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.