It's easier to make speeches, but implementation is the real test.

Last week, the World Bank, launched the World Development Report 2005: A Better Investment Climate for Everyone, which highlights barriers to creating a conducive business climate, based on a worldwide survey of some 30,000 firms across the globe, including some 850 Indonesian businesses. The Jakarta Post's Dadan Wijaksana talked with the author of the Report Warrick Smith, about the issue. These are excerpts from the interview.

Question: Can you summarize the main messages of the report especially for Indonesia?

Answer: The report reiterates the vital role of private firms -- whether micro, small, medium or big-scale enterprises, or whether domestic or foreign -- in generating economic growth, which in turn is crucial for reducing poverty.

It says that government policies and behavior are pivotal to the investment climate through their influence on costs, risks and barriers to business competition, and their improvement is thus fundamental to driving growth. It also stresses the importance of credible government policies to gain public support and a positive response from firms and investors.

An investment climate is not just about costs. For example, some countries focus only on costs, reduced taxes, tax holidays, but the work we've done shows that a good investment climate really focuses on three things; cost is certainly important, but it's not all about taxes -- things like bad infrastructure, difficulties in enforcing contracts, riots, crime and bad regulations often cost foreign firms far more than taxes.

A second element is the notion of risks. Investors are deciding their future when they're making an investment, and certainty about the future is obviously very important.

What is the next concern?

The No. 1 concern of firms in developing countries including Indonesia is policy uncertainty; not only with what the policies are today but also, are they going to be sustained. And will they also be enforced in a serious way.

The third element, important as part of a good investment climate, is competition. Individual firms would prefer less competition -- if I was investing, I'd rather have a monopoly, it's much easier -- but when we look at the experience across countries, the countries that are growing more and have more dynamic economies have more competition.

It's really important that governments when they look at policies in these areas are also looking at other barriers or distortions to competition. In Indonesia, there's been quite a lot of trade liberalization. When the government looks at policies across various areas it is looking at other options to extend competition. That would really drive productivity improvements, encourage firms to improve their efficiency, to upgrade their technology, quality products -- that's really the source of long-term growth.

But the credibility of the government is low due to the wide gap between policy and implementation. How should the government resolve this issue ?

Credibility is fundamental. Unless firms are confident that policies will be implemented, they won't have much impact. All governments have a choice. Some governments say we'd start with very modest reform steps and we can demonstrate that we can achieve them, and build that credibility that way.

A very different strategy, is the government sets very ambitious goals -- high-profile, politically difficult goals. In the second strategy, if you can achieve them, it will have a big impact on your credibility, but if you fail, it can undermine your credibility.

With modest goals, you can make slow progress and build up your credibility over time. Ambitious goals can have a much bigger impact on your credibility, but they can also be harmful if you fail.

When we look at countries that have made the most progress in this area and have improved their investment climate, an important part of their strategy is public education, and really building a social consensus about the future direction of government policy. And governments that have done that, have consulted with firms, NGOs and the general public. It's much easier to make progress when you have a consensus, and it also sends a strong signal to firms that the policies are more likely to be sustained over time.

We look at, as a case study in the report, a country like China. It's not very famous for being an open democratic society, but we see provinces in China that are making the most progress are already having wide-ranging consultations, having public hearings before they make any changes to any roles affecting business. These simple measures can have a big impact.

So, national political consensus is important in this case?

Seemingly, the country that has built that consensus can make more progress. In countries that have not built that consensus there is always a risk of the policies not being implemented or being reversed. This doesn't mean that you have to wait until everybody agrees before doing anything, but you need at least in parallel to make big effort to try to build that consensus.

In a case of Indonesia, decentralization will allow local governments to be involved more in such a process as well. This is a common direction.

Also pretty much related to the credibility issue in Indonesia is corruption, collusion and nepotism (KKN). Commitment to be more transparent is crucial, not just to build consensus, but to ensure the citizens of Indonesia that when the government is awarding a contract, it is not awarding a contract to firms because they're friends of the minister, or they've made some payment, but it's because they're the best firm for the job.

You mean in the fight against corruption?

To clean up the situation, not just citizens must have more confidence in the government, but also firms should be confident that a level playing field exists for them.

I have only known what I've seen in the newspapers about the new government's pledges to fight against corruption. But, as always, it's easier to make speeches, while the implementation is the real test.