World Bank urges Indonesia to revive investment climate

Dadan Wijaksana, Jakarta

Investment will remain in the doldrums unless clear signs are given to investors that various problems detrimental to the business climate here are being addressed, the World Bank has warned.

Andrew Steer, World Bank country director in Indonesia, said investors have already realized that the complexity of the problems was too deep to be resolved overnight, but what they wanted to see was signs of a clear path towards improvement.

"Investors don't yet have confidence that this country is moving clearly in a certain direction," Steer said in a seminar on growth and investment on Thursday.

"They (investors) are not expecting solutions to these problems overnight, but they do not have confidence that the problems are being addressed."

The country's business climate has grown progressively worse with investors shying away from the country and picking instead other nations in the region as their investment destination.

As investment, particularly much-needed foreign direct investment (FDI), remains in the doldrums, it is depriving the country of its economic engine.

The economy consequently, has been forced to rely largely on domestic consumption and exports which has resulted in only modest economic growth -- 3 percent to 4 percent in the past several years.

The unfavorable investment atmosphere, due in large part to the weak legal system and corruption, has made Indonesia less competitive in terms of investment compared to other countries.

Steer cited the case of Vietnam, which has emerged lately as a favored investment destination in the region, as it pertains to the legal system.

"If you go to Vietnam and ask investors a question: What do you think of the legal system? They'll say it's terrible, but if you then ask them: What do you think the legal system will be like 10 years from now? They'll say: We think it will be a lot better."

"But if you ask the same question in Indonesia: What do you think of the legal system? Well, not very good. What do you think it will be 10 years from now? They'll say: We don't know.

"That's the difference. That's why they won't invest here," Steer explained.

Sharing Steer's view were Chatib Basri and Mari Pangestu, noted economists from the University of Indonesia and Center for Strategic and International Studies (CSIS).

"The absence of that kind of sign is what creates uncertainty -- which is pretty much what investors look for the most," Chatib said.

"For business people, there has to be a clear direction for the government's medium and long-term programs. Only then are they able to draw up realistic business and investment plans," Mari added.

On the issue of corruption, former executive of the International Monetary Fund (IMF) Hubert Neiss said that, "corruption is not an absolute obstacle to investment, as long as there are clear signs that something will be done to fix it."

"There is corruption in other nations, but investment is still coming in, that's because they (investors) see the signals that the government (in each of those countries) is doing something about it."