There is no silver bullet to improve the business climate: IFC

The Jakarta Post ,  Jakarta   |  Mon, 09/15/2008 10:08 AM  |  Business

When it comes to investment competitiveness, Indonesia's rank this year declined to 129th from 127th last year out of 181 countries surveyed by the International Finance Corporation (IFC) for its 2009 Doing Business Report.

While IFC praised the government's efforts in improving the business climate here, other countries had made greater improvements to improve their business climate, which made Indonesia slip down the list.

The Jakarta Post's Aditya Suharmoko and Riyadi Suparno talked to IFC country manager for Indonesia Adam Sack to find out more about the report. The following are excerpts from the interview:

Question: Why did Indonesia slip? Has the government not put enough effort into improving the country's business climate?

Answer: The first point to make is that, this year, the government of Indonesia, led by the Coordinating Ministry for Economic Affairs, has made a lot of important reforms to make it easier to do business in Indonesia -- some 11 reforms.

The Vice President's office has set up a coordinating inter-ministerial working group, including many agencies of government, to continue this reform effort.

The way the Doing Business indicators are calculated is, there is with a cut off date of June 1, 2008. So, of the 11 reforms the government introduced this year, not all count for the Doing Business 2009 results.

The second point to make is that other countries around the world this year have been making a large number of reforms. The report identifies 239 reforms carried out in 113 countries. So we see globally many countries are working hard to improve the business environment for domestic SMEs.

There are 10 topics that are covered by Doing Business, and these represent the life-cycle of an SME, starting from how to start a business, all the way to how to close a business. The report identifies where Indonesia ranks for each of these 10 indicators.

So, do you think the government did not make an all-out effort to support SMEs in Indonesia? I think the government is making a lot of effort to support SMEs. Many senior government officials have made support for SMEs an important part of their ministries' or agencies' work.

The majority of businesses, over 90 percent of businesses here, are SMEs. The majority of jobs are in SMEs. The majority of investment is through SMEs. So, for the continued growth of the economy, for continued job creation, the success of Indonesian SMEs is critical.

There are two questions .. How easy is it to start a business? How can the government make it easy to start a business whilst having the proper regulations, but to do it in a way that is easy.

The second point is that the more businesses or SMEs that become formal SMEs, the better it is for jobs and the better it is for growth.

If the barriers to setting up a formal business are high, then the incentive to entrepreneurs is to stay informal. If you are informal, then your employees do not have as much protection under the labor laws.

If you're informal, you're not captured by the tax regime, so there's less revenue for the government. If you're informal, it's more difficult to get credit from a bank. So, becoming formal is good for jobs, good for investment and good for growth.

The easier the government makes it, for example eliminating or reducing the minimum capital required to start a business, then the more businesses become formal and the better it is for the economy.

Local governments are responsible for the implementation of the measures to ease the way of doing business in the regions, while the central government makes the policy. What do you think? Both central and local government are involved and both need to proceed with the reform program. The governor of Jakarta, for example, has initiated a program of reform to make it easier to start businesses in Jakarta.

The World Bank and IFC are supporting the governor and his administration in that program. But, it requires both national and provincial governments, in fact the whole of government needs to engage in this. And we've seen some good progress this year.

The Doing Business report doesn't look across the regions, but IFC is launching this year a Doing Business that does examine regional differences.

You raise an important issue, which is that different regions have different business environments and local businesses deal with the local business environment.

What are your recommendations to the government to improve the business climate here, based on the progress on the 2009 Doing Business report? We have shared with the government some suggestions based on experiences from around the world.

There is no silver bullet, there is no one thing to change that makes the business environment easy for SMEs. We fully support the government's commitment to continue the reform process and our recommendation would be to continue building on that and even to increase the pace of reform.

The government now has the institutional framework in place to drive those reforms and it's important this continues. IFC is very happy to support those government-led initiatives.

In the Doing Business Report for 2009, the best positive measure was in improving access to credit. And you may know that access to credit is a critical issue for Indonesian SMEs.

The steps taken by Bank Indonesia (BI) to make it easier to access credit are very welcome.

The number of days to register a business has also been reduced in the last year from 105 days to 76 days as a result of the reforms made and there are more government reforms under way, but not yet reflected in the survey data, that will take off a further 43 days from the time it takes to register a business.

So this is a very significant improvement.

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