RI's economy hinges on drifting legal framework

RI's economy hinges on drifting legal framework

Umar Juoro, Jakarta

In every discussion about the main obstacles to doing business
in Indonesia, the problem of the legal framework is almost always
at the top of the list. However, the implication of this is
different from one case to another. From the administration and
House of Representatives (DPR) point of view, this means more
laws and more regulations should be enacted. While, from the
business point of view, generally, this means certainty and
reliability. For the court system, this means making decisions in
its own way based on their own interpretation of laws or even the
Constitution.

During the Soeharto era, practically the entire administration
under his strong leadership was the sole institution to interpret
the Constitution, and the main actor in drafting and passing the
laws. The House was a rubber stamp body. Meanwhile, the legal
system was also under his direct control.

Nevertheless, in that situation, the legal framework at the
time was able to give certainty to businesspeople. Business
disputes were resolved, not through the legal process, but by the
heavy handed state apparatus, whether bureaucracy or security
forces. Certainly from a democracy and human rights point of view
this measure is hardly acceptable, but for development, this
approach was accepted as a way to propel high economic growth.

In the current reform era, things have been changing
drastically, especially after the amendments to the Constitution.
The House and the People's Consultative Assembly have more say,
not only in drafting and passing the laws, but also in changing
the Constitution. The creation of the Constitutional Court makes
this body the sole interpreter of the legality of the
Constitution.

Unlike the Soeharto era, where laws guiding economic
activities were interpreted in order to accommodate economic
liberalization, without necessarily amending the Constitution,
now, the laws considered too liberal, such as opening to
competition certain economic sectors, such as electricity and
oil/gas, can be annulled or asked to be revised by the
Constitutional Court if they are not consistent with the spirit
of the Constitution.

Judging from that situation, one may be pessimistic that a
reliable legal framework can be secured before doing business in
this country. Just an example, the recent presidential decree on
land acquisition for infrastructure projects was immediately
challenged by several non-government organizations. They claim it
is against the agrarian law that guarantees property and human
rights in general. This case may go to the Constitutional Court
and the court might annul the decree, thereby jeopardizing the
investor interest in infrastructure development, which is
desperately needed in this country.

In general, the legal framework will drift in the direction
depending on which institution is involved in it.

This factor, in a very open sociopolitical environment, keeps
the legal framework adrift, creating a high degree of
uncertainty.

Under these circumstances, the bureaucrats, judges and state
police, tend to make decisions that are most suitable to their
own interpretations of certain laws and regulations and to their
interests. They know that the government cannot intervene. This
is why bureaucrats often do not even abide by decrees or
regulations on reform measures made by the President and his
ministers.

However, this does not mean business cannot flourish in
Indonesia. Though there has not been much improvement in the
legal framework, the economic growth in the first quarter of 2005
was 6.35 percent (year-on-year) spurred by investment, which
expanded by around 15 percent.

When we look further into the base of this relatively high
growth, it turns out that it was the sectors that do not rely on
an extensive legal framework that have flourished, such as
telecommunications (mainly wireless), construction (especially
apartments, housing and malls), and trade (especially retail).

The financial sector also grew robustly, even though banks and
financial institutions are heavily regulated, because the
activities were mainly on the consumer and retail side that are
much less regulated.

The sector that requires a solid legal framework, such as
mining and oil/gas, suffered from disappointing downturns.
Furthermore, we can infer that the less a sector requires solid
legal framework or the less regulated is a sector, the better the
performance, and vice-versa, a sector that relies on solid
regulation will continue to languish.

We can also see the situation from the origin of investors.
The domestic and other Asian investors, especially from
Singapore, Malaysia and China, are able to understand the
situation very well, realizing that the opportunity for business
is large and the expectation is high, despite the existence of a
weak and unreliable legal framework.

As long as their local business partner is reliable and well-
known and prefers to resolve disputes out of court, high returns
are guaranteed from the investment that they jointly make.
However, for North American and European investors in general,
and to some extent Japanese, that rely more on solid legal
framework for investment, the situation is not yet attractive.

They need more time to decide on significant investment and
will wait until the legal framework is reliable, except for
short-term portfolio investors. So it is no wonder that the elite
business and government people are starting to pay more attention
to Chinese investors, especially in infrastructure and natural
resource projects.

The question becomes, is that situation going to be
sustainable? The answer is likely no. Simply tapping the
opportunity and high expectation without a solid legal framework
will eventually lead to severe difficulties to resolve disputes
because of economic or political reasons that might come later
on.

The three branches of government should work together for a
common interest of the greater long-term welfare of the people.
They should not pretend to be independent of each other while
undermining each function in practice.

The writer is the Chairman of CIDES (Center for Information
and Development Studies) and a Senior Fellow at the Habibie
Center.