exist for the same
piece of land. Farmers who have lived and worked land for
generations may have no evidence of ownership.

This chaos, coupled with corruption in the courts, creates
opportunities for unscrupulous acquisition of land, often from
the poor. The tenuous standing of title deeds also means that
many banks are unwilling to accept them as collateral for loans.

Meanwhile, the courts are so thoroughly rotten that the poor
and weak are terrified of any involvement with them. Poorer
members of society rightly see that judges' decisions are, in
effect, auctioned to the highest bidder. Of course, the highest
bidder in most disputes will be the richer party.

This is a lamentable state and an area of urgent concern for
the government.

8. Information

Access to information might be considered a combination of
other factors, including education, markets, and communication
infrastructure.

In the presence of all three, it is hard to imagine how
information might be constrained -- except that there could be
lags and income constraints that might prevent the poorest in
society from having ready access to information.

And there might be certain types of information that the
market doesn't produce or deliver well. As an example, money
spent on agricultural research and extension (essentially
information activities) are among the best investments countries
can make.

In general, though, information is normally plentiful and
cheap through radios, television, and newspapers, all of which
most Indonesians have ready access to. Information Communication
Technology (ICT) will make information cheaper and even more
widely available.

There are some threats to the flow of information through ICT,
including an emerging cartel among warung internet owners
(organized by the Assosiasi Warnet) which has been set up and is
attempting to enforce a floor price for hourly internet access.

SME owners often complain about access to market information.
What they often mean by that is not so much access to the
information itself (which is plentiful) but rather their capacity
to find and use that information.

The Asia Foundation's research on strategic alliances between
large companies and SMEs shows that market-based, voluntary
alliances are very effective arrangements for the sharing of
information and transferring technology to SMEs.

Such alliances facilitate the efficient flow of information
from buyers (sometimes foreign) to producers, which assists
export-oriented SMEs to better position their products in highly
competitive and fluid world markets.

Creating an environment which can produce mutually beneficial
strategic alliances will be a key step towards creating vibrant
SMEs in Indonesia.

In Jepara, Central Java, dramatic increases in exports, wage
rates and the number of companies followed an influx of foreign
buyers and factory owners (sometimes technically illegal) in the
wake of the rupiah's collapse in early 1998. Local bureaucratic
response was hostile, despite the obvious benefits for local
communities.

Recently the minister for law and legal reform, Yusril Izha
Mahendra, proposed introducing a hefty application fee for
tourists wanting to come to Indonesia.

Apart from the obvious undesirable effect of cutting the
number of tourists, such a measure would also reduce the
competitiveness of arts and crafts producers in Bali, Lombok,
East Java and Central Java.

How? Many of these producers send their goods to Bali for
final sale. Buyers in Bali (often the "undesirable foreign long-
termers" the government wants to send home) provide, in return,
the invaluable information on world trends that enables the
producers to make goods that meet buyers' tastes and so fetch
high prices.

This is a sound example of policy being framed in ways that
are incompatible with, or at least sit uncomfortably beside,
dynamic economic activity.

9. Credit

In order to create rural dynamism that can best relieve
poverty, basic structural problems need to be addressed.

Deregulation in production and marketing will give more
opportunities to rural producers. Production decisions can then
be based on market demand, eliminating obstacles and reducing the
costs of production, building production and distribution
networks, and developing access for small producers and traders
to export markets.

To lessen the difficulty of this transformation to a more
industrialized, market-oriented economy, special attention needs
to be paid to improving rural capital markets.

Both historical and comparative evidence clearly shows that
directed and subsidized credit programs do not work. At best
they are financially unsustainable. At worst, they discourage
commercial credit systems from developing in rural areas and trap
rural inhabitants in poverty.

A good example has been the massive failure of the KUT
(farmers' credit) system, a particularly poorly devised program.
However, programs such as the KUPEDES (village credit scheme) and
other small, commercially based schemes have demonstrated how to
design and implement rural credit systems that work for local
economies.

In short, the government needs to tread a fine line between
its twin roles of laying the foundations for economic progress
(education, health, and infrastructure) and getting out of the
way when government involvement would merely impede economic
activity.

In principle it should avoid measures such as legal
exemptions, tariffs, monopolies, and other distorting measures
that benefit a few but reduce economic opportunities for the
majority, mainly the weak.

The Indonesian economy might benefit from a regular public
benefits review, which tests whether laws and regulations hamper
access to economic participation, or not.

If they do, then the government or legislative councils should
decide whether the economic damage inflicted by the law or
regulation outweighs the benefits accrued to society in other
ways and recommend remedial action. This is a method that has
been used successfully in Australia for some years and tested in
some Asian countries.