Local innovation for national prosperity

Local innovation for national prosperity

William M. Frej
Jakarta

The Dec. 26 earthquake and tsunami have had an enormous impact
on Indonesia and the economic program of the Susilo Bambang
Yudhoyono government. USAID Indonesia and a host of U.S.
government agencies have worked closely with the Indonesian
government to provide relief and other assistance.

Within days of disaster, the USS Abraham Lincoln began
delivering life saving medical and humanitarian supplies in a
blizzard of helicopter sorties. USAID rapidly mobilized
additional relief supplies, including food, water purification
kits, medical supplies, generators, trucks and other assistance.

To date, the U.S. government has invested more than $42.1
million in the relief effort, and now has turned to
rehabilitation and reconstruction. With an additional $950
million requested by President Bush for the tsunami response,
USAID Indonesia will continue to support the Indonesian
government in the rehabilitation of Aceh.

Since taking office, President Susilo's government has notched
some notable economic successes. Economic growth accelerated in
the fourth quarter of 2004, lifting the annual rate to 5.1
percent. The availability of financing, in particular for SMEs,
has grown throughout the last year, and we expect this trend to
continue as many banks report strong balance sheets, earnings,
and liquidity. Since November, all the major international rating
agencies have boosted Indonesia's sovereign rating to the
equivalent of B+, a remarkable three-notch leap in less than two
years. On Feb. 11, Indonesia came off the list of non-cooperating
countries because of its strident efforts to combat financial
crime and corruption -- testament to the government's resolve in
fighting financial crime.

The government has advanced a sound, sensible and practical
economic program. The government, in its first hundred days, has
produced credible results that fuel optimism will stimulate
further gains. The perception of Indonesia domestically and in
the international marketplace has begun to change, as evidenced
by a stock market that has vaulted to 1,100 from 700 when the
government took office, and by the rash of rating upgrades.

The World Bank estimates that it takes 570 days to enforce a
contract, and costs on average 126 percent of the contract value.
Enforcing a bankruptcy takes more than six years, well above the
regional average, and yields only 10 cents on the dollar.

It falls upon the national government to create conditions
conducive for business growth but local government has a critical
role to play, as well.

Last week, Regional Autonomy Watch (KPPOD) recognized those
Kota (mayoralty) and Kabupaten (regency) that lead in promoting
local economic growth in Indonesia. These local governments have
distinguished themselves by creating a climate conducive to
business that will build stronger local economies and, therefore,
a more stable national economy. They have created an environment
that invites business, and creates jobs that lead to prosperity.
They have demonstrated that they can implement economic policies
and strategies to fuel growth and local competitiveness.

One first step in the reform process consists of getting
businesses to register. Registered businesses have access to
credit and, therefore, can grow more quickly. Registered
businesses also tend to implement better labor practices, and,
pay their taxes, and contribute to a stronger and more stable
Indonesia.

Yet, the World Bank reports that registering a business in
Indonesia remains complicated, lengthy, and expensive. With USAID
support, however, more than a dozen local governments have
reduced substantially the time for businesses to register.
Through The Asia Foundation, 15 one-stop-shops now register
businesses more efficiently, and less expensively, and with
powerful results:

- The time to register a company has fallen by 60 percent, and on
average now takes 15 days.
- Cost has dropped an average of 30 percent.
- Nearly 70 percent of the firms reported higher profits and
higher employment, three quarters reported paying higher salaries
after they registered.
- The one-stop shops produce growth, jobs and prosperity.

In addition to removing obstacles to business at the local and
national levels, the Government also has worked to remove "behind
the border" obstacles to economic growth, trade and commerce. In
a Feb. 14 article in The Jakarta Post, Minister Pangestu drove
this point home. Economic obstacles such as nuisance taxes and
levies, unfortunately, have increased since 2001. To ship East
Java apples to the capital has become more expensive than to ship
apples from New Zealand, because many kabupaten along the road
from Malang to Jakarta levy a fee or tax. Nuisance fees and taxes
strangle domestic trade and threaten to make Indonesian exports
less competitive.

USAID will assist in removing unnecessary regulation and
nuisance taxes. Implementing a Domestic Trade Law would help
contain these market-distorting practices. This Law could include
provisions similar to those in the U.S. Interstate Commerce Act,
which facilitates trade and commerce among the fifty States.

Establishing the equivalent of an Interstate Commerce
Commission to oversee and regulate domestic trade in goods and
services could prove worthwhile, as long as it did not become
just another bureaucratic hurdle to trade.

The regions hold the future of Indonesia's democratic and
economic transformation, therefore, USAID provides substantial
assistance to local governments.

Over the past years, USAID has helped about 150 local
governments in 14 provinces strengthen and deepen local community
involvement in local planning, budgeting and governance. As a
result, many local governments have better performance plans,
stronger communities and economic development, and have begun
more efficient delivery of basic services.

Stronger more capable local governance, and market-oriented
national and local-level economic policies remain key to
attracting investment to regions that can drive national growth.
Having a skilled and well-educated labor force, however, will
prove a critical determinant of investment potential and
attractiveness. Over the past four decades, all of the countries
that have built economic growth through substantial inflows of
foreign direct and domestic investment, have succeeded because
they themselves invested heavily in their youth and in their
people.

USAID will devote $157 million to education in Indonesia over
the next five years. We will focus on primary education -- the
source of Indonesia's next generation of leaders and
entrepreneurs. With the government's expressed promise to
dedicate a portion of the savings resulting from the reduction of
energy subsidies to education, we see education reform as very
possible. Broadly available quality primary education will yield
long-term dividends that will propel the Indonesian economy
forward.

The writer is Mission Director for USAID in Indonesia.