Medium-term challenges affect growth sustainability

Vincent Lingga, The Jakarta Post, Jakarta | Fri, 12/23/2011 9:47 AM

A consensus has emerged among economic forecasts for next year: Indonesia should gear up to cope with bigger risks of financial market turbulence next year in case the eurozone debt crisis worsens and the US economy falls into recession.

Most analysts also agree that Indonesia — with domestic consumption as its main driver of growth, a strong fiscal position and low government debt ratio, international reserves worth more than seven months of imports and a strong financial sector — already has a strong defense against external shocks. 

It is comforting to know the government has not been complacent with all these advantages. The government has put in place a set of contingency fiscal and monetary measures in maintaining stability in the domestic financial market and the rupiah exchange rate through joint market operations by the central bank, the Finance Ministry and state companies to buy government rupiah bonds should jittery portfolio investors decide to dump their rupiah assets. 

Preemptive and proactive policies could help break a potentially vicious loop between financial weakness and the real economy.

Indeed, extreme exchange rate volatility and financial panic warrant foreign exchange intervention, but only so long as support for the exchange rate and the resulting foreign reserve drawdown is not so excessive as to undermine macroeconomic fundamentals.

The 2012 State Budget Law stipulates several articles specially designed to empower the finance minister to quickly and firmly take fiscal measures, including providing additional fiscal stimulus, whenever necessary, to cope with any adverse fallout from the global economic uncertainty or downturn.

Putting it briefly, the government and Bank Indonesia are already fully prepared to respond quickly and firmly to external shocks by deploying fiscal and monetary measures to restore confidence and ensure financial stability. 

The only vital component still missing from all these anticipatory measures is a crisis management framework, held up by delays in the House of Representatives for over a year as discussions have stalled over the financial safety net bill.

 However, a narrow focus on anticipatory measures for near-term risks without adequate efforts to accelerate structural reforms to sustain medium-term growth could damage both portfolio and direct investors’ confidence in the longer-term economic prospects.

Several key reforms are required to strengthen investor confidence in the medium and long-term economic prospects, including concerted efforts to accelerate the implementation of government investment (the capital expenditure component of the state budget), significant reduction in fuel subsidies and infrastructure development.

Without significant progress in these areas, Indonesia’s economy will continue to be plagued by factors of uncertainty, and fall short of its potential growth of 7 to 8 percent.

Next year may well be our last chance under the current administration to launch bold reforms, because starting in 2013, most parties will embark on preparations for the 2014 legislative and presidential elections.

Turning first to capital expenditures, investment spending by the central government and regional administrations has remained very slow with the bulk of expenditures occurring in the last two to three months of the year, thus causing inefficiencies and losses through corruption.

“As of early this month, only about 50 percent of the government investment budget had been spent,” said Chairul Tanjung, chairman of President Susilo Bambang Yudhoyono’s economic think tank — the National Economic Council — which groups senior economists and business leaders.

Unfortunately, there seems to be no bold programs on the way to increase this public sector investment. 

The council’s 2012 Economic Outlook report cites bureaucratic reform and infrastructure development as the most pressing problems in the medium term.

The delay in government capital expenditures inflicts especially severe damage on the long-term foundation of the economy because most investments have been allocated for crucial infrastructure development. 

Yet more discouraging is the acute absence of political courage to significantly reduce wasteful spending on fuel and electricity subsidies, which tops US$25 billion annually (this year it could exceed $27 billion). The bulk of these subsidies supported middle and high-income consumers.

More than simply wasting taxpayer money, fuel subsidies blur price signals, distort consumption and investment decisions on alternative renewable energy, and increase the vulnerability of the state budget to oil-price volatility.

This misguided policy certainly abolishes any incentive for energy conservation and diversification programs to reduce the economy’s addiction to fossil fuels by developing new sources of renewable energy. With artificially cheap energy costs, businesses feel no urgency to replace their plant equipment/machinery with more energy-efficient ones.

If the government does not start gradually phasing out fuel subsidies next year with a clearly set time-bound schedule, we can simply forget about investment in renewable energy such as biofuel. 

The effectiveness of the recent government policy to offer a 10-year tax holiday to investors in renewable energy development remains questionable at best as long as domestic fuel prices remain way below international levels.

The acute lack of basic infrastructure and the crumbling condition of most existing infrastructure has become the main obstacle to robust growth. Unusually high logistics costs reduce the competitiveness of Indonesian products and hinder connectivity between the various major islands.

