The recent publication of the 2008 economic report by Bank Indonesia, titled "Maintaining Economic Stability in the Global Financial Crisis", once again confirms that Indonesian economic growth in 2009 will be less than what it was in 2008. The rate of economic growth is estimated to be around 4 percent in 2009, which is much lower than the growth rate of 6.1 percent in 2008.
Such low growth, it has been argued, can partly be attributed to impacts of the global financial crisis (GFC) which has led to a decreasing rate of growth of aggregate demand components, particularly consumption, investment and exports. It is quite surprising, however, that the 10-step policies introduced by the government to stabilize the economy have almost nothing to do with improving investment.
It is a great mistake to ignore the importance of foreign direct investment (FDI) in particular as source of growth under the pressures of the GFC. Why so? There are at least three reasons why the government needs to pay greater attention to FDI.
First, FDI plays a dominant role in comparison to domestic direct investment. Over the last seven years (2002-2008), for instance, the structure of investment in Indonesia was dominated by FDI which was recorded to be around 70 percent of the total investment per year.
In 2008, the total number of FDI projects realized, based on the number of permanent licenses issued by Investment Coordinating Board (BKPM), was more than 5 times the number of domestic direct investment projects. FDI accounted for 1,029 projects, with a realized investment value of US$14.2 billion, while domestic direct investment accounted for only 210 projects worth Rp 16.73 trillion ($1.36 billion).
Second, FDI has been able to maintain growth in many economic sectors, including transport, communication and storage, followed by metals, machinery and electronics, motor vehicles and other transport equipment, as well as chemical and pharmaceutical industries.
Meanwhile, domestic investment has played roles in the food, metals, machinery and electronics industries, food crops and plantations, construction, and rubber and plastic industries.
Note that both FDI and domestic direct investors have established projects primarily in Java.
Third, FDI has grown significantly faster than domestic direct investment since 1997/1998. Last year a significant drop of around 40 percent in numbers of realized domestic investment projects occurred, while FDI projects increase by more than 43 percent. This could indicate that the economic crisis of 1997/1998 has led to limitations of domestic capital on the one hand, and limited market access and low levels of technological capability on the other.
It is true that following the crisis in 1997/1998, the government implemented a long list of policies, programs and activities aimed at the development of FDI in particular and investment in general. Between 2007 and 2008, for instance, 21 regulations were issued by the government which were directly or indirectly related to investment.
However, of these 21 new regulations, only 4 were directly related to the development of FDI. These are Law No. 25/2007 on FDI, Government Regulation No. 1/2007 on Income Tax facilities for investment in certain sectors in certain regions, Presidential Regulation (Perpres) No. 76/2007 on criteria and requirements for investment, and Presidential Regulation (Perpres) No. 77/2007 on negative and positive lists of investment.
Law No.25/2007, however is still considered problematic because this law has no detailed implementation procedures for the "One roof investment policy". Also, the issuance of this law has not been accompanied by the availability of improved infrastructure and land ownership management.
In general there are at least two major problems that reduce the competitiveness of the Indonesian investment climate, and discourage potential investors from choosing to invest here.
The first is associated with high risks arising from social and political insecurity, macroeconomic instability, policy and regulatory uncertainty and a lack of coordination among government departments.
The second relates to the high cost of doing business in Indonesia, because of power shortages, poor infrastructure quality, the tax system, the cost of financing, labor regulations, poor contract enforcement, intensified corruption, and the changing role of local government with the decentralization brought about in the reforms era.
The introduction of local autonomy or decentralization, for instance, while enable local governments to have more power, authority, and responsibility in managing local economic affairs, to some extent has had a detrimental effect on the competitiveness of Indonesia's investment climate.
This is because with increased autonomy, local governments frequently legislate new taxes and charges with little or no legal basis. In fact, these local charges often overlap similar charges imposed by the central government.
Another example can be seen in the case of the issuance of Labor Law No. 13/2003 which has increased production costs, and has been the basis of numerous industrial disputes that have disrupted production activities.
The list of complaints from foreign investors is still very long, and the problem is that the government has not been able to respond effectively to many complaints that have been around for years.
The writer is the deputy chief of societal dynamics at the State Ministry for Research and Technology.
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