Investors' stance
The plunge in foreign and domestic investment approvals last year, as reported by the Investment Coordinating Board (BKPM) last week, served only to confirm the market perception that Indonesia is now among the least attractive places to do business.
The 35 percent decline in licensed foreign direct investment has been expected, given the multi-dimensional crisis that has been gripping the country since 1998 and the legal and regulatory uncertainty in many provinces during the current transition from a centralized government to local autonomy.
Yet far more worrisome was the 57 percent drop in domestic investment approvals as it shows that even Indonesian businesspeople who are supposed to be more capable of assessing local risks and of treading the difficult business terrain have increasingly been downbeat about the country's economic prospects.
The approved investments would become much less significant if it was set against actual (realized) capital outlays, which as a percentage of licensed total investment, are usually less than 40 percent for foreign investment and 30 percent for domestic investment.
The licensed foreign investment would become even more negligible, as compared to the billions of dollars still fleeing the country every year, either through debt payments, profit repatriation and capital flight to safety. In fact Indonesia has steadily suffered a net resource outflow since 1997.
Even though the board's data does not include investment in the hydrocarbon sector, financial services as well as capital outlays by small companies, the report portends a sluggish growth and worsening unemployment ahead.
This development is quite worrisome as it takes place at a time when the country, suffering from a falling rate of domestic savings due to the depressed economy, is desperate for 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 three years, has begun to lose steam, and the government, overburdened with huge domestic and foreign debts, is deprived of meaningful investment capacity.
Indonesia has indeed lost most of the three fundamental advantages it previously had to attract investment.
The first advantage, natural resources such as minerals, fisheries, agribusiness such as plantations, forestry and fisheries that are located mostly outside Java, is no longer attractive to new investors due to security problems and the imbroglios caused by the excesses of the start-up implementation of local autonomy. The legal and regulatory uncertainty has scared away investors as they do not have any clear guidelines to make reasonable calculations of business risks.
The huge pool of low-cost labor, which had largely been tapped by export-oriented businesses under the authoritarian rule of Soeharto, has now become a major hurdle to sound business operations.
The country has lost its competitive wage structure to other countries such as China and Vietnam as more trade unions have resorted to radical labor movement pressure and labor regulations are seen has too heavily in favor of workers.
The huge potential market of more than 210 million people that had lured many manufacturing investors for more than three decades until 1997 is no longer feasible for new investors because most of the existing factories have operated far below capacity due to decreased demand.
The economic crisis has depressed domestic market demand for almost all goods and services and virtually all manufacturing industries are suffering from excess capacity. Worse still, pervasive corruption and extensive incompetence within the government bureaucracy has added a great deal to the costs of doing business.
The government's decision last week to lift value added taxes on power, toll roads, capital goods and services and luxury sales tax on 23 categories of electronic goods, as well as to lower luxury sales tax rates on nine other groups of electronic goods would not contribute much to reducing the costs of doing business. They would simply help stimulate consumer demand through lower sales prices.
The gloomy investment report should serve as another alarm bell for the government to exercise a stronger resolve to take focused, definitive and concerted efforts to improve the business climate if it is serious about its declaration of 2003 as Indonesia Investment Year.
The investment climate must be entirely rife with risks and uncertainty if even national businesspeople themselves are not confident enough about investing in their own economy, let alone foreign investors. Without new investment there will be no job creation to absorb the tens of millions of people who have lost jobs amid this economic debacle. Nor will there be any additional capacity to fuel economic growth.
Investors are rational and realistic enough not to expect an overnight solution to the problems described above. What they do want to see is a steady, however small, progress under the right set of priority programs.
Certainly, the top priority, besides stable political and security conditions, should be a significant improvement in legal certainty because in a highly complex market-economy, it is good legal institutions and laws that serve as risk management tools. After all, the ability to reasonably calculate risks is what distinguishes business from gambling.