In fact, the absence of connectivity between islands, and even between neighboring districts in the outer islands, leads to conditions in which several areas may suffer from a severe shortage of fish or agricultural produce and have to depend on imports while farmers in their neighboring districts have to dump their produce at throw-away prices due to a lack of local demand.

The recent controversy over the import of fruits, vegetables, salt, sugar and fish is closely related to inadequate infrastructure which hinders connectivity between markets in various districts and islands. 

The enactment of the land acquisition bill last week could be a breakthrough in infrastructure development providing a remedy to the complexity, weak legal framework and arduous procedures for land clearance which have become the biggest barriers to project implementation. 

The government also has made regulatory and institutional improvements for the public-private partnerships (PPP) scheme for infrastructure development. This scheme stipulates contractual arrangements between public and private parties under which rights and responsibilities are shared for the duration of the contract. 

Institutional support for PPP includes the state-owned Indonesia Infrastructure Fund to provide long-term financing, the Infrastructure Guarantee Fund and the Land Acquisition Revolving Fund (LARF) to help accelerate the selection, preparation and execution of PPP projects. An inter-ministerial coordinating committee (KKPPI) was set up to speed up the implementation of PPP infrastructure projects.

However, only a few of the 80 infrastructure projects offered under the PPP scheme this year have entered implementation stages because most of the projects turned out to be either inadequately prepared or poorly selected.

A recent study by the World Bank showed how the lack of coordination among involved agencies during the selection process has resulted in multiple lists of projects which create confusion for potential investors. 

Coordination on PPP projects at the central government level has been complicated, with the KKPPI being chaired by both the coordinating economic minister and the national development planning minister. 

This institutional arrangement may be a fatal flaw. Good coordination and strong governmental leadership is key to PPP project implementation. India, for example, received $40 billion in investment commitments to its PPP infrastructure projects last year, thanks in part to its coordination structures. 

“In India, the Cabinet committee on infrastructure, headed by the Prime Minister, decides on infrastructure sector projects and monitors their performance,” the World Bank report says.

The author is a staff writer at The Jakarta Post

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Going beyond the law to spur sustainable palm oil

Vincent Lingga, Kota Kinabalu | Thu, 11/24/2011 10:10 AM

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When the Indonesian government and the private sector announced in late 2009 a broad plan to launch a sustainable palm oil scheme, it was immediately welcomed. 

The announcement was seen as showing a strong determination to develop oil palm plantations that were socially, economically and environmentally sustainable. 

That move was made soon after giant consumer product companies, such as Unilever and Nestlé, suspended crude palm oil purchases from several Indonesian companies, which were alleged by the environmental organization Greenpeace to have damaged the environment.

But when the green movement was officially launched in Jakarta early this year under the Indonesian Sustainable Palm Oil (ISPO) program, and when the Indonesian Palm Oil Association (Gapki) decided a few months ago to quit the internationally recognized Roundtable on Sustainable Palm Oil (RSPO), questions arose as to the motives behind that program.

Most big palm oil producers in Indonesia and green nongovernmental organizations (NGOs) see the Gapki move as misguided and narrow-minded, as demonstrated by their strong presence at the ninth RSPO conference and assembly, which ended on Thursday.

The ISPO program and the RSPO could complement each other because the former scheme is designed to make palm oil production sustainable in compliance with Indonesian laws, while the latter program goes beyond the law as it also covers the social aspects of the industry.

While the ISPO program is mandatory, designed and administered by the government, the RSPO is voluntary, running as a multi-stakeholder forum with the mission of promoting the growth and use of sustainable palm oil products through credible global standards.

The establishment of the RSPO in 2004 by plantations (growers), processors, manufacturers of consumer products, retailers, banks, nature conservation NGOs and civil society producers was prompted largely by market forces, or mounting consumer demands for green products.

The RSPO now has over 650 member organizations from 35 countries, including large companies such as Unilever, Walmart, Carrefour, Nestlé, Hershey’s, Citibank and the World Bank.

As Norman Jiwan of Sawit Watch, an NGO specializing in monitoring the palm oil industry, argued that if the ISPO program upholds only Indonesian laws and regulations, it will not be adequate because the scheme still falls short of several other elements vital for sustainable palm oil management.

