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.