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

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.