Editorial: Business-friendly governance

Thu, 07/24/2008 10:41 AM | Opinion

The 2001 launch of decentralization moved local governments to the front line of economic development challenges in Indonesia, meaning the quality of regency and city administrations, where the local autonomy is centered, now matters more than ever.

Advancing governance reforms further, in particular at the local level, is key to achieving economic and social success. The country needs champions forging ahead with such reforms so that we can all learn from their experience.

This underlines the importance of the recent 2007 Local Economic Governance Index survey conducted by regional autonomy watchdog KPPOD and the Asia Foundation and cofunded by USAID.

The study drew on success stories of some local governments in 243 regencies and cities in 15 provinces across Indonesia that have pioneered new policies and approaches to improve their capacities in responding to the needs of their business communities.

But the survey also revealed the failures of many regency or city governments to adopt good governance and best practices needed to reinvigorate local economies.

Encouragingly, though, the study also showed an increasing awareness on the part of local governments of the vital importance of facilitating businesses.

More than 30 percent of the approximately 480 second-level administrations (city or regency) in the country have used their policy autonomy for setting up one-stop business licensing centers out of their realization that it is investment that creates jobs, which in turn generates purchasing power for the consumers.

But as the latest survey reveals, business licensing is only one of a number of basic conditions required to stimulate investment. Access to land and improving local infrastructure seems to matter more, though business development services are also important, especially for micro and small enterprises.

Nearly half of the firms surveyed said access to land was difficult and in several large cities that tenure contracts lacked security. The message requires local governments to focus more on the basic infrastructure of land titling.

The survey confirmed the finding of similar studies made by other institutions, including the World Bank, that good local economic governance is primarily the result of good political leadership rather than favorable financial or natural endowments.

This strongly suggests that regencies and cities with poor natural endowments should not despair in attracting private investment because businesses consider policy variables the main influence on their investment decisions.

Policy variables, which include institutional capacity related to legal certainty, policy consistency and predictability, government services and local regulations, have heavier weight in the rating of factors investors consider in choosing business locations.

Pro-business policies should indeed top the economic programs of local administrations because it is investors (businesspeople) who create jobs, which in turn generate purchasing power to spur consumer demand for goods and services, creating a virtuous circle within the economy.

Especially now as provincial governors, regents and mayors have to compete in direct elections, economic records that directly benefit the people are surely the most effective means of gaining voter support.

Many businesspeople have complained about distorting regulations issued by local administrations in an overly zealous bid to raise as much local revenue as possible without realizing that such rent-seeking measures will sooner or later kill the goose that lays the golden eggs.

The central government had so far revoked more than 975 regional bylaws on local taxes and user charges that contravened national laws but almost 2,000 other local regulations which are seen as inimical to businesses and investment have yet to be annulled.

Even though the survey covered only 15 provinces, its findings and the indicators it used for measuring economic governance could still be highly valuable for the inter-ministerial National Team for the Evaluation of the Performance and Accountability of Regional Governments, which will start assessing the implementation of local autonomy next year.

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