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Jakarta Post

Investment studies must be forward-looking

  • Will Hickey
    Will Hickey

    Associate professor for the School of Government and Public Policy in Jakarta

Jakarta   /   Wed, May 18, 2016   /  12:07 pm
Investment studies must be forward-looking In a hurry: An expatriate wearing batik in observance of National Batik Day, runs with other workers to catch their train from Duku Atas train station. BPS recorded 73.46 percent increase of foreign worker arrivals in January, compared to the figure in December, 2015. (JP/P.J. Leo)

Recently, the US Chamber of Commerce in conjunction with the American Chamber of Commerce in Indonesia and the Paramadina Public Policy Institute published a year-end US-Indonesia investment study for 2015 entitled Taking Stock, which included a recommendations roadmap for 2016. 

First, some background: The US has an outsized investment footprint and policy influence on Indonesia compared to other countries that invest in the country. The US, if one considers Singapore as a proxy for US investment, is the largest source of foreign direct investment ( FDI ) year-on-year ( although other countries, like Malaysia, may affect the investment amount quarterly ). 

In fact, the study also claimed that US companies may have been the largest source of FDI for Indonesia in the past 12 years. Much of this is directed toward the energy and commodity sectors ( oil, coal, gas, ores ), via US energy and mining giants CPI, PT Newmont, PT Freeport, and maintaining that sector, via US companies. 

This undue influence on the Indonesian economy may not be entirely beneficial when considering that these large-scale investments are not transparent, represent old investment patterns and have failed to bring about human development in the long term. This is also important in setting a template for future and growing FDI, such as with Korea and Japan, both in search of “bluer oceans”.

Perhaps the most important point, though, is that the world’s currency, the US dollar, with its addiction in Indonesia, means that US financial policy also becomes Bank of Indonesia’s financial concern.  

The US influence in many aspects is clear and makes this study open for a serious review and critique, especially if these recommendations are being presented to Indonesia’s leaders as any type of way forward, when in actuality they may be insinuating a return to past practices, namely the export investment model which is not a good developer of talent in itself. Sometimes, the past is the best predictor of the future, but this time is different.

Namely, we live in a deflationary world: Commodity prices have cratered, dragging down Asian currency values and exports to China. Therefore, some aspects of this study need external evaluation based on world trends and threats. 

The study also does not mention three of the elephants in the room of world macro-trends and makes a policy recommendation that may be off-center in regards to reinforcing old business patterns.

Indonesia needs endogenous growth and this means focusing on building real domestic capacity, as opposed to external influences, such as US Federal Reserve policy, world energy prices, or the buying patterns of China. Endogenous growth, not “consumptionomics”, remains the real future sustainable growth model if Indonesian development is to be all-inclusive at this stage.

 Therefore, the quality of the investment is important to promote endogeneity as opposed to total aggregate amounts of investment. A question, are investments helping Indonesia reach its long-term political and development needs or someone else’s? Getting to 8 percent economic growth by 2019 is laudable, but it could also prove to be an economic catastrophe if the investment is not structured correctly. 

This is a fine point, but very crucial in Indonesia’s direction. Indonesia’s main interests right now are on infrastructure building, energy capacity and creating better regional employment. 

Perhaps the old investment playbook needs to be scrapped and revised to reflect current Indonesian economic and social needs. The study urges three steps that need to be addressed. We consider these in light of the fact that in getting to self-sufficiency, changing these steps may not be in order.

First, the “negative list”, things that foreigners cannot invest in, would on the face of it seem to be an impediment to Indonesian investment, that is if preferential investor policies could be given to things not on the list. 

However, to promote human capital development it may not be a bad idea to keep it in place, for now. In other words, breaking the cycle of investments in raw materials and commodities is crucial to get investment channeled into more productive, human capital engaging enterprises and sectors. Any opening up of the negative list must include offsets of know-how transfers. 

Second, eliminating currency controls is called for since everything in Indonesia worth having or doing is referenced in dollars. The rupiah becomes more of a commodity play and thus less of a currency with investors. Currency controls are not a bad thing if implemented correctly. 

More to the point, as in breaking the foreign investment addiction to all things commodity, breaking the dollar addiction is also part of endogenous growth cycle. Real people doing real things in Indonesia don’t earn dollars, they earn rupiah. 

Currency controls in part stem capital flight, which left unchecked weakens average people’s purchasing power. One of the building blocks of social capital is in people having resources on hand to develop themselves!

Third, expatriate employment restrictions are an issue. One standard, two systems are in play here: one for Western countries, one for Chinese labor. Western expats are burdened with needing to have proper registrations and other work permissions in place, but this does not seem to preclude workers in Chinese infrastructure projects with a vertical organizational structures ( that means from ditch diggers to top managers ) from working in Indonesia. 

The advent of the Asian Infrastructure Development Bank of which Indonesia is a signatory partner stands to only exacerbate this trend. 

Western companies pay high wages that are subjected to rent-seeking activities in Indonesia’s bureaucracy; Chinese ones are not. But a key question here is, does Indonesia want to be competing for foreign investment against low-skilled Burma/Cambodia or aspiring to be high-tech Singapore/Korea? Upgrading Indonesia’s human resources for better quality investment is a core mandate. 

Hot money inflows are not beneficial to Indonesia unless they are cooperating and in-synch with an endogenous growth activity. Nonetheless, this does little to develop Asian or other “shop floor” countries without a robust technology transfer mandate in place that includes know-how transfer.

To better triangulate the Taking Stock survey, it is best to compare it with FDI issues in other ASEAN countries. According to the 2016 ASEAN Business Outlook Survey, also sponsored by the US Chamber of Commerce, Indonesia scores very low in regards to infrastructure, regulations ( too many ) and corruption. Laos and Myanmar even score better than Indonesia on the first two.

Dealing with these issues for not only FDI, but also domestic direct investment would benefit Indonesia’s development for both sides. 

In short, endogenous growth must become part of Indonesia’s fabric. This is not idealism. Norway did it in the 1960s, as did Korea in the 1970s and later China in the 1990s by promoting tech transfer and know-how transfer in education ministries via appropriate investment. 

By promoting we mean that substantial government policy initiatives that foster developing long-term Indonesian economic priorities. Practically all of these priorities can be solved with relevant know-how and skills transfer initiatives. Know-how and transparency will also over time expose and drive out corruption, which simply cannot be legislated out of existence under an existing cultural mindset.

 

***

The writer is an associate professor and public policy adviser for the School of Government and Public Policy in Jakarta.

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