The principles of sustainable management promoted and assessed by the RSPO for its certification process are more complete, covering such elements as transparency, legal and regulatory compliance, best production practices, environmental responsibility and commitments to local community development, human rights and land rights. 

By and large, the principles and criteria assessed for the RSPO green certification are precisely the best practices of agricultural development that Indonesia itself has been trying to promote. 

Even though the green consumer campaign in Indonesia’s biggest palm oil markets of China, India, Pakistan and Africa has not been as strong as those in Europe and the US, Indonesia cannot simply ignore the RSPO and the principles of sustainability it promotes.

Though Europe takes only around 8 to 10 percent of Indonesian total output and its biggest markets now are in Asia, giant companies, increasingly pressured by green consumer organizations, will enforce the principles of sustainability in their subsidiaries in the region as well.

The allegations that the RSPO movement is a deception by producers of vegetable oil, such as soybean, sunflower, rapeseed and corn oil, in rich countries, in coping with the fierce competition from palm oil, seems misplaced.

Independent product certification has earlier been used in the forestry industry as a market-based instrument to supplement the regulatory system in curbing illegal logging.

Environmental NGOs and other civil society organizations have mobilized consumers and traders to shun forest products that are not certified according to internationally recognized standards of sustainable forest management.

The Bonn-based Forest Stewardship Council (FSC), which groups representatives from environmental and conservation groups, the timber industry, forestry professions, forest certification organizations and forestry communities has developed forest certification standards and accredits independent certifiers.

Therefore, an increasing number of Indonesian companies, mostly furniture producers in Java, have voluntarily sought forest certification for their products from internationally accredited certifiers to gain easier access to American and European markets.

Consumers’ buying decisions affect what ingredients manufacturers use and what retailers put on their shelves. As consumers actively seek out the trademark on certified products, manufacturers will be compelled to use only sustainable palm oil and wood in all their products.

However, the success of the RSPO campaign will finally depend on how much the premium price producers can gain by certifying their products.

As Malaysian Minister of Plantations Industries and Commodities Tan Sri Bernard Dompok warned at the opening of the RSPO conference on Tuesday, “If suppliers do not see a growth in market demand, or the RSPO brand is not strong enough, they will not increase supplies.”

The author is a staff writer of The Jakarta Post.

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Transforming China

Vincent Lingga, The Jakarta Post, Jakarta | Sun, 10/02/2011 4:00 AM

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Broad-based economic reform is never easy. Because: first, it takes away rents that have been built up in an economic system and therefore sets off opposition from those whose income is at risk.

Second, wholesale reform requires broad-based popular sentiment supporting leadership and systemic changes to address mass dissatisfaction through concrete programs.

The upshot is that with very few exceptions, broad-based reform seems to require as a necessary condition – a perception of crisis, or at least a sense of chronic deterioration. 

China met all these prerequisites when in early 1979 it launched its reform and opening policies under the leadership of Deng Xiaoping, which in just about 30 years transformed China’s economy from ruins under ten years of the Cultural Revolution into the world’s second largest economic powerhouse after the United States.

Many books have been written about China’s economic “miracle”, the discovery of cheap land and a huge pool of low-cost labor that has attracted trillions of dollars of foreign investment that now fuels China’s export juggernaut.

One new book, titled Breaking Through: The Birth of China’s Opening-Up Policy, written by former Vice Premier Li Langing, translated into English by Ling Yuan and Zhang Siying and published by the Oxford University Press, is perhaps the first book that tells the story from an insider, one of the key players in the reform and opening movement.

Since Li was one of the key government executives who took part, not only in the making but also supervision and implementation of the opening policies and decisions, he was able to vividly chronicle the step-by-step process of decision making, the trials and errors, the actions and the thought process which brought about reform measures. 

The book is a perfect reference to better understand who the main players were and the key events and milestones in the early years when Deng, against tremendous odds and resistance, led the Chinese people, who in 1978 were just recovering from the devastating effects of ten years of the Cultural Revolution, out of their decades long international isolation and economic ruins.

The book provides details about the process by which government officials at all levels executed policy decisions. 

Li, who began his government career in the early 1960s as one of the top executives of China’s first domestic car manufacturer (Dongfeng), was directly involved in implementing the opening-up policy in 1978 when he conducted negotiations to tie up Dongfeng with US General Motor to modernize its factory.

He rose steadily through the ranks to enter the Party central leadership and eventually became a vice premier, which enabled him to often meet personally with Deng.

