Good governance vital for development

JAKARTA (JP): Good governance is important to hold down costs of doing business, to sustain investor confidence, maintain international competitiveness and improve equity, the World Bank asserts.

Surveys of businessmen rank Indonesia low on bureaucratic delays and contract enforceability," the World Bank says in its latest report on Indonesia, titled Indonesia sustaining high growth with equity.

The report, issued here on Wednesday, discusses good governance as a vital component of what the World Bank calls soft infrastructures which are essential to sustain rapid growth with equity.

Following are more excerpts from the World Bank report on good governance.

Public confidence in the efficiency and fairness of the legal system is a critical part of good governance. The need to improve the legal system to strengthen its credibility is evident from survey results and workshops.

The importance of a well functioning legal system is recognized by the inclusion of plans for legal reform in the Sixth Five Year Development Plan (REPELITA VI).

In discussing these plans, the Assistant State Minister/BAPPENAS for legal Development Social communication and Institutional in Relations, Sutadi Djajakusuma, spoke of building a state based on the rule of law, with a modern body of laws, a responsible and qualified judiciary, and an efficient and affordable judicial process to provide access to justice for the society at large, in particular, the underprivileged.

He highlighted the need to: (a) reform judicial administration to ensure the speedy resolution of conflicts and an effective appeals system, and (b) improve the skills and performance of legal and judicial personnel by strengthening ethical and professional standards, transparency and accountability.

One step that has already been taken is the introduction of a new company law in March 1996. the new law sets time limits on the process of company approvals (though initial indications suggest that these are not being observed), strengthens the rights of minority shareholders, sets guidelines for liquidation, and attempts to increase transparency.

The effort to reform the legal system is benefiting from widespread consultations within the country and the government's use of international experts. For example, preparatory work for the 1995 Company law involved widespread discussion and contributions from within the country and in this way provides a model for on-going work to follow. External assistance has included the AUSAid Specialized Legal Training Project, the EU- IPR Program, and the USAid-funded ELIPS project.

Priorities for this legal reform effort include:

1. Strengthening national commitment to the rule of law and the effective working of an independent judicial system. Government needs to show on-going commitment to the transparent establishment and enforcement of laws and regulations, as part of maintaining a consensus on the role of law. Providers and users of judicial services point to the lack of independence of the judiciary as the paramount deficiency in the system.

2. Institutional reform of the judicial system. Public opinion and modern business practices demand efficient means of dispute resolution. At present, economic actors are bypassing the courts and formal arbitration systems more often that can be readily explained by the culturally recognized an widely respected "musyawarah" concept of reaching consensus and avoiding conflict.

This creates uncertainty regarding the equity with which many disputes are resolved. There is a need for improved screening procedures to appoint judges, attorneys and court administrators, accreditation boards for the legal profession, and a code of ethical and professional standards.

Government and NGO sponsored legal aid centers may be one way of providing legal advice to the poor and increasing the equality of access to justice. Similarly the use of ADR mechanisms (i.e. conciliation, mediation or arbitration) prior to proceeding with civil litigation is in line with Indonesia's culture. However, conciliation is not currently mandatory under Indonesian law, and legislation in this area is required to clarify the extent and nature of such ADR mechanisms.

3. Modernizing laws. Rapid changes in trade, business and technology require new laws to regulate activities and maintain confidence in public policy. Similarly there is a need to update laws on arbitration, competition, bankruptcy intellectual property rights and secured transactions. There is still a monumental task of overhauling the civil, commercial, penal and civil procedure codes and other fundamental laws dating from the Dutch colonial era. Moreover, this process needs to have widespread public participation, as was done in developing the new Company law, to reflect the interests of affected parties, and to ensure credibility and administrative feasibility.

4. Capacity building by strengthening human resource. Indonesia already places a high degree of importance to human resource development and there are already about 13,000 law graduates from over 200 law schools in Indonesia every year. However, the report by the consortium of seven leading law faculties suggests that the curriculum needs to be made more relevant. Seconds, ongoing education for law professionals is essential for their skills to remain up-to-date with changes in the law and its application.

Despite the perceptions of large hidden costs in Indonesia, foreign investment and GDP growth have been high recently. Nonetheless, Indonesia will need to keep pace with other countries and improve investor perceptions regarding governance in order to reduce risks and ensure that its impressive development record continues into the 21st century.

The challenges to maintain rapid growth and improve equity and perceptions of fairness, by maintaining clear policies and administering them consistently over time. This challenge is increasingly important because growing public and international interest or expectations concerning corporate governance.

Reducing the hidden costs of doing business in Indonesia involves changes by both the public and private sectors, and will be a lengthy process. It entails a combination of policy and institutional reform, and changes in the way business is undertaken. World Bank cross-country experience indicates that a successful strategy of policy and institutional reform to reduce the hidden costs of doing business in Indonesia and improve equity is likely to involve five aspect: 1. Strong sustained commitment to the program at all levels by leadership and example. 2. Policy reform to reduce discretionary authority and increase transparency and competition, as this reduces opportunities for corruption 3. A new civil service pay structure and a system of recruitment (inter- and intra-) departmental mobility, and promotion that is merit based. 4. Increased civil service accountability by strengthened monitoring of public employee performance, and penalties for poor performance, abuse of power or malfeasance, 5. The continued development of a sound predictable legal system, and an effective and independent judiciary. (das/vin)