Give us a just system

The decrease of almost 60 percent in foreign direct investment approvals and 30 percent in licensed domestic investment projects in the first five months of this year provide further evidence of the worsening disadvantages of doing business in Indonesia.

Trade figures, as reported by the Central Bureau of Statistics (BPS) early last month, also showed how investment has been slackening to almost a negligible level, as reflected by the 26 percent decline in imports, which usually consist largely (more than 80 percent) of industrial basic materials and capital goods, in the first four months of the year.

The US$1.67 billion in foreign investment and Rp 9.4 trillion ($1.05 billion) in domestic investment licensed by the Investment Coordinating Board (BKPM) in the January-May period look even more insignificant because realized investment is usually less than 40 percent of the approved foreign investment and below 50 percent of licensed domestic investment.

This small capital inflow became even more negligible, compared to the billions of dollars still fleeing the country every year, either through debt payments, profit repatriation and capital flight to safety.

This development is quite worrisome as it takes place at a time when the country, suffering from a steeply falling rate of domestic savings due to depressed economy, is desperate for foreign investment to fuel economic recovery. Private capital outlays are badly needed to increase the economic capacity as private consumption, the main locomotive of growth over the last two years, has begun to lose steam, and the government, overburdened with huge domestic and foreign debts, is deprived of meaningful investment capacity.

The increasingly stable political condition, strengthening rupiah, weakening inflationary pressures and declining interest rates are ineffective to prompt Indonesians to repatriate the capital they moved overseas during the peak of the economic and political crisis in 1998, let alone to attract foreign investors.

BKPM chairman, Theo Toemion, was right in observing last week that a worsening legal uncertainty is now enemy number one to investors. Yet similarly damaging is the regulatory uncertainty arising in the start-up implementation of regional autonomy.

The legal limbo, caused by incompetent and corrupt courts, shows how the judicial system that was designed to support the authoritarian and corrupt administration under Soeharto, remains untouched by the reform movement.

The legal uncertainty makes investing in Indonesia like gambling in a casino because in a highly-complex market economy, interdependent and contingent world economy, it is good legal institutions and laws that serve as risk management tools.

Effective laws create structures of expectations that guide official behavior in making decisions, particularly economic decisions, by allowing people to make predictions reasonably accurate within an acceptable range. Legal certainty empowers officials and the people to manage the contingencies and risks of complexity within a market economy. Put another way, effective law enforcement enables businesspeople to reasonably calculate risks.

Worse still, regulatory uncertainty that arose in the launching of regional autonomy has discouraged investors from doing business in most provinces outside Java where most of the country's natural resources are located.

Legal and regulatory uncertainty makes the country's rich natural resources, low labor wage structure and potentially large market -- supposed to be the main attractions to investors -- virtually meaningless for business proposition.

It is therefore most imperative that the government act immediately and firmly to reform the judicial system. True, the development of a full-fledged rule-of-law based system takes a long time as it involves changing many minds, systems, ways of being and doing, education and retooling on a grand scale.

However, given the urgency of the problem, we cannot afford an incremental reform. A sort of shock-therapy approach, beside a gradual reform, is needed to build a minimum confidence in the court system.

We suggest therefore that the government select a pool of highly competent and honest judges and prosecutors and assign them to courts in Jakarta and several other major cities that handle high-profile criminal and civil cases.

Widely-perceived justice dispensed by courts in several big criminal and civil (commercial) cases would inspire confidence in the court system. The jailing of several big corruptors and recalcitrant big debtors or the bankrupting of some bad conglomerates could go a long way toward convincing people that the supremacy of law is still the rule and not the privilege of those with political or money power.