Give us a justice system

Give us a justice 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.