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.