Indonesia needs big bang reform to woo investment

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.