Indonesia needs big bang reform to woo investment

Vincent Lingga, The Jakarta Post, Jakarta

No one says economic reform is easy. As World Bank country director for Indonesia Andrew Steer says, it requires a national political consensus and an effective coalition between the government and the business community.

A broad-based reform is also not easy because it essentially amounts to taking away rents that have built up in the economic system. Yet even much more challenging is that the political environment for tough policy making is now more demanding because the House of Representatives is no longer satisfied with simply taking the legislative initiative.

However, most analysts and businesspeople are complaining the pace of reform in Indonesia should be much faster because the key drivers of reform are already in place: the strong political mandate of President Susilo Bambang Yudhoyono and the broad-based popular sentiment that things have to change.

Sofyan Wanandi, chairman of the Employers Association, observed at an investment workshop here last week the implementation of reform measures was utterly disappointing because of inertia within the bureaucratic machinery.

James Castle, a seasoned business consultant who has more than 30 years of experience in the country, says the national leadership has a strong political will and commitment to reform, but the bureaucratic machinery responsible for implementing reform measures has not changed and remains resistant to change.

No wonder the issues and recommendations -- on governance, institutions and infrastructure -- discussed at the World Bank's workshop on "Improving Indonesia's Investment Climate: Reform Experiences from the Region" here last week were mostly the same as those discussed at numerous other seminars and studies by multilateral agencies.

In fact, most of the policy recommendations presented at the two-day workshop were very similar to the reform agenda that was supposed to be implemented over five years ago when the country was still under the special oversight of the International Monetary Fund.

International and national speakers and panelists, as well as participants, at the workshop unavoidably sang the same old song: How Indonesia has remained among the least attractive places for investment, as confirmed by national and international business surveys over the past five years.

Vice President Jusuf Kalla was right in asserting in his opening remarks at the workshop that "the government has been listening to the voices of the private sector and is well aware of the complaints from businesses about the hassles from so many layers of bureaucratic requirements, the rivers of red tape that investors must wade through".

But what the business community wants to see is concrete action and steady, if small, progress, as well as the right signals on the long-term policy direction.

Had President Susilo started his reform drive with some big- bang regulatory reform earlier this year, significant progress could have been made in the investment climate and, most importantly, the government could have built on its credibility in policy making and implementation.

But the government failed to strike hard while the iron was still hot. It did not seize the momentum for change.

Unlike Indonesia, South Korea, the first country to recover fully from the 1997 Asian economic crisis, acted immediately on the back of popular demand for change and succeeded within less than two years to reduce by half the number of its economic regulations to 6,308 by the end of 1999.

This reform, as Jong Seok Kim, a member of the Korean Regulatory Reform Committee, described at the workshop, significantly improved virtually all areas of the economy.

The story of how the Malaysian Industrial Development Authority (the equivalent of the Investment Coordinating Board here) successfully transformed that country into a favorite global investment destination also hinges on a conducive regulatory environment.

True, all business surveys have shown that regulations affect, for good or bad, investment. Good, sensible regulations with a high degree of compliance help markets function properly and economies grow. But excessive, low-quality regulations, different interpretations of regulations and regulatory uncertainties are inimical to investment.

A bad regulatory environment is one of the main barriers to new investment in Indonesia, the main source of economic inefficiency and the main reason why the costs of logistics and starting up a business in the country are among the highest in Asia.

Poor logistics make Indonesia even less attractive for business because most investors now demand efficient supply-chain management to enable them to tap comparative local advantages and economies of scale.

The modern production system requires efficient supply-chain management to allow for lower warehousing costs, lean manufacturing and just-in-time delivery.

But as discussions at the workshop showed, the slow-pace of reform does not have much to do with the painstaking democratic process of reaching a political consensus. The main problem is the combination of bureaucratic inertia and resistance from vested interests, a problem that can be resolved only by strong executive leadership.