Opening access to economic opportunity in Indonesia

Opening access to economic opportunity in Indonesia

The following is the first of two articles by Roderick
Brazier, the director of economics programs of The Asia
Foundation in Jakarta, identifying nine key areas to open access
to economic opportunity. In the next article, to be run on
Friday, he will focus his attention on legal infrastructure,
information and credit.

JAKARTA (JP): Opening access to economic opportunity is the
simplest way of ensuring that as many people as possible can
improve themselves materially.

Governments should ensure that there are as few barriers to
economic opportunity as possible and have many thousands of
choices to make in this direction. They can enact, alter or
repeal policies and regulations in a constant effort to create an
environment in which access to economic opportunity is as wide
open as possible.

Many of the remedies for the reduction of poverty are
strikingly similar to those prescribed for opening access to
economic opportunity for micro, small and medium-sized businesses
(MSMEs).

MSMEs employ well over 90 percent of Indonesian workers.
Their growth can have a direct and huge impact on the livelihoods
of ordinary Indonesians. We know that the key constraints on
their growth can be removed or significantly cut by enlightened
policy-makers.

Below are nine key areas to open access to economic
opportunity.

1. Growth

The single most critical factor in opening access to economic
opportunity is sustainable growth. MSMEs benefit in obvious ways
from a growing economy in which inflation is under control. The
poor can benefit from a growing economy if real wages rise,
employment expands, and low levels of inflation keep prices low.

The bulk of the poor still live in rural Indonesia. A rural-
oriented development strategy for Indonesia, at least for the
first decade of the 21st century, will be key to linking rapid
growth to poverty alleviation.

Both Indonesia's own experience and lessons from the rest of
East and Southeast Asia show that growth of the rural economy
helps the poor more than growth in the urban industrial sector
does and that rural growth contributes to more rapid growth in
the overall economy.

Between 1966 and 1997 Indonesia had a very good record of
sustaining strong economic growth with low inflation. Much of
this growth was fueled by massive investment, both domestic and
foreign. But the fruits of that growth were sometimes distributed
to unworthy parties.

Indonesia's current growth rate (around 5 percent) is touted
by some in government as a sign of recovery. But growth here
seems mainly to be consumption-oriented, and without a massive
increase in investment, both domestic and foreign, that growth
may not be sustainable beyond the near term.

Indonesia desperately needs to attract investment that can
fuel economic growth and give opportunities for economic
betterment to the population.

2. Health

Health and nutrition are simple but crucial elements in
determining access to economic opportunity. Children can be
immunized against many diseases cheaply. Healthy children learn
more at school, and make better employees and entrepreneurs later
in life. Healthy employees and entrepreneurs can work harder and
smarter.

Early action in the form of immunization and public health
education can also reduce public health costs that might accrue
when the sick need treatment. Indonesia has an excellent record
of immunization and public health education that has helped
increase life expectancies substantially and improved quality of
life.

Some dark clouds loom, though. Most men smoke the impossibly
noxious kretek cigarettes (smoking one is equivalent to smoking
20 light 'white' cigarettes) and many will die early from
smoking-related diseases. These diseases are usually long and
drawn out and so become extremely expensive to treat.

3. Education

Access to education is a critical prerequisite to opening
access to economic opportunity. Indonesia's record in this regard
has been excellent. Drop out rates are generally low (less than 6
percent per year among 13-15 year-olds and around 11 percent for
16-18 year-olds) and the gender balance is even.

Given Indonesia's development, illiteracy is quite low. But
gender gaps are significant. In the cities about 8 percent of
women and 3 percent of men cannot read and write properly. In
rural Indonesia, 19 percent of women and 9 percent of men are
illiterate, a much bigger imbalance.

As surprising as this may seem, large parts of the population
also have difficulty communicating in Indonesian. In parts of the
country, even in cities like Surabaya, Indonesian is a second
language for many.

In the cities, 6 percent of women and 3 percent of men cannot
speak Indonesian well. In rural areas the picture is worse: 19
percent of women and 12 percent of men cannot use Indonesian
effectively.

These and the illiteracy figures suggest that for significant
parts of the population, in rural areas in particular, economic
participation is limited by illiteracy or inability to speak
Indonesian effectively.

But governments must not focus on coverage only. Quality of
education is in some ways more important than coverage.
Foreigners are often shocked at how incurious Indonesians are.
The blame for this may rest with the Indonesian education system,
which was fashioned mainly during the intellectually-arid New
Order period.

A fundamental review of the national curriculum is therefore
needed.

4. Security

When individuals or groups do not feel that engaging in
economic activity is safe, they may refrain from participating in
the economy, or at the very least will curtail their activities.

The effect of crime and corruption on the business community
can be profound and, in Indonesia, the picture is utterly dismal.
Since the crisis began in late 1997, security conditions in
Indonesia's cities have deteriorated.

In some cases the decline has been extreme, as in Ambon. But
even in some of Indonesia's key commercial centers the situation
is terrible. SME owners recently surveyed in Medan paint a
picture of almost constant harassment by criminals in collusion
with corrupt officials and members of the police, that has driven
some to send home their employees and close their businesses
altogether.

When criminals can extort money from the private sector at
will, that reduces opportunities. It is happening routinely now,
with 46 percent of business owners recently surveyed nationwide
by The Asia Foundation reporting that they paid regular
protection money to "youth groups" or oknum.

Recently, self-appointed religious police have ransacked
legitimate businesses, such as bars and restaurants. Such a trend
merely adds to the uncertainty facing entrepreneurs. Their sense
of vulnerability is magnified when the police fail to take action
to stem such attacks.

Security is an issue which touches on Indonesia's most
stubborn systemic problems, and one where the Indonesian
government is failing its entrepreneurs and employees most
dramatically.

Stern government action simply to curb corruption and enforce
the law would do more to help MSMEs than any grand plan with
complicated and expensive subsidized credit schemes and export
financing programs.

5. Discrimination

If women or minorities face cultural barriers, not only do
they face more curtailed access to the economy, but the size of
the economy and the number of opportunities in general are
reduced.

Discrimination against Chinese in Indonesia in the form of
limits on where they can work (for many years Chinese Indonesians
have been barred, formally and informally, from working in the
military, the bureaucracy and even some state-owned enterprises)
and get an education probably limits opportunities for all
Indonesians.

Women entrepreneurs face certain obstacles, too. Some tax
refunds are not available to single women entrepreneurs who are
heads of households. Such obstacles reduce the incentive for
women to go into business and for women entrepreneurs to expand
their activities.

6. Physical infrastructure

Roads, bridges, ports, and electricity are critical pre-
requisites to economic activity. Economic opportunity is defined
by the presence of markets, and those exist only locally without
physical connections to populations outside the immediate
community.

One school of economics is based on the assumption of
"complete markets" -- i.e. there is a buyer somewhere for
everything at some price. But without infrastructure, many
markets may not exist at all, and with shabby infrastructure,
there may be no buyer at plausible prices. So markets require
connections.

Thanks mainly to oil and gas revenues, Indonesia has
comparatively good infrastructure. SME owners surveyed recently
gave relatively high marks to Indonesia's infrastructure, with
some niggling problems related to the maintenance and upkeep of
telephone connections and electricity supply, caused mainly by
corruption in the utility companies.