In ancient China, a person wanting to bestow a curse on his enemy would say these words: “May you live in interesting times”. Indonesia is indeed currently cursed with too many ‘interesting’ events, with the recent terror alerts still haunting dwellers of the nation’s big cities and problems assailing political stability, which have created numerous obstacles to a healthy economic growth.

 

Opportunities

 

Despite the gloomy atmosphere overshadowing Jakarta and other big cities the past two months, Indonesians should not miss out on opportunities that can help restart Indonesia’s engines of growth.

One significant change in Indonesian economics later this year is that the IMF will cease its financial assistance operations in Indonesia in December. The Indonesian government has released information regarding its new package of policies for economic reforms, better known as the White Paper document, which is in itself an opportunity for the government to show the Indonesian and global public that it is committed to improve economic conditions. To be specific, the package is planned to create an environment more attractive to investors, to enhance the financial sector so that it can better accommodate the economy, with a strong emphasis on macroeconomic stability. Some of the more striking policies include: (i) reducing the fiscal deficit to zero by 2006, (ii) revised procedures for government procurement along with implementing regulations for budget preparation and government accounting standards, (iii) the privatization of ten state enterprises, (iv) revamping fiscal relations between regions, specifically limitations on what type of taxes can be raised by each region, (v) the enhancing of capital adequacy standards, along with a revised anti-money laundering law, (vi) the creation of a one-stop investment centre, and (vii) the finalization of the Industrial Dispute Law.

 

Investment is the Nourishment for a Healthy Reforms Program

 

Attracting investment is an integral part of increasing the chance of the White Paper document being successfully implemented. As we have pointed out, Indonesia now lives in interesting times, and foreign investors need to be convinced that Indonesia is truly safe to invest it. Easing entry of investors into the Indonesia economy (i.e. cutting the red tape) is relatively easy to do, but credibility is also needed to bolster the confidence of investors. Among unlucky expatriates, dealing with any Indonesian bureaucracy has been likened to being strip-mined; it is important that corrupt activities be weeded out so the Indonesian investment atmosphere develops a better reputation. Unfortunately, legal ambiguity is one of the strongest disincentives to foreign (and domestic) investors. Corruption is at the center of this muddle: it is easier for businessmen to get involved into a project by ingratiating themselves with the appropriate government officials, which single-handedly destroys any incentives to obtain a project through legal means. Furthermore, many legal disputes in Indonesian business are settled by bribery, or in unfortunate cases violence and/or slander. We can be hopeful that the White Paper document will pursue its objectives in implementing laws such as the Industrial Dispute Law with a good degree of commitment, but without reforming the corrupt bureaucracy with proper carrots and sticks strategies (successful in some Latin American countries) it could be an exercise in futility.

 

Recently top Indonesian officials, including President Megawati Sukarnoputri and the Coordinating Minister of Economy Dorodjatun Kuntjoro-Jakti, have actively spread the word across the globe that Indonesia is a good place to invest in, the latter confiding that (among other things) Indonesia has stabilized its currency to a decent Rp 8,500 to the dollar from Rp 17,000 at its lowest during the Asian crisis, that the budget deficit has been shorn to 1.8% of GDP from a high of 4.8%, and that inflation has similarly dropped from 60% in 1998 to a much healthier 6%. What to make of such figures? The pessimistic observer may insinuate that they reflect a ‘catch-up’ mechanism, that Indonesia has merely crawled back to a spot not as good as it was before the crisis, which is why it needs investment so badly. Another observer may reflect on the general trend of the world economy (mainly the US) weakening, while the Asian region is still somewhat supported by China’s burgeoning economy. Indeed, China has remained a strong contender in the world economy, so much so that American industries have been clamoring for China to float its currency, instead of pegging it to the dollar, thereby giving Chinese exporters a significant edge in undercutting American producers. Chinese products literally flood the world’s shops, while at the same time the growing wealth of the Chinese is fueling China’s demands for imports from countries like Indonesia.

 

The Indonesian vice-president Hamzah Haz has garnered more success in Saudi Arabia, where his meeting with the King and Crown Prince of that country, along with the management of the Islamic Development Bank has safeguarded an increase in investment relations. Saudi Arabia is interested in Indonesia’s chemical, hotel and restaurant, housing, transportation, communication, and metal industries. To further facilitate interest in Indonesia, the vice president has set up an Indonesian promotion and business development service centre in Jedda in order to help market some 295 different goods from 50 Indonesian producers in 12 provinces, which mostly constitute of goods primarily produced by small to medium enterprises. The latter effort is hoped to channel funds into the Indonesian market for consumer goods and services, which will help it deepen and complexify, therefore creating more job opportunities.

 

It is therefore important for Indonesia to solidify and enhance its capital market sector, as there is a huge segment of the Indonesian market at the moment that are considered to small to be able to participate in the capital market and too small for investors to take notice of. If certain law reforms are made to facilitate their inclusion, i.e. by decreasing legal uncertainty and increasing faith in the economic system through policy-making means and through correct implementation, then the market would take notice of the smaller entities and have channels through which they can help those entities grow.

 

The Difficulty of Maintaining Stability

 

Although the White Paper document has pledged that one of its main aims is to uphold (macro) economic stability, in reality the situation may be too complicated for the government’s plans to work.

 

One major source of concern for analysts is that 2004 is the year for elections. Whoever is going to win and take charge of running the nation will be tempted to forego its commitments to the White Paper in favor of policies mellowed to suite popular opinion. The fact that safety nets are off as the IMF is leaving Indonesia means that there are no institutions that will coax and coerce the government to complying with its own plans. This is a very dangerous situation as conventional wisdom tells us that a broken promise incites more ire in the international and domestic public than no promises made at all.

 

The election itself is a cause for concern for many observers, mainly because there is a general feeling of disappointment of the populace with regards to the many failed reform governments, even a feeling that they are ready to go back to New Order style regimes. If such a party wins, Indonesia’s credibility will suffer severely, because there will be no incentives for transparency or legal reforms.

 

Another local problem also looms to threaten stability: Indonesia’s regional governments have been observed to degenerate into smaller forms of the central government, where those put into positions of privilege have turned to corrupt practices that further impoverish their populace. Furthermore, these local governments are essentially bigger versions of bureaucracies that shake down expatriates (this time foreign investment executives) for all their worth. The transfer of power has only managed to enable corrupt local officials to do what they have always wanted, copy the fat cats of Jakarta.

 

An uglier manifestation of the bad behavior of local governments’ concern privatization efforts in regional governments: A good example is the case of the privatization of Semen Padang (Padang Cement), where local entities interested in keeping Semen Padang as a source of income has rallied against its privatization, utilizing less than honorable strategies, in the name of the people of Sumatra.

 

At this point in time, it seems that the deciding factor in all this brew of ideological planning, confusion and greed is who will win the 2004 elections. Indonesians have to brace themselves and get truly involved in the elections, ensuring that the whole process is properly communicated to the public and accountably undertaken, if only to increase the chances of a regime capable of undertaking the heavy task before it to win. In the meantime, the public should never stop clamoring for the government to clear up the ambiguities of the Indonesian legal system, as economic growth thrives of certainty.