[Kabar-indonesia] Blaming Democracy for Slow Pace of RI Reforms a Dangerous Thought [a JP Op-Ed]

[Joyo at aol.com]

The Jakarta Post
Monday, October 9, 2006

Op-Ed

Blaming democracy for slow pace of reforms a dangerous thought 

James Van Zorge, Jakarta

There is a consensus within the international and local business community-as 
well as multilateral lending institutions such as the World Bank and the 
International Monetary Fund-that the Indonesian government's macroeconomic 
policies are sound. For this, the president's economics team, which includes chief 
economics minister Boediono, Finance Minister Sri Mulyani Indrawati and Trade 
Minister Mari Elka Pangestu, deserve kudos.

There is, however, one big caveat. Although the economy is expected to grow 
around 5.5 percent this year (which is the expected average for Asian economies 
for 2006, excluding China), prospects for growth in 2007 will depend in large 
part on the ability of this government to attract more investment. 

With consumption -- a key engine for growth in the past -- slowing down, 
improving the business climate should be a top priority for the government. 

On that score, much remains to be done. In a recent world-wide survey 
conducted by the World Bank on the ease of doing business, Indonesia ranks 135 out of 
a field of more than 150 countries. Compared to its neighbors in Southeast 
Asia, Indonesia is far behind the pack-Thailand and Malaysia, for example, rank 
within the top 25 countries. 

In another study conducted by the Fraser Institute, which publishes a yearly 
index on economic freedom (measuring critical variables such as the legal 
structure, security of property rights, and regulations on credit, labor and 
business), Indonesia again fares poorly in comparison with other emerging markets 
in general and its competitors in Southeast Asian in particular: Malaysia, 
Thailand and the Philippines rank 53, 60, and 68 respectively, while Indonesia 
sits near the bottom at number 83. 

Then there is the highly-respected Corruption Perceptions Index, published by 
Transparency International, which shows Indonesia consistently ranking at the 
bottom of the pile; in 2005, Indonesia ranked 137, while Malaysia and 
Thailand ranked 39 and 49. 

The good news is that the government understands that it needs to push ahead 
with reforms in order to become more competitive with other emerging 
economies, attract investment and generate the higher rates of growth necessary to 
start reversing the tide of unemployment. The government is planning on moving 
forward with tax reforms, labor law revisions, and a new investment law. 

The bad news is that -- despite their good intentions -- when you scratch the 
surface, it becomes obvious that policy-makers lack a sense of urgency for 
reform and, in many cases, have relied upon some dubious excuses for explaining 
why reforms have been so slow in coming. 

One of the more dangerous kinds of thinking now permeating the higher levels 
of government is that democracy is to blame for the slow pace of reform. 
Indonesian policy-makers are pointing their fingers at the communist states of 
China and Vietnam and are saying that because they have authoritarian governments, 
it is easier for them to get things done. 

At first glance, this argument might seem sensible. After all, leaders in 
democracies have to share power in a system of checks and balances, while 
dictators and their ilk can evoke power and influence more efficiently by using 
patronage and intimidation. 

True enough-still, there are plenty of examples of authoritarian governments 
making bad policy decisions and democracies producing good policies without 
much difficulty. 

Another example of ill-founded thinking that has affected the Indonesian body 
politic is that the anti-corruption campaign being spearheaded by President 
Susilo Bambang Yudhoyono has created a climate in which decision-makers and 
bureaucrats -- because of their fear of being caught in the web of 
anti-corruption agencies -- have become overly-cautious. 

In some cases, this argument could be valid, but surely the benefits of 
taking a hard-line approach against corruption far outweigh the "efficiency costs." 
Moreover, it is an extremely dangerous position to take for it implies that 
the solution to getting things done more quickly is to slow down the pace of 
cleaning up the government: for crony businessmen and their counter-parts in 
government, saying "anti-corruption is a bad thing" is a convenient and 
profitable mantra to propagate. 

More alarming, we have started to hear intelligent technocrats inside the 
government being influenced by the strain of thought that perhaps anti-corruption 
measures have gone too far, even to the point of criticizing the World Bank 
for being too aggressive in its efforts to buttress anti-corruption reforms. 

Indonesia's policy elite should be reminded that, while efficiency is a lofty 
goal, investors invariably care much more about clean government than 
efficiency. This is especially true from the perspective of Western corporations that 
are beholden by their home governments to strict ethical standards when doing 
business overseas; it is often their experience that corruption actually 
slows down their ability to get deals done and, often makes it impossible to move 
forward with a project when the quid pro quo is to offer illegal payments in 
return for procuring the licenses and approvals they need to make an 
investment. 

For non-Western corporations the problem of corruption is less of an issue. 
This can explain, in part, why many larger Asian players have started to fill 
the vacuum left behind in the wake of decreasing inflows of investment by U.S. 
and European multinationals. 

This leads to the third strain of dangerous thinking that has permeated the 
upper reaches of the Indonesian government: some high-level officials are 
saying that because China is investing lots of capital in Indonesia, then the 
business climate must not be so bad after all. 

It has even gotten to the point that some policy-makers think that they can 
deal the "China card" when talking with the international business community in 
the hopes that this will entice them to invest more in Indonesia. 

Once again, the Indonesian government is playing out of tune. Policy-makers 
who think they have an ace in the China card are forgetting that Chinese 
corporations -- which are mostly state-owned-have an entirely different set of 
values and interests than those coming from the West. 

One should always keep in mind that Chinese corporations are an arm of their 
government. Besides their need to secure the energy resources for fueling the 
economy on the mainland, Beijing's desire to exert greater political influence 
in Southeast Asia certainly plays into the calculus and long-term strategy 
behind their willingness to invest in Indonesia in spite of the commercial 
risks-to believe otherwise would be, at best, horribly naive. 

For the most part, Western multinationals are driven by the bottom-line. With 
few exceptions, they are privately-held corporate entities, and therefore not 
beholden to political interests back home. Hence, regardless of what the 
Indonesian policy elite may say about China's large appetite for investing here, 
it will fall on deaf ears in the boardrooms of MNCs. 

So, here is the bottom-line for the Indonesian government: investors are not 
interested in excuses or flowery speeches. The government needs not just to 
"talk the talk" about reform. Holding road-shows in the U.S. and saying that 
things are really not bad as they seem will also not prove very fruitful. Now is 
the time to "walk the walk." 

The writer is a senior partner of Van Zorge, Heffernan & Associates, a 
government relations consulting firm based in Jakarta. He can be reached at 
jvzorge at rad.net.id. 

------------------------------------------
Joyo Indonesia News Service
------------------------------------------