Reinvigorating investment
Reinvigorating investment
Judging from the main messages of the World Development Report 2005: A Better Investment Climate for Everyone that was launched in Jakarta last Friday, the top-priority programs of President Susilo Bambang Yudhoyono's government -- strong law enforcement and the enhancement of good-governance practices -- seem to be on the right track.
Consistently strong law enforcement would build the credibility and certainty of government policies and control corruption and other forms of rent seeking, two preconditions vital for stimulating private investment. Likewise, good-governance practices reduce the policy-related costs and risks of doing business and minimize barriers to sound competition.
A much higher pace of private investment is virtually the only avenue available to the new government for it to achieve one of the main objectives of its mission -- accelerating growth to create jobs for the estimated 40 million unemployed and under- employed. Yet, more important is that productive jobs are the best means to alleviate poverty.
The government, faced with heavy domestic and foreign debt service burdens, is simply not able to provide fiscal stimulus for pump-priming. It is private enterprises that provide jobs, produce goods and services and are the main source of tax revenue.
But private companies, whether cooperatives, micro-, small-, medium- or large-scale enterprises are willing to stake out their capital only when the general business climate meets the minimum degree of physical, legal and institutional infrastructure that allows for reasonable risk calculation.
No wonder. Strong law enforcement to minimize government policy-related costs and risks, such as those regarding regulations on taxation, customs, labor, local autonomy and basic infrastructure, are high priorities on the business road map that was recommended to President Susilo by the Indonesian Chamber of Commerce and Industry (Kadin) last week.
The World Bank Report, which draws on surveys of over 30,000 companies in 53 developing countries, including more than 730 companies and 250 micro-enterprises in the informal sector in Indonesia, is therefore quite valuable as input for the United Indonesia Cabinet, which is currently finalizing its short-term agenda of action.
However challenging the task of improving the investment climate is already, a conducive investment atmosphere alone is not enough, particularly with regard to Indonesia, which now badly needs foreign direct investment (FDI) to cover its domestic-savings gap over the past six years of its economic predicament.
A good investment climate alone may already be effective enough to woo new capital inflow, but allowing market forces to entirely determine the forms of FDI inflow and the areas of business where they will operate could be detrimental to the goal of development with equity. This is a new paradigm of development, which the new government needs to implement to correct the disparities of development between provinces or regencies and the wide gap of income between groups of people.
The government, therefore, needs an investor-targeting strategy, which, instead of trying to attract FDI in general, focuses on wooing a defined set of investments to selected categories of industries or selected areas the government wants to develop, in line with the concept to promote development with equity, and to stem the negative impact of economic globalization and liberalization.
An investor-targeting strategy could be much more effective in view of the heightened international competition to attract FDI. Such a strategy also allows the government to choose the kinds of FDI it desires and direct them to support its objectives related to employment, technology transfer, export competitiveness, skills development and other development objectives.
An investor-targeting concept would also help the government screen out foreign investors who intend to exploit only Indonesia's static comparative advantages, with little long-term contribution to bolster its export competitiveness.
Greater export competitiveness is quite essential as it helps the country diversify away from its heavy dependence on a few primary commodities and manufactured exports, and move up the skills and technology ladder that is essential to increase value and to sustain rising wages.
But again, recalling the main message of the World Bank Report, the credibility of government policy is the key. Investors do not automatically respond to policies alone as they make judgments on how the policies are implemented. It is the interaction between policies and governance practices that investors assess before making decisions.
-----