Old problems, new burdens

Old problems, new burdens

Every time the government raises domestic fuel prices closer
to their real economic cost, businesspeople always raise a
rumpus, urging the government to deal firmly with the old
problems of red tape, illegal levies, and corrupt tax and customs
services to offset the additional burden on business.

This was also the case after the March 1 fuel price hikes.
Most businesses argue they will not be able to remain
competitive under the new environment of higher fuel prices if
the government does not act immediately to cut other costs
related to government regulations and public services.

The Riau chapter of the Indonesian Employers Association
notified economics ministers last week that 24 more foreign
investors on Batam island had threatened to pull out due to the
worsening business climate and the uncertainty over that island's
free-trade status.

The complainants are not skittish investors who
are demanding special facilities or preferential treatment. Their
grievances are legitimate as they have found that their
international competitiveness is being eroded by an inimical
business climate. Now, higher fuel prices are imposing additional
burdens on them.

The government should fully realize why the competitive edge
of our economy has steadily been declining. Many studies have
diagnosed the problems and made policy recommendations. But the
leadership and political will of the new government seem to not
be as strong as the political mandate it received in last year's
presidential election.

Indonesia consistently performs abysmally in all international
surveys of economic competitiveness and invariably ranks far
below all of the other founding members of ASEAN. The 2004
Economic Freedom of the World Report, which was prepared by
Canada's Fraser Institute last July, ranked Indonesia 86th out of
the 123 countries assessed in terms of good governance, access to
sound money, freedom to trade internationally, regulations on
credit, and labor and business, legal structures and security of
property rights.

Indonesia also ranked very low in both indices of the Global
Competitiveness Report 2003, which was prepared and issued by the
Geneva-based World Economic Forum. It was rated 66th out of 102
countries surveyed in the growth competitiveness index and 58th
in the business competitiveness index.

Overall, businesses in Indonesia shoulder almost twice as much
in administrative costs and have to struggle through twice as
arduous bureaucratic procedures as their counterparts in other
ASEAN countries.

The higher business risks and gross inefficiency in Indonesia
can, for example, be seen from the much higher terminal handling
charges (THC) for containers charged by foreign shipping
companies at Indonesian ports than at other ports in ASEAN
countries. For example, the THC for a 20-foot container in an
Indonesian port is set at US$150, as against $110 in Singapore,
$100 in Malaysia and a mere $60 in Thailand, the latest data from
the Far Eastern Shipping Conference shows.

The government needs to take a more strategic view of all the
weaknesses of our economy, and realign its list of priorities
with the focus on creating a sound business environment so as to
woo new domestic and foreign investment.

Pointless regulations foster corruption. The more irksome the
rule, the greater the incentive to bribe officials not to enforce
it. Red tape is one of the chief obstacles to growth in almost
all poor countries.

There is much that governments can do to promote reform even
when lacking a clear mandate for wide-ranging action, let alone
the current government which possesses such a strong a political
mandate.

Moving ahead in areas where the basis for reform has
been best prepared and laying the groundwork for further reform
by setting out to shape, or reshape, popular understandings of
the issues would inspire business confidence about the direction
of the country's economic management.

Laggards sometimes argue that reforms are difficult and costly
to enact. But what could be simpler than scrapping a stupid rule?
Simplifying procedures is harder, but not too hard. There are
plenty of examples to learn from.

It needs to be remembered that it's a vicious circle -- an
economy can never be competitive if its businesses are not
productive, while its businesses will never be productive if the
investment climate is not supportive.

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