Demonstrating Deng’s reformist determination, Li quoted the Chinese leader as repeatedly asserting at their numerous personal encounters “We have to reform and open up, otherwise we are doomed”.

Li played a more pivotal role in the opening program when in early 1982 he was appointed a director general and later a vice minister at the ministry of foreign economic relations and trade in charge of foreign investment and involved directly in overseeing the development of special economic zones (SEZ).

He was widely known as a strong advocate of joint ventures between China and foreign companies in order to bring in foreign technology and equipment, initially championing the development of the Guangdong province SEZ and eventually in nine other provinces in south and southwest China, now popularly known as the Pearl River Delta regions. 

He rightly devoted more than one third of the 465-page book to the early process of SEZ development. This concept has undoubtedly been the window and main instrument of China’s colossal economic transformation.

The trove of information in the book about the early process of developing the SEZ in 1979 should be a good source of lessons for Indonesia, which has still to build SEZs in various provinces under its 2009 SEZ law.

The Hong Kong factor

Hong Kong has played a pivotal role in the modernization of the Chinese economy, providing capital, logistical support, access to world markets, management know-how, technology, equipment, design and research, marketing skills, procurement services and quality assurance.

Nothing would have happened, however, had it not been for the strong leadership of Deng, who was supported by a determined team of reformers, including Li Langing. 

It all began in early 1979, when a China state company based in Hong Kong applied for a license to open a factory in Guangdong province. 

When this application was sent to Deng, who at the time had started promoting the idea of opening to the outside world, this reformist leader immediately wrote down his instruction, “Guangdong should be provided a free hand to to give this sort of thing a try”. 

His ministers and Guangdong regional leaders immediately followed up that instruction by designing a special economic zone initially in Guangdong with more liberal economic regulations than in Fujian and other provinces in the south.

However, this process was not an easy one because the opening policy and SEZ were unprecedented in a socialist country following the lingering impacts of the Cultural Revolution.

There had been some concern that the special policies and flexibility granted to Guangdong and Fujian could slip these provinces on to the capitalist road. 

Some equated the special zones with “foreign colonies” or restoration of capitalism.

Deng’s strong leadership, however, continued to push officials and state company executives in the province to implement the SEZ concept.

The name Special Economic Zone was given by Deng himself in April 1979 after officials tried to come up with a name that did not connote foreign concessions or enclaves such as free trade zones or free ports.

The success in Guangdong became a confidence-building block for developing SEZs in other provinces in southern China. 

The basic idea then was to combine Hong Kong’s abundant finacial resources and advanced technlogy and efficient infrastructure with China’s low-priced mainland real estate and labor resources to bring in foreign capital, technoloy and raw materials. 

Hong Kong still has an important role to play in the trading business. Its current relationship with the Chinese mainland is complementary. As a major business service center, Hong Kong and its firms package financial and business deals for corporate and private clients from Hong Kong and the rest of the world.

The Pearl River Delta, now one of the most economically dynamic regions in China, has developed into a manufacturing center of global importance and one of the world’s fastest growing economic regions due largely to the vital role of Hong Kong as an excellent international financial and supply-chain management center of global importance.

The Greater Pearl River Delta covers Hong Kong, Macao, Guangzhou, Shenzhen, Dongguan, Foshan, Jiangmen, Zhongshan, Zhuhai, Huizhou and Zhaoqing.

While Hong Kong has developed as a leading center for management, coordination, finance, information and business services, the Pearl River Delta region has emerged as a manufacturing powerhouse with few global rivals. 

The idea of SEZ then was: Instead of making only incremental progress through an overall reform simultaneously in the whole mainland that could take many decades to accomplish, it was deemed more effective and efficient, and most importantly, more politically acceptable to start with bold moves in particular areas (islands), selected for their strategic roles, to establish show cases of success and thereby build confidence.

It was indeed unrealistic – given China’s vast territory and regional disparities in socioeconomic development and uncertain investment environment – for all regions to jump on the opeing badnwagon at the same time.

SEZ therefore essentially called for the development of islands of competence with streamlined licensing procedures, good infrastructure, flexible labor regulations, superior logistical efficiency, anchored on fast flows of goods, labor and documents, efficient tax administration and customs and immigration service.

They were called special ecoomic zones because the economic regulations and other rules in these zones are more liberal and flexible than most of the rest of the mainland. 

