Making sense of RI's business climate

Making sense of RI'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.