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.

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