Jiang Zemin, who supervised SEZ development since its launching in 1979, noted at a meeting with foreign guests in June 1987 the strategic importance of China’s decision to establish SEZ (see box story).

“Our effort to run the special economic zones played an important role in our reform and opening endeavor as a whole”, noted Jiang, who later became China’s President for ten years (1993-2003).

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Indonesian provinces reach out to Russian investors

Vincent Lingga, The Jakarta Post, Moscow | Wed, 09/14/2011 8:00 AM\

Four Indonesian provincial governments competed with each other here on Monday to attract Russian investors to develop resource-based ventures and infrastructure in their respective regions.

North Sulawesi Governor Sinyo Harry Sarundajang offered railway, toll road and geothermal projects. North Sumatra acting governor Gatot Pujo Nugroho promoted toll road projects and palm oil-based industries. East Kalimantan Regional Secretary Irianto Lambire highlighted opportunities in coal-transportation, palm oil and cacao plantation projects, while the West Nusa Tenggara Regional Investment Board chief promoted seaweed and tourism-related businesses.

“The six governors in Sulawesi will meet next month in the North Sulawesi provincial capital of 
Manado to discuss the development of the 1,200 kilometer Trans-Sulawesi railway project,” Sarundajang said at the Indonesia-Russia investment forum here on Monday.

He said the railway project is commercially feasible because it will connect the six provinces on the island of Sulawesi, which is naturally rich in mining and maritime resources, as well as agriculture and tourism opportunities. 

“We are only 20 minutes by air from the famous resort island of Bali and we have tremendous investment opportunities in tourism-related industries. Yet more interestingly, our new Lombok international airport will soon open for wide-bodied jetliners,” the West Nusa Tenggara investment chief said.

North Sumatra’s acting governor Nugroho promoted railway and tollroad projects which will connect the main growth centers in that province, pointing out that several of the projects had been supported with feasibility studies.

East Kalimantan offers four railway-projects, mostly for transportation of coal and plantation commodities such as palm oil and rubber. 

Indonesian Ambassador to Russia Hamid Awaluddin and Investment Coordinating Board (BKPM) chairman Gita Wirjawan, both of whom organized the business gathering, described it as a good start in promoting economic linkages between the two countries.

Gita said Russia, with its US$1.6 trillion economy and foreign reserves of more than $480 billion, has been a major provider of technology and financial capital to foreign countries, but its investment in Indonesia is almost negligible compared to most other countries.

“It is our fault that your investment in our country is still very small. We should have come here more often, knocking at your doors,” Gita said.

Over the past few years Gita has told journalists that Russia had set its eyes on investment opportunities in the Middle East, but the recent political turmoil in several countries in the region investors to seek other safer and more stable investment destinations. 

“I think we now have many advantages to attract [Russian] investment to our country, especially because of the long [almost 60 year] history of our relations,” he added, citing the recent tax-incentive package launched in Jakarta for high-priority investment projects in infrastructure and natural resource-based ventures. 

Russia itself seems to be very enthusiastic about developing broader economic relations with Southeast Asia, as it will for the first time take part as a full-fledged participant in the upcoming East Asian Economic Summit in Bali in mid-November.

Russian-Indonesian Business Council executive director Mikhail Kouritsyn also hailed the investment forum as a good start for Russian businesspeople in exploring and developing businesses in Indonesia.

“But this is only the first step on a very long journey,” Kouritsyn cautioned.

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BKPM chief woos investors from Germany, Russia

Vincent Lingga, The Jakarta Post, Moscow | Mon, 09/12/2011 8:00 AM

Seizing on the sustained momentum of high flows of foreign direct and portfolio capital to Indonesia, the Investment Coordinating Board (BKPM) chief Gita Wirjawan opened a business forum on Monday to brief Russian businesspeople on investment opportunities in Indonesia. 

The delegation also included regional leaders and investment board chiefs from North Sumatra, North Sulawesi, East Kalimantan and West Nusatenggara.

“I deliberately asked several regional leaders to join this mission to enable them to interact with, and brief, potential investors on investment opportunities in their areas,” Gita said Sunday, arriving from another promotion in Germany.

“A joint mission like this will also promote better understanding and cooperation between the central government and regional administrations in attracting investors from overseas.”

Earlier on Friday, at an Indonesian Business Day as part of the Asia-Pacific Week Berlin 2011, Gita enlightened businesspeople on the wide range of business opportunities and the new tax incentive package the Indonesian government will be offering to investors. 

