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.