More investors flee
More investors flee
How ignorant has the Indonesian government been about the
rapidly worsening investment climate in the country?
The fact that it took newspaper headline stories, disclosing
Sony Corp.'s plan to close down its audio-equipment plant in
Bekasi, West Java, to jolt the government with a rude awakening
of the inimical business environment, is simply illustrative of
its inertia.
Foreign and domestic investors, and foreign chambers of
commerce have since 2000 often expressed their utter frustration
about the adverse business condition, threatening to move their
production units elsewhere unless major obstacles to investment
operations are removed.
The World Investment Report 2002 of the Geneva-based United
Nations Conference on Trade and Development released in September
shows a steady capital flight out of Indonesia since 1998, while
all other Asian countries posted positive investment flows.
Yet the government has done virtually nothing to address the
horrendous problems. Cabinet ministers instead tend to blame each
other for the problem.
It would be understandable if Indonesia had become a pariah
among foreign investors immediately after its 1997 economic
debacle, which set off the political crisis in 1998. The country
then plunged into all kinds of uncertainties as it grappled with
the complications of its transition from an authoritarian,
centralized government into a democratic, decentralized
administration.
However, the investment climate should not have been so bad as
to force direct foreign investors to close down their production
facilities and move to other countries. The overall condition has
now become more stable compared to that between 1997 and October
1999, when the first democratically-elected government came to
power.
Even though Sony's drastic move is said to be a part of its
effort to realign its global production networks, it is
especially shocking because more than 1,000 workers will lose
their jobs as a result, and hundreds of other employees may be
laid off as many local suppliers to Sony will suffer the impacts
of the closure.
Yet, even more damaging is the impact this closure would have
on the image of the country as a place for investment. The
conditions must have been so poor as to force industrial
companies already operating in the country, such as Sony, to move
its operations just a month or so before the commencement of the
ASEAN Free Trade Area (AFTA) in January 2003.
The AFTA is supposed to make Indonesia a better place for
industrial companies because of the potential of its large market
of about 210 million people, and because investors can use the
country as a base or beachhead to export to other ASEAN countries
under arrangements of the preferential import tariff.
Still more hurtful is the fact that Sony is not the first
major company to flee the country because of the hostile business
climate; at least six industrial companies have quit or have been
driven into bankruptcy since last year due to the adverse
business conditions.
The problems that forced Sony to quit are the same business
hurdles that investors have been complaining about: Incompetent
and corrupt customs and tax services and judicial system, radical
trade unions, corrupt regulatory environment, and inappropriate
application of luxury taxes.
A corrupt customs service badly hurts domestic producers, as
they have to compete with smuggled goods or under-invoiced
imports that pay duties and taxes far below the official rates.
A corrupt and inefficient customs service also erodes the
competitiveness of local companies, as the cumbersome customs
clearance of imported inputs, parts or components increases
production costs.
This obstacle is especially damaging in view of the
increasingly globalized production system, whereby industrial
firms import most of their inputs, then assemble them in the host
country and later export the semi-finished or finished goods.
An incompetent and corrupt tax service horrifies businesses
because, in spite of the tax self-assessment system, tax auditors
can still exercise discretionary power to unilaterally assess tax
liabilities. Worse still, corporate taxpayers who, according to
auditors, have overpaid on their taxes, always face red tape in
getting tax refunds.
Labor rulings that are seen to be too much in favor of
workers, despite the huge pool of an unemployed and under-
employed workforce, cause uncertainties, because new trade unions
that mushroomed in the democratic era tend to over-emphasize
their rights at the expense of sensible labor negotiations with
management.
Investors fully realize that most of the problems cannot be
solved overnight. But what makes the condition seem so hopelessly
bad is that they have not seen any resolve nor any well-
coordinated efforts on the part of the government. What they see
instead is a mounting sentiment of xenophobia among politicians.
Minister of Industry and Trade Rini M.S. Soewandi's recent
initiative to set up a crisis center to resolve business problems
expediently ended in tatters due to inter-ministerial bickering
and complete ignorance on the part of chief economics minister
Dorodjatun Kuntjorojakti, who is supposed to coordinate all
economics ministers and lead policy coherence.