Gita seemed confident about attracting more foreign investors to Indonesia, primarily because of the severely limited investment opportunities in developed countries due to the lingering debt woes in Europe and the economic slump.

The Indonesian government, after several years of debates, finally launched in August a tax incentive scheme which provides income tax holidays between five to 10 years and tax allowances for projects in high-priority sectors and in remote areas, in a bid to ramp up investment in infrastructure and resource-based manufacturing industries.

The tax holiday facility will be offered to manufacturing projects in base metals, oil refining, petrochemicals, machine tools and renewable energy, with a minimum investment of about US$117 million. 

Tax allowances — a reduction of taxable income up to 30 percent of total investment carried over six years — will be offered to labor intensive projects in remote areas with a minimum investment of 
Rp 50 billion ($5.82 million). 

Indonesian Ambassador to Moscow, Hamid Awaludin, also saw the investment mission as quite opportune. Russia has been enthusiastic about its interaction with the dynamic Southeast Asian region as, for the first time, it will attend as a fully fledged member, the East Asian Economic Summit, due to take place in Bali in the middle of October.

As part of the preparations for the summit, ASEAN economic ministers held a consultation with a Russian delegation in Manado in August to chart out a road map for their economic, commercial and investment cooperation.

The ASEAN region, with its 10 member states, a total population of 600 million people and $1.7 trillion economy, is strategically nestled between India and China, and has become an attractive alternative for investment amid the global volatility triggered by concerns about the European sovereign debt crisis and economic slowdown in the US.

For the $1,500 billion Russian economy, with a total population of 142 million and per capita income of $15,200, deeper economic linkages with Southeast Asia also seem quite strategic.

Indonesian Trade Minister Mari Elka Pangestu led a trade mission to Russia last September in a concerted bid to expand trade ties with the world’s 11th largest economy.

According to the data collected by the Indonesian embassy, bilateral trade between the two countries more than tripled, to US$1.91 billion last year, from figures in 2009, with a deficit of $180.3 million for Indonesia. During the first half of this year, bilateral trade totaled $980 million, with a surplus of $290 million for Indonesia.

Indonesian exports consisted mainly of palm oil, coconut, coffee, tea, electronic goods and footwear, while imports from Russia comprised defense/military equipment, chloride, iron ore, metal, synthetic fibers and aluminum.

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Commentary: Regional summit in Bali designed to unshackle entrepreneurship

Vincent Lingga, The Jakarta Post, Jakarta | Fri, 07/22/2011 8:00 AM

We don’t expect many investment deals between Indonesian start-up businesses and American prominent entrepreneurs and angel investors during the ASEAN Regional Entrepreneurship Summit opening in Bali on Friday as a follow-up to the Entrepreneurship Summit hosted by US President Barack Obama in April, 2010.

The meeting, expected to be attended by 200 foreign and domestic delegates and to be addressed by US Secretary of State Hillary Rodham Clinton, will serve more as a forum for exchanges of experiences and views about best practices and prerequisites for nurturing entrepreneurship.

But, to be sure, the gathering will heighten the momentum for the development of entrepreneurship in Indonesia because participants from the US, well known as the beacon of entrepreneurship, include well-known entrepreneurs and leaders of the Angel Capital Association, which groups individual investors looking for investment opportunities in start-up businesses.

Entrepreneurialism is deeply rooted in American history. It was founded and then settled by innovators and risk-takers who were willing to sacrifice old certainties for new opportunities.

This culture is greatly supported by flexible labor rules — the freedom to hire and fire workers — big venture-capital industry and the long traditions of close relationships between universities and the industry.

Many American giant companies such as the Amway consumer products company and Wall-Mart began from garages. Even the history of many high-tech giants started up as partnerships: Steve Jobs and Steve Wozniak founded Apple, Bill gates and Paul Allen (Microsoft), Sergey Brin and Larry Page (Google) and Mark Zuckerberg and Dustin Moskovitz (Facebook).

Studies by the World Bank and various business institutes in Europe and the United States found the positive correlations between a broad base of entrepreneurship and economic expansion.

Entrepreneurs contribute greatly to producing and commercializing high-quality innovations, spurring productivity growth and enhancing employment creation and dynamics because creativity and innovation are at the heart of entrepreneurial behavior.

