Putting business at ease

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.