Todung Mulya Lubis, Senior Partner, Lubis, Santosa & Maramis, on the problems facing the domestic business environment

Todung Mulya Lubis, Senior Partner, Lubis, Santosa & Maramis

With growth exceeding 6% annually, economic fundamentals are sound and the market does have confidence in the stability and continuity of positive growth. For a country with close to 250m people and abundant natural resources, Indonesia is certain to be a huge market for the future, especially as more than 100m have already been raised to middle-class status. The country has also been undergoing democratic changes; in spite of concerns that democracy is incompatible with the Islamic ideals of the majority of the population, Indonesia’s success is a testament to the complementary nature of these two systems.

There is of course much room for improvement here, but it is not wrong to argue that the country has much potential to become a major economic power. Indonesia was recently named one of the world’s top emerging economies, along with China, India, South Korea, Hong Kong, Taiwan, Brazil, Russia and South Africa. The government has been very aggressive in attracting foreign investment by offering incentives to investors around the world. Road shows in industrialised nations have received an encouraging response. Given that Indonesia earned investment-grade status from Fitch and Moody’s in 2011, it is only a matter of time before investment pours into many parts of the country.

Interest in Indonesia is especially strong given the continuing financial crisis in Europe and the US. Of course, this is no time to be complacent; we must sustain the interest of the global business community by meeting expectations and addressing barriers to economic growth. After all, foreign investors have no ideological commitment to countries – profit is the only concern.

There are at least five very pressing problems faced by investment community these days: lack of infrastructure; systemic and endemic corruption; legal uncertainty; growing labour unrest; and excessive regional autonomy. These five problems are not unrelated, but are instead part of a bigger problem, that of the lack of strong leadership by the government. If they are not addressed we will suffer reputational damage.

With regard to the first point, the country has suffered due to poor infrastructure, especially in the eastern part of Indonesia. Those are the rich mining areas, where a lack of infrastructure prevents big mining companies from exploiting their concessions.

On the issue of corruption, despite aggressive action by the Corruption Eradication Commission, corruption remains as bad as before. The point is to have a system that is transparent and accountable and closes the door for corruption. So far, the system still offers opportunities to exploit the loopholes.

With regard to legal uncertainty, we have seen improvement in the judiciary: many laws and regulations have been promulgated, and administrative and penal sanctions have been imposed against police, prosecutors and judges. However, corruption seems to be endemic in the legal apparatus and the country is perceived as one where law enforcement is not in accordance with prevailing international standards.

On the point of labour unrest, labour organisations have the right to strike and demand better wages and allowances. We all respect labour rights. However, the labour strikes have now reached a point where they inevitably disrupt the operations of the company, creating more uncertainty for businesses.

It will also be necessary to address the last point, excessive regional autonomy. Make no mistake – we are in favour of regional autonomy. Centralisation under the New Order stagnated the economy and made the economy less efficient and competitive. However, regional autonomy has also created a great many problems instead of solving them. Corruption in local government has made the economy inefficient, and operation costs in some places have become so high that it is not worth continuing to do business there.

Each of these five problems needs to be addressed. Indonesia cannot afford to lose out on investment opportunities, and much remains to be done. Failure to fix these problems will surely hold the country back from continuing on its march toward prosperity.

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Todung Mulya Lubis

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The Report: Indonesia 2013

Legal Framework chapter from The Report: Indonesia 2013

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