Law: Missing link in stabilizing the rupiah

Various theories on how to fight the economic crisis have been forwarded. Charles Himawan, professor of law and economics at the University of Indonesia, argues that the Supreme Court could play a major role in helping to alleviate the suffering.

JAKARTA (JP): Long before the "Thailand storm" of July 2, 1997, hit Indonesia, many foreign entrepreneurs often complained openly that there seemed to be no law in Indonesia.

They misdefined law. They saw the law as that conceived in many developed countries, that is "autonomous law" -- a law which is applicable both to the lawmakers and to the people. If they were to define law as the manifestation of the will of the power holders, then they could easily see that there is indeed law in Indonesia.

On top of that, court decisions could also be defined as law, especially decisions of the Supreme Court, because the Supreme Court is the highest judicial body in Indonesia. Most of Indonesia's business partners in the world therefore look upon these decisions as their guidelines in their economic activities. The Supreme Court's decisions are generally defined as law-by- action as opposed to law-by-the-book. To date, law-by-action has not been conducive to ensuring a transparent business legal environment.

Were it transparent, it might have cushioned the country against Thailand's financial storm, and Indonesia's initial recovery would have begun a few months ago. The International Monetary Fund (IMF), for one, is aware of the role that the law can play in preventing financial meltdown.

This is evidenced when the IMF evaluated the ability of Singapore to recover from the financial crisis in a relatively very short time. IMF analysts attributed this to Singapore's "high quality of regulation." Furthermore, under paragraphs 29 and 30 of the Memorandum of Economic and Financial Policies of Jan. 15, 1998, the IMF also called for the strengthening of the legal and supervisory framework of Indonesia's banking sector.

To date, the Supreme Court's decisions in terms of banking activities have been a deterrent to seeing the operation of healthy banks, whereas we all know that banks are an indispensable institution for smooth export activity. And exports are a major source of U.S. dollars which in turn are the crucial ingredient in stabilizing the rupiah. Furthermore, a stable rupiah is a conditio sino quo non to reestablishing a healthy business atmosphere, and hence to recovering from the current economic crisis. It has become apparent to people recently that there is a link between the four major players in the country's economic activity: law, banking, exports and a stable rupiah.

The implementation of law-in-action judicial decisions is in general far from encouraging. Take for example the case of Drs. R.J. KAS versus PMI, PT T and BDN. KAS sued and obtained compensation of about Rp 7 billion from the three defendants. The case went through the District Court, the Court of Appeal and the Supreme Court for about ten years, and was examined by a total of nine judges. Nevertheless, the Chief Justice himself withheld its enforcement on April 2, 1993.

The Supreme Court's decisions in regard to banking are also very disappointing. The case in point is BoA versus PT BJA. PT BJA made a notarial form of Acknowledgement of Indebtedness which under Indonesia's law-by-the-book qualifies as a judicial court's decision, and therefore could be immediately executed upon default by the debtor. Central Jakarta District Court was for allowing the plaintiff, BoA, to execute the document, but the Supreme Court said no on Sept. 25, 1989.

This special IOU document is actually a potent instrument for the protection of a bank, because it ensures the speedy return of the bank's money, hence ensuring a healthy bank. Annulling the enforcement of the document endangers the bank itself.

There were too many considerations given in favor of the debtor by the Supreme Court, because the Supreme Court believes that the debtor is the weaker party. The Supreme Court overlooks the fact that in a business transaction the debtor and the creditor each have their own function.

In regard to exports the Supreme Court's decisions are also not conducive to a healthy legal environment. Many foreign buyers of Indonesian merchandise prefer to choose arbitration as the means to settle their differences should they arise.

Prior to 1990 the Supreme Court practically refused to enforce foreign arbitration awards. Since then there have been some encouraging decisions in favor of foreign buyers, though there have still been some cases in which the Supreme Court refused to enforce internationally made decisions. One case in point was SM Ltd. versus PD PL of April 6, 1994.

In the country's coming recovery years, the Supreme Court could play a major role as exemplified, for example, by Singapore, if the justices can take into consideration the economic effects of their decisions, particularly in the three areas above.

They need to detach themselves from purely theoretical considerations. If they are successful, then law could be linked to economic progress and may be able to help stabilize the rupiah. Otherwise, the law will only become an annoying ringside spectator.