Entrepreneurship is important for continued dynamism of the economy because it is entrepreneurs that are capable of identifying business opportunities and have the will to stake out their capital in business start-ups against all the risks.

Yet Indonesia erected regulatory barriers that make it extremely difficult to start up businesses. 

Costly regulators hamper the creation of new firms, especially in industries that should naturally have high entry.

No wonder many SMEs in Indonesia continue operating in the informal sector (underground economy), thereby denying them easy access to low-cost bank financing and other public services and facilities.

The Doing Business 2011 report of the World Bank that rated 183 countries according to their performance in 11 requirements for the ease of doing business ranked Indonesia at the 121st. Even among ASEAN countries, our performance was among the worst, better only than the Philippines.

Regulatory and administrative costs obviously hinder entrepreneurial activity, dampen investment and researches and development and stunt firm growth. They can edge firms out of business by absorbing too much time and resources.

Even difficult exit conditions that make it costly for firms to wind down, such as lengthy creditor claims on assets or too rigid labor regulations on severance allowances, debilitate business start-ups.

As the American experiences have shown, culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping up attitudes to risk-taking and reward.

The government can play an important role in nurturing entrepreneurship, through formal education and training (including continued education) and fostering entrepreneurial attitudes.

Establishing conducive regulatory framework for the development of venture capital companies will also provide alternative financing for start-up businesses.

In major developed countries, notably the US, the business schools at major universities also function as the incubation centers for small entrepreneurs where innovations and creative ideas are developed and converted into commercial products.

But in Indonesia most university graduates are acutely short of entrepreneurship quality. Hence, they look mostly for paid jobs either in the private or public sectors.

Entrepreneurship thrives mostly among small and medium enterprises (SMEs). The role of small businesses cannot be underestimated.

But neither can the challenges they face, particularly in a world where markets are globalizing and large-scale enterprises dominate so much of the government’s policy making time

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Commentary: The Ruyati case and the plight of the maids

Vincent Lingga, The Jakarta Post, Jakarta  Sat, 06/25/2011 8:00 AM

The Indonesian government’s decision last week to stop sending maids to Saudi Arabia starting as early as next month should only be a temporary ad hoc measure that would be revoked as soon as both countries put in place stronger legal frameworks for the protection of the human and labor rights of our migrant workers in the gulf state.

The national outcry over the last few days after the surprise execution of Ruyati binti Satubi, who was convicted of murdering her Saudi employer, is of course understandable. But we should not allow it to blind us to the greatly important economic role the millions of Indonesian migrant workers in Saudi Arabia and other countries in the Gulf have for their native villages in Java.

No other government program, not even poverty alleviation projects, can be so effective in directly injecting as much cash into the rural economy in Java as the billions of dollars our migrant worker women in the Middle East remit every year.

We would not tolerate any abuse of our migrant workers overseas, but with more than 1 million Indonesian women working as domestic workers in Saudi Arabia alone, there are inherently big risks that some of them are bound to be abused.

In fact, we should magnanimously acknowlege that most of our migrant workers who work as maids overseas have been treated better and paid much higher than domestic servants in Indonesia.

The temporary moratorium on sending maids to Saudi Arabia should be used as an opportunity to look deeper into all aspects related to our migrant workers in the Middle East, right down from the qualification of employment agencies, their recruitment processes, their preparations (technical training), the terms and condition of their employment contracts and the terms imposed by the Saudi Arabian government on the families employing the migrant workers.

We should understand the plight of our migrant workers, who have been forced by the extremely difficult economic conditions at home to set out from their native villages into such far-away places as the Middle East with a strikingly different social environment and culture.

The acute shortage of jobs in Indonesia for low-skilled laborers has forced them to seek work abroad to support their families and pay for the education of their children or siblings. It is indeed a great sacrifice and heart-rending experience for them to be uprooted from their home villages and to leave behind their families for such a long period of time.

President Susilo Bambang Yudhoyono himself, when addressing the Intenational Labor Organization’s conference in Geneva a few days before Ruyati’s execution, praised Indonesian migrant workers as economic heroes who should be given social justice and protected from abuse.

Working overseas as maids will remain an outlet for the millions of unemployed, unskilled laborers from rural areas, until our economy is able to expand fast enough to absorb all the job seekers.

But the Saudi Arabian government should also realize the great contribution of Indonesian migrant workers to the welfare of its people through the supply to its economy of low-priced labor and should consequently see to it that the maids are treated humanely by their employing families.

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