Making sense of Indonesia's business climate

Arya B. Gaduh, Contributor, Jakarta

----------------------------------------------------- Business in Indonesia: New Challenges, Old Problems Editors: M. Chatib Basri and Pierre van der Eng ISEAS Publications, 2004 276 pp -----------------------------------------

Suppose you can bring a single book on Indonesia on a desert island vacation; what would it be? For me, it probably would not be Business in Indonesia -- this is no vacation book. But if the question was on a list of books to use to brief the new administration, it would certainly be among them.

The book collects papers from the 2003 Indonesia Update conference at the Australian National University (ANU) in Canberra. The conference itself was an examination of the evolving challenges of businesses in the reformasi (reform) era. Amid differing viewpoints, the conference suggested the need for major reforms at the micro-level, particularly in revamping policy institutions and governance.

At the macro level, things were improving slowly but surely -- and indeed, years 2002 and 2003 were the turning point on macroeconomic stability. Careful monetary and fiscal policies were responsible for improving the macroeconomic environment. However, as pointed out by Chatib Basri, "[there] is still a long way to go to repair the damage caused by the economic crisis... when the economy contracted by more than 13 percent." (p. 43). Indeed.

Despite two years of improving stability, growth remained modest, with exports and investment sluggish. Though external factors -- SARS and the Iraq war -- played a role, policies mattered as much. The inability of the government of Megawati Soekarnoputri to administer effective policies to handle Indonesia's classic problem of a "high-cost economy" were as important, if not more, in stifling growth.

The priority, then, is on tackling this high cost of doing business -- but where to start? Business did not set out to instruct or recommend policies, but mainly to describe. These descriptions, nonetheless, suggest several starting points: issues that are all too familiar for foreign and domestic businesses operating in the country.

In an illuminating table, James Castle presents his survey, done in September 2002, on obstacles to invest in Indonesia. His survey suggests that regional officials perceive bureaucratic corruption and policy instabilities to be the most critical barriers to foreign direct investments (FDIs).

It's perhaps common knowledge that bureaucratic corruption is an endemic problem in Indonesia. Firms are particularly easy prey for officials wanting to extract bribes for services rendered. The private sector often gripes about it, yet, more often than not, they reciprocate. Merly Khouw reports how, while most businesses opposed what they considered "active corruptions" (such as bribing judges to win cases), the majority are still willing to pay government officials to get them to do their job.

This ambiguous attitude of the private sector toward corruption reflects how deeply rooted corruption is in Indonesia. In itself a major problem, corruption creates barriers to other much needed reforms. Daniel Fitzpatrick argued that institutional corruption and family-owned conglomerates interacted to limit the effectiveness of the Corporate Governance Code in improving good governance practices.

Hence, rooting out corruption is extremely important but it will take some time to accomplish. In the short term, solving the problem of policy uncertainties is more urgent. On this, the expert contributors of the book have much to offer.

Uncertainties associated with decentralization and labor regulations are among the top concerns of the private sector in Indonesia. The sudden transfer of power from central to the local governments created what Bambang Brodjonegoro calls "abnormal business conditions" where "institutional and social factors ... [are] more important in investment decisions than economic potentials". (p. 139).

At the same time, the expanded authorities often tempted local governments into myopic, rent-seeking, or simply confused behaviors -- at a cost to investors.

The government can help -- not by taking back some of these powers, but by strengthening local institutions so that they can foster favorable business environments. At the same time, there is a need for "stronger monitoring and strict enforcement...to ensure that local regulations do not create a high-cost economy and internal trade barriers". (p. 140). Striking the appropriate balance will be necessary to make decentralization work for the regions.

On labor issues, two complementary articles -- one by Michele Ford and another by Chris Manning -- provide insight into the evolution of labor relations after reformasi. Ford is critical of the perception that stronger, "more militant" trade unions threatened business climates. By examining recent cases of labor disputes, Ford argued that more predictable and equal relations between firms and unions had been constructive, and in the long run would be good for business.

Post-Soeharto governments, however, appeared unable to comprehend the implications of this evolution. The latest manpower act, passed in 2003, was correct in protecting disadvantaged labors often at little cost to businesses; but, as argued by Manning, it gave "little latitude for collective bargaining to reflect enterprise and industry circumstances".

The government failed to recognize that stronger unions necessitated the opening of a greater space for negotiations between employers and employees, with the government acting only as a facilitator.

The issues brought up by Business in Indonesia are, as suggested by its subtitle, "old problems" posing as "new challenges". They are issues that the new administration needs to understand -- and that is why, I think, members of the administration should read it. In fact, new President Susilo Bambang Yudhoyono doesn't have an excuse for not tackling these problems; after all, Chatib Basri, the book's lead editor, is a presidential spokesman.

The reviewer is an economist at the Centre for Strategic and International Studies (CSIS). The views expressed here are his alone.