Quo Vadis, Export and Investment
In the last three years we have been reminded that Indonesia\'s economic growth still relies on two out of four factors: exports and investment. The other two factors – government spending and domestic consumption – have not made strong contributions, it is believed.
We were stunned to hear the recent statement made by the country\'s highest leadership that there was something wrong with our exports and foreign investment, which have dropped sharply despite the tireless efforts carried out by the relevant ministries and agencies to boost exports and foreign investment in the past three to four years.
Then, the discourse emerged discussing the need to establish a ministry-level institution to further boost exports to other countries and attract foreign investment. Export revenues are largely determined by our products and foreign markets. Unfortunately, Indonesia has not produced enough manufacturing products that could meet the demand in the world market. For this reason, Indonesia needs to attract more investors, especially foreign investors. However, investors need a business environment that provides long-term certainty. Until now, complaints from domestic and foreign businessmen are mostly still about government policies that are not conducive to business. They are often not supporting each other and changing so it makes it difficult to create long-term business plans.
Perhaps we need to do a brief reflection before concluding that the establishment of a new institution is needed in order to cope with the slump in exports and investment. The increase (and decline) of exports is due to many factors that involve more than just government institutions that deal with boosting trade and exports. A number of other factors such as the ability of our industry to produce products that are competitive and needed in the export market; economic infrastructure and superstructure; domestic connectivity and connectivity between Indonesia and regional and world trade centers; and the situation of global trade, which is increasingly challenging with the number of countries imposing trade protections, also affects the performance of our exports.
An increase in the industrial capacity cannot be separated from the involvement of foreign investors. But why is Indonesia unable to increase foreign investment despite the fact that it has an abundance of natural resources, more productive workforce, a growing middle class, and a number of financial incentives and permits offered to potential investors? The answer is certainly not just a matter of land acquisition or how many days or hours of investment it takes for approvals to be issued.
Many factors
Like exports, the decline in foreign investment is caused by a number of factors that cannot be overcome simply by establishing an export and investment ministry. Instead of getting better, the government\'s performance in the field of exports and investment can even worsen if the bureaucratic chain becomes longer and the elements in the bureaucratic system are still incapable of coordinating and synchronizing, both in formulating policies and their implementation.
One thing that is often a subject of complaints by national or foreign investors is the lack of certainty over the policies of the government. This is caused by the absence of good regulatory practices in our bureaucracy, both on the stage of policy formulation and in its implementation. As a result, a regulation can be issued by a ministry only in a matter of days without being known by other relevant ministries.
In fact, in some cases, policy disharmony can emerge in one ministry because an advisory unit in the upstream sector pursues a policy that hampers growth in the downstream sector, even though both were within the same scope of duties of the ministry.
In fact, to overcome uncertainty over policy/regulation as mentioned above, the government introduced a series of deregulation packages, the first round of which was in Sept. 9, 2015. After the launch of the 16th deregulation package in November last year, we observed that there were two general responses to the deregulatory measures. First, positive responses came from investors burdened by extra operating costs and compliance costs in carrying out their business. Second, a response came from those who were concerned that the deregulation would erase the various protections that have so far been given by the government.
The basic premise of "deregulation" is simplification and synchronization of regulations; the fewer and simpler the rules, the easier it is to attract investment, encourage productivity (including in the export sector) and increase efficiency by reducing costs and prices. In other words, with deregulation we remove unnecessary rules, including those that are overlapping or conflicting and ineffective in achieving the goals.
Based on this premise, deregulation should be carried out thoroughly when it comes to the existing regulations. It cannot be done in increments without any clear goals. The deregulation process can be disrupted and can even create uncertainty among business people and investors if there are new regulations issued against the spirit of deregulation. This can occur if there is partiality and dichotomy within the country and abroad in an increasingly integrated world.
Indeed, we have witnessed a wave of deregulation since the early 1980s. However, during its implementation, deregulation policy has always been overridden by the spirit of re-regulation, which in the end encourages the government to roll out deregulation policies again.
The more often the deregulation packages are issued, the worse we are perceived, with our image being one of reregulating regulations that have deregulated, with the economy being managed piece by piece. The consequence of the aforementioned practices can be easily predicted: the purpose of deregulation cannot be achieved so that competitiveness remains a problem because productivity and efficiency remain low. Exports cannot also be increased significantly because we still rely on primary commodities. This will create uncertainty in the business climate, which makes potential investors think twice about making a long-term investment in Indonesia.
Work moving forward
So, what is lacking in deregulation in the context of competitiveness in increasing exports and investment? The United States has the 1980 Regulatory Flexibility Act, while in the UK, you can find the Better Regulation Commission, which continuously monitors various rules so as not to create overlapping policies and incur unnecessary costs.
We will find it easy to agree that deregulation is necessary, but in order to maintain the spirit of deregulation, the government also needs to roll out regulatory reform programs independently.
The spirit of deregulation and regulatory reform, as developed in the US or the UK, does mean that regulation is no longer needed. Any country in the world still need regulations to manage its economy and all countries in the world refer to international agreements as a reference in formulating and implementing rules at the national level. In the field of trade, the international agreements that are used as the main reference are those that fall under the umbrella of the World Trade Organization (WTO), which now consists of 164 countries.
In addition to the agreements under the WTO, there are also other preferential agreements with other countries, some of which are still under negotiations. These agreements are called "WTO plus" and apply only between certain countries, while minimizing free riders wherever possible.
These agreements need to be seen as a platform to increase the exports of goods and services and attract investment, but more than that, it can be implemented as part of regulatory reform. It is different from the reforms that we have made, as through these agreements, Indonesia can apply international best practices and internationally recognized policy norms and at the same time get a bonus: additional market access and investment. So, to encourage exports and attract foreign investment, there is no other way than to fix the national economy holistically and link it with our cooperation with other countries, especially in negotiations that have been concluded or those currently being negotiated. This certainly cannot be resolved simply by extending the chain of bureaucracy.
Hatanto Reksodipoetro, Former Secretary General of the Trade Ministry and the Chair of the Trustees of Trade Policy Forum