The new economic reform package, introduced Thursday after a two-month delay, is better designed than the previous package unveiled last October, together with the increase in domestic fuel prices. This is because the new package is supplemented with fixed schedules for implementation and a list of which ministers are responsible for the execution of which reforms.
The format of the package very much resembles the reform action agendas the government regularly attached to its letters of intent to the International Monetary Fund between 1998 and 2003, which many analysts and politicians at the House of Representatives very much detested.
Nothing is completely new in this latest package, which covers tax incentives for investors in remote areas and small and medium-scale enterprises; streamlining procedures for port handling and customs inspection; expediting procedures for obtaining business visas; harmonizing regulations between the central government and regional administrations; the enactment of a new investment law; improving labor regulations to make them more conducive to business; expanding the role of bonded industrial zones to bolster export-oriented industries; and reforming the tax laws.
The measures also set specific targets, such as speeding up business licensing from the current 150 days to 30 days.
However welcome the new reforms may be, the business community will still wait to see how the new measures are implemented in the field. After all, their experiences with the October reform package have not left them impressed, with many of the measures yet to be implemented five months after their announcement.
The core problem again boils down to institutional capacity, interministerial coordination and the leadership to translate the "wish list" into reality.
The chief economics minister, Boediono, with the full support of President Susilo Bambang Yudhoyono, should be able to translate the broad dissatisfaction among investors into concrete solutions to the main problems hindering new investment and virtually debilitating existing businesses.
Economic reform -- policy changes directed at improving the static or dynamic efficiency of resource allocation in the economy -- is never easy, especially in a nascent democracy such as Indonesia. Because, in essence, reforms involve taking away rents that have built up in the economic system. So reform, as opposed to redistribution, involves reducing rents in the economy as a whole.
Take, for example, regulatory reform and the synchronization of regulations between the central and regional administrations. The central government has tried to annul or abolish a myriad of new regional regulations that are inimical to business and which were introduced soon after the introduction of regional autonomy in 2001.
The central government has had to work hard to convince regional administrations of the importance of business-friendly policies. Many regional administrations often do not realize the importance of new investment or businesses in creating jobs, and opt instead for shortcuts to raising state revenue by imposing new levies on existing businesses. They seem unaware that it is productive jobs that produce wages, which in turn generate purchasing power for consumers.
Most of the reform measures in the new package have been included in previous reform action agendas, which the government promised to implement when it was still under the special oversight of the IMF between 1998 and 2003.
Just look at how long the new investment law, which will provide equal treatment for domestic and foreign investment, has been in the planning. A bill to replace the 1967 Foreign Investment Law and the 1968 Domestic Investment Law was prepared as long ago as the early 1990s. Likewise, the bills on tax and customs reform are now almost three years behind their original schedule.
We think this new reform package could be last chance for the government to gain investor confidence in its capacity to make and execute policy. It also will be the most challenging test for Boediono's economic team, which was installed last December.
If this new package is botched up, it will kill whatever investor confidence has been won in the future outlook of the economy.
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