JP/7/DHARMA

JP/7/DHARMA

For better living standards,
foreign investment is not the answer

Siwage Dharma Negara
Indonesian Institute
of Sciences (LIPI)
Jakarta

The continuing decline of foreign direct investment (FDI) in
Indonesia has led to a drop in total FDI approvals by 11 percent
for the first nine months of this year, compared to the same
period last year. Domestic investment approvals also plunged by
about 70 percent during the same period.

The worst was yet to come, with Japanese technology giant Sony
Corp. announcing plans to transfer its production line to a
Malaysian plant, which would cost some 1,000 jobs.

That number is not significant when compared to the estimated
40 million unemployed people in the country, or even compared to
the two million lost jobs following the Oct. 12 terrorist strike
in Bali. However, the bandwagon effect of Sony's move might
induce similar action by many other multinational and domestic
enterprises.

Despite abundant resources, about 15 percent of Indonesia's
total population, or 33 million people, live below the poverty
line. More than half of this number can be classified as living
in extreme poverty. Half of the total population of 220 million
is very close to the poverty line, hence making them extremely
vulnerable in the event of another economic crisis.

It has become painfully evident that despite the surge in
capital inflow, through direct foreign and domestic investment,
in the past decade, mass poverty still exists, more people are
unemployed or underemployed, absolute poverty is increasing and
the distribution of income and assets has become more unequal.
Moreover, inequality in the distribution of human development
persists and environmental degradation has accelerated as a
result of efforts to maximize short-term growth.

So to what extent should we worry about the recent decline in
direct foreign and domestic investment, while those investments
have not significantly improved the living standards of the
people? Studies show that how capital is allocated is more
important than the level of capital accumulation. Indeed, it is
the allocation of capital that should become our primary concern
for future development strategies.

We have been trapped too long by the old paradigm that capital
accumulation is the central focus of development. Development is
associated with an increase in per capita real income. Hence, as
the population was increasing, the emphasis had to be on a rapid
rate of growth or gross domestic product (GDP).

The flow of investment has been misallocated for the sake of
capital owners, despite the main development goal of distributing
resources equally among the people. Learning from history would
mean the need to move beyond concentrating on growth per se;
changing our myopic view into a longer-term perspective and
adjusting emphasis from production toward living standards. The
latter can only be achieved by accumulating and improving social
capital.

It is true that both foreign and domestic investment can bring
benefits, e.g. bringing in fresh capital, new technology, new
knowledge and management, and creating employment opportunities,
but it may also be overly capital intensive when there is surplus
labor, as is the case in Indonesia.

Multinational enterprises may exhibit costs to the host
country that mount over time -- costs that are too often
neglected as short-sighted policymakers chase short-term gain.

Indonesia is not poor because of the vicious circle of poverty
but because of poor policies created by leaders aiming for
political popularity. The post-1997 Asian financial crisis shows
that differences in policies are responsible for the disparate
performances of Indonesia with respect to other countries struck
by the same crisis.

Markets, prices and incentives have long been abused based on
political ideology. Although the rationale for government
intervention had been to remedy market failure, lack of
capability in implementing what was planned have made matters
worse. Leadership and improved institutions are important
determinants in making policies work. Both are part of the social
capital needed for sustaining any development strategies.

An expert has defined the importance of social capital as the
social and cultural coherence of society, the norms and values
that govern interactions among people and the institutions in
which they are embedded. Meier (2001) explained that social
capital can be attributed to transparency in decision making, an
efficient administrative system, effective accounting, a reliable
legal system, avoidance of corruption, good corporate governance,
social cohesion and state capability and credibility.

All in all, unfortunately, these are not well developed, if
not completely omitted, here despite several decades of physical
development. Therefore social development through improving
social capital is also crucial for better living standards in
Indonesia.