The attractive rewards of practicing good governance

The attractive rewards of practicing good governance

Rajenthran Arumugam, The Straits Times/Asia News Network, Singapore

The United Nations World Investment Report 2004 -- The Shift
Towards Services notes that globally, foreign direct investment
(FDI), particularly in services, is on a moderate rise after a
slowdown since 2000, this corresponds with the dramatic increase
in outsourcing.

But the increase in FDI flows varies among countries and
regions. Developing nations seem to be experiencing a recovery.
The report also posits that Southeast Asia is poised to be a
favored destination for FDI.

FDI in ASEAN countries increased from US$15 billion (S$25.13
billion) in 2002 to $19 billion last year. The impact of SARS on
FDI flows to the region was minimal. Singapore, Brunei
Darussalam, Thailand and Vietnam stood as clear winners -- due
mostly to improved economic conditions and a better investment
climate. Also, disinvestment in Indonesia since 1999 have slowed
down considerably.

Nevertheless, it is too early to celebrate.

Apart from Singapore, credible governance is still lacking in
the region and this raises doubts about the sustainability of FDI
flows. Investors' common complaints include ambiguous investment
laws and policies, undue political interference, bureaucratic
high-handedness and weak institutional set-ups.

Interestingly, The World Bank's recent World Development
Report 2005 -- A Better Investment Climate for Everyone, calls
for a pragmatic approach to improve the climate for investments,
which it believes strongly is important, together with human
empowerment, for sustainable economic growth and reduction of
global poverty.

The report firmly advocates that governments ease policy-
related risks, costs and barriers to competition to entice
investment. These are the very issues with which several ASEAN
economies are still grappling.

Countries like Indonesia, Thailand, the Philippines and
Vietnam have revamped their investment laws and policies in a bid
to make them business-friendly. In a free-market economy,
business activity including FDIs cannot be totally unregulated --
this would lead ultimately to market failure and the culmination
of systemic, structural and contingent risks. The challenge is to
have the investment laws administered in a transparent and
accountable manner.

Typically in ASEAN countries, the relevant ministries and
bureaucracies are given power to administer and implement the
investment laws. In the absence of proper checks and balances,
unfettered discretion, arbitrary regulation and abundant rent-
seeking activities have flourished in several countries. These
have invariably caused distortions in policies, as well as
uncertainty in the investment environment.

Since the onset of the Asian crisis, Indonesia, Thailand and
to some extent the Philippines have attempted to improve their
general governance, which had come under severe criticism during
the crisis. In most part, this has taken the form of enacting
administrative and constitutional laws and establishing related
institutions that act as checks and balances.

However, not many critics and investors are entirely satisfied
with the effectiveness of these institutions: They opine that the
efforts to eradicate corruption, collusion and nepotism seem
half-hearted. Indeed, in Indonesia, local autonomy without due
clarity of the law has made the investment environment rather
more uncertain. In sum, there is an urgent need in the region to
enhance general governance underpinned by rule of law.

Apart from Singapore and Malaysia, ASEAN countries' commercial
and non-commercial laws are wanting. Personal, property and
contractual rights remain ambiguous in the Indochinese countries.
In Indonesia, land rights in relation to the extraction of
natural resources are vague. Moreover, whilst corporate
governance has improved in the region, critics argue that the
reforms still lack credible substance and minority-shareholder
protection is on the whole inadequate. Labor laws also need to be
relevant to modern business practices. Taxation regimes need
transparency and accountability.

Several studies show that the advent of information,
communication and technology, coupled with globalization, has
boosted the protection of patents, trademarks, copyrights and
trade secrets.

Increasingly effective protection and enforcement of
intellectual property rights are crucial determinants in the
investment decision-making process. But although most of the
ASEAN countries' intellectual property laws have been re-modified
to suit the Agreement of Trade Related Aspects of Intellectual
Property Rights under the aegis of the World Trade Organization,
to a large extent, implementing regulations are lacking and
institutional failures pose problems. That said, overall, the
intellectual property rights regimes in the region are now much
better than before. Yet, there is an urgent need to beef up the
implementation and enforcement aspects.

The full efficacy of commercial laws can only be realized in
the context of a legal system that is able to dispense just,
economical and speedy justice. Unfortunately, this is one of the
major challenges in ASEAN countries, apart from Singapore.

The judiciaries of several ASEAN countries are plagued with
delays, high costs, politicization and corruption. This has
translated into high economic transaction costs for corporate
entities, as well as made business commitments unpredictable and
uncertain. As FDI in services increases, it becomes imperative
that contractual agreements are readily enforceable between and
among all economic actors.

However, Malaysia, Singapore and Thailand have made
significant progress. It takes much time, expertise and expense
to reform a beleaguered formal legal system and therefore it
would be prudent to put in place an ADR mechanism as a
complementary component.

On a broader spectrum, several ASEAN countries have the urgent
need to develop their physical infrastructure and skilled labor
force in order to attract manufacturing of high value-added
products.

On the global plane, the race to attract FDI has become
extremely aggressive. Hence, if the region is not able to remain
competitive and project a sound investment climate it will lose
out ultimately to other regions.

Without adequate FDI flows, the region will suffer low growth
and massive unemployment that can bring social upheavals. The
time has come to take decisive steps to improve the investment
climate in the region.

The writer is a visiting research fellow at the Institute of
Southeast Asian Studies.