Mutual distrust hurts economy

Panelists at the business forum, which is being held as part of the current national congress of the Indonesian Chamber of Commerce and Industry (Kadin), raised fundamental issues which, if not adequately addressed, could hinder new investment, business development and consequently economic growth.

Andrew Steer, the World Bank country director for Indonesia, observed that the government had little trust in the business community. Businesspeople, he added, are not confident that the government is on the right path, in terms of policy reform. The lack of business trust in the government, especially in regard to its consistency and fairness in law enforcement, was the main factor that distinguished economic recovery in Indonesia from that of other crisis-hit Asian countries (Thailand and South Korea).

What Steer had perhaps wanted to assert was that the acute lack of business trust in the government had partly been responsible for the slower economic recovery in Indonesia than in other crisis-ridden Asian countries.

Another panelist at the forum, John A. Prasetio, chairman of Ernst & Young, shared Steer's views, pointing out that the relationship between the business community and the government had been marked by mutual suspicion and distrust. The government, Prasetio said, tended to see businesspeople as "thieves" while businesspeople were wary of the government, considering it technically incompetent in dealing with business affairs.

These observations are of great concern, because, as Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti himself noted at the same forum, mutual trust should be the foundation of cooperation between the business community and the whole government (executive, legislative and judicial branches).

Many researches have concluded that modern institutions, such as contracts and commercial laws, are necessary to facilitate a market economy that functions properly. But these are not sufficient in themselves, and without trust, the whole process is rendered inefficient.

The presence of trust as an additional component of relations can increase economic efficiency by reducing the costs of transactions, as there is less need to draw up lengthy contracts, less need to hedge against unexpected contingencies, less need to litigate in case of dispute.

To our knowledge, the business gathering was the first official, public occasion where business leaders, ministers and economists from multilateral agencies, such as the World Bank, explicitly acknowledged the acute lack of mutual trust between the government and the business community.

Businesspeople have increasingly suffered the brunt of the fallout with the government, especially after the outbreak of the 1997 economic crisis, which was blamed mainly on collusion between the (then Soeharto) government and bad conglomerates.

The government's sweeping distrust of most businesspeople has certainly increased the cost of doing business. Take for example, the field of taxation whereby the government tends to treat most corporate taxpayers as cheaters bent on evading tax obligations. Even though the tax laws apply a self-assessment system, this mechanism hardly works because taxpayers remain subject to tax audits at the whims of tax officials.

So dreadful have the tax problems been in Indonesia that State Minister of State Enterprises Laksamana Sukardi, also a speaker at the business forum, cited uncertainty in tax law enforcement as the biggest barrier to foreign investment in Indonesia. He concluded that this problem was more horrendous than security and law enforcement problems.

Distrust has often led to the harassment of businesspeople dealing with customs procedures, or in the process of conforming to the regulations, as they are constantly under suspicion of cheating or violating laws. No wonder, both the tax and customs services have been perceived by the people as the most corrupt public institutions. Yet more damaging to the business world is the increasing number of businesspeople that have lost faith in honesty as a tool in dealing with the government.

This is not to imply that all businesspeople are honest and, therefore, should not be subject to supervision or scrutiny within the regulatory system. But effective supervision is a far cry from distrust and inordinate suspicion.

Both the government and businesspeople have been trying to resolve the problem of mutual distrust through the development of good governance practices in the public and private sectors, but more concerted efforts are needed to speed up the process.

The enhancement of practices of good governance is the most effective way of building trust, because the old mind-set has primarily been generated by the public's perception of pervasive corruption within the government in collusion with the private sector.

In this context, it is worth recalling the Kadin declaration of a national anticorruption drive last October. The current Kadin national congress is also quite an opportunity to reiterate the urgency of this problem of trust, as a new board will be elected to lead the business community within the next five years.