Putting business at ease

The new package of deregulation measures announced the other day complements a previous package delivered earlier this month. While the previous one put emphasis -- and substantially so -- on the ways and means to encourage more foreign investments, this new package focuses more on the import sector, to strengthen existing industries to better compete on the domestic as well as international markets. The new measures cut down import duties, remove non-tariff barriers and lift surcharges. All of this hopefully will reduce the input costs in the respective industries.

At least two different results can be expected. First, output prices will decrease proportionally, which will make products more affordable to more people, consequently increasing demand. Secondly, with the same amount of input, more output can be expected, which in turn can reduce the unit cost of production, which will decrease prices further, and in turn increase demand.

At least theoretically, that is the expectation. Lower prices increase demand; higher demand increases production volume, which will further reduce the cost per unit of goods produced.

Domestically, the national economy can be expected to grow faster; externally, Indonesian products will be more competitive in the world market.

All of this explains the reasoning behind the new package as pronounced by Coordinating Minister Saleh Afiff: "... to step up the whole spectrum of development activities directed to enhance the national economic situation and resilience." At the same time the measures conform with the Uruguay Round commitment and even "anticipate the post-Uruguay Round development in world trade."

Businessmen can argue about a lot of things concerning this new package. It can be perceived as not substantial enough compared to the previous one. Many expected a more significant reduction in the protection of domestic industries in the form of tariff and/or non-tariff barriers. Some sectors of the economy continue to be unnecessarily protected, like some agricultural products, paper products and the automotive industry.

On the other hand it can be pointed out that last year the government indicated that there would be no more "big" deregulation packages. Streamlining the economy through deregulation measures would continue, but in "smaller" steps. It was a kind of acknowledgment of the existing protection provided for the domestic industries, while at the same time hinting at the gradual approach to be taken by the government.

As we noted in this column a few weeks ago, the announcement of the deregulation is simply the start of a long and arduous process that will require good coordination among the various government agencies, in the nation's capital, as well as in the provinces. The effectiveness of deregulation depends a lot on the technical guidelines that have to be formulated.

However, it seems only proper for us to remember that economic reasoning alone is not enough to encourage economic activity. When a businessman makes an economically strategic decision, whether it is to expand his business, or to invest in some new venture, the economic calculation is just one of several considerations he has to take into account. Political risk is one of those and this kind of risk is hard to measure.

Therefore, businessmen need to be assured politically as well before they can be expected to respond to available opportunities. Political assurances are usually read through signals given by the government. Thus the question now is whether this new deregulation package is being provided along with the necessary political signals to encourage businessmen to take action. Somehow it seems to us that this aspect has not been given the full attention it deserves.