Local autonomy creating high-cost economy

Arya Abhiseka, The Jakarta Post, Jakarta

The chaotic implementation of local autonomy policies could become a threat to the nation's economy as they are creating a high cost economy and deterring new investment, an expert has argued.

Bambang Brojonegoro, an economist at the University of Indonesia, said on Thursday that the higher cost of doing business was mainly the result of red tape imposed by the newly- empowered local administrations, and illegal fees charged by corrupt officials.

He said that according to a survey conducted by his university, the extra cost of doing business was more evident in areas outside the capital.

"The additional cost of doing business outside Java has reached 11 percent (of total production costs), while in Java, with the exception of Jakarta, it has reached 10 percent," he said.

Bambang explained that the extra costs mainly arose from payments for bureaucratic services and illegal fees.

"In the past, businesses had only to cope with the central government bureaucracy. But now they also have to deal with the local bureaucrats," he said.

"This double billing could make investors pack their bags," he warned.

The central government introduced the autonomy policy in 2000 to allow local governments to manage their own economic affairs. The move was part of an effort to accelerate economic development in the regions and to help cope with the disintegration threat from rich provinces.

But the implementation of local autonomy has shocked many investors as local governments have been excessively aggressive in exercising their new administrative powers, particularly as regards collecting local taxes.

This problem is seen as one of the major factors scaring investors away.

Foreign direct investment (FDI) approvals plummeted by 35 percent to US$9.7 billion last year from $15.06 billion in 2001. A grimmer picture is revealed by the 57 percent drop in domestic investment approvals to Rp 25.26 trillion compared with Rp 58.62 trillion in 2001.

The government is now in the process of revising the existing local autonomy law.

Bambang said that the higher cost of doing business in the regions was hurting small and medium enterprises in particular as they had less bargaining power in dealing with the bureaucrats.

"Aside from that, manufacturing industry also suffers the most from the levying of illegal fees," he said.