Sky-high rice prices require redesign of food security

Friday, May 02, 2008 ,Vincent Lingga, The Jakarta Post, Jakarta

Contingency measures to increase food buffer stocks and improve price stabilization are necessary but not enough to address the skyrocketing price of rice in the international market.

The most outstanding change in food grain markets since early 2007 is that sky-high food prices have been taking place amid relative abundance, not at a time of severe scarcity caused by crop failure. That means the steep price hikes have been driven mostly by demand.

Most analysts agree that the present upward price trend will likely be a permanent development due to the cascading impact of the following factors: climate uncertainty, steady rise in demand, high oil prices that make fertilizer much more costly, farmland conversion into other industrial uses and the misguided subsidized biofuel craze in the United States and Europe.
No wonder the clearest message of this trend is that, like oil, the era of cheap food has ended.
The steep price hikes to as high as US$1,000/metric ton last week should therefore prompt the Indonesian government to redesign the concept of its food security which has thus far focused on ensuring an adequate supply of rice at affordable prices to all people at all times.

The government should not let itself be misled into past grave mistakes of going all out at all costs to achieve rice self-sufficiency.

It is rather impossible for such a vast archipelago state with a population of around 230 million and an annual national rice consumption of 32 million tons -- which will keep growing -- to secure rice self-sufficiency.

Indonesia did achieve rice self-sufficiency in the mid-1980s but only for one or two years. Even this unsustainable achievement was the culmination of more than 15 years of huge investment in irrigation, agricultural extension services and studies, generous subsidies for fertilizer, pesticides and farm loans and the work of the National Logistics Agency (Bulog) to manage buffer stocks and a price stabilization mechanism.

The oil windfall that made all these huge investments possible has dried up as the country has instead become a net oil importer.

In the absence of new technology breakthroughs and of any significant expansion in rice land outside Java due to lack of irrigation networks, there seems to be few better alternative policies for the government than to step up food crop diversification programs through integrated agriculture development.

Even irrigation networks in Java, which accounts for more than 70 percent of the national rice output, have been crumbling due to lack of maintenance, Pantjar Simatupang of the Centre for Agro-Socioeconomic Research told a seminar at the Centre for Strategic and International Studies last Thursday.

However vital rice is, the blunt reality is that rice growers never find themselves among the highest earners in the rural areas, especially in Java where most farmers till less than 0.5 hectares of land. Moreover, more than 80 percent of the whole population are net rice consumers.

Food security therefore should only be part of a broad-based agriculture development program with the ultimate objective of increasing rural household incomes both from farm and off-farm activities.

The concept thus aims at empowering the farmers' economy and the rural community through the development of rural and farm infrastructure. This is quite strategic as more than 55 percent of the total population still lives off farming in rural areas.

The focus of the program should be on farmers' income, which needs a good balancing act of securing food security and a steady rise in farmers' earnings. Better earnings will enable people and the farmers to diversify their diets away from rice.

Bayu Krisnamurthi, deputy of the coordinating minister of the economy for agriculture and marine affairs, was right in observing last week that the clear and present danger now was not an acute food shortage. The real problem is the weak purchasing power of many people who have to spend as much as 25 percent of their income on rice alone.

Krisnamurthi said the per-capita supply of all carbohydrate-rich food commodities (rice, cassava, tubers, maize, sago, etc.) amounts to about 1.2 kilograms/per capita per day while a balanced daily diet only calls for 300 grams/capita.

The problem, though, is that misguided diversification programs have succeeded only in making wheat (bread and noodles), which is not grown locally, the second-most widely consumed staple after rice.

The vulnerable food situation is similar to what the country is now facing in the energy sector. Decades of misguided energy policy made the nation dependent mostly on fossil fuels despite the availability of other energy sources such as geothermal, coal and solar power.

Too much emphasis on rice no longer provides much room for additional employment and income growth because productivity gains in this food grain have diminished, especially in Java.

The government should instead accelerate integrated agricultural development by pouring more investment into such basic rural and farm infrastructure as roads, market places, transportation and processing facilities, financial networks and research stations designed to meet area-specific conditions as well as farm technical extension services.

Better farm and rural infrastructure will enable farmers to diversify their crops into higher value commodities such as horticulture, fruits and other perennial crops.

If the government is really serious about revitalizing the agriculture sector that still employs more than 50 percent of the labor force, it is the rural and farm infrastructure that should become the focus of its investment.

The Rp 20 trillion ($20 billion) allocated in subsidies for farm loans, fertilizers and seedlings this year is paltry compared to the almost Rp 200 trillion appropriated for wasteful subsidies for fuel and electricity.

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Bribes, poor roads hamper supply-chain management

Friday, April 18, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Commercial deliveries are unpredictable because of conflicting local regulations, illegal payments and crumbling road infrastructure, according to a recent survey of domestic trucking costs by the Asia Foundation and the University of Indonesia's Institute for Economic and Social Research (LPEM-FEUI).

The study, conducted in Sulawesi, East Java, North Sumatra and East Nusa Tenggara, found truck drivers and transportation firms made regular payments to the police, officials at weigh stations and to local thugs at checkpoints along their routes.

Adding to trucking costs are the poor road infrastructure and cumbersome route licensing procedures imposed by regional administrations.

The reasons the roads are in such bad condition include the widespread practice of overloading trucks and inadequate maintenance work. Truck drivers simply bypass weigh stations by paying a noncompliance fee to the local officials.

These problems make the overall vehicle operating costs for trucks US$0.34 per kilometer, as against $0.22 in Vietnam, Thailand, Malaysia and China, the survey concluded.

The findings validated a complaint made earlier by the Food and Beverage Industries Association that hauling cargo from Jakarta to Surabaya required the payment of almost Rp 450,000 in illegal levies to officials at 14 scaling bridges between the two cities.
But it is like an egg and chicken game. Truck drivers claim they have to overload their trucks to be able to cover all the illegal levies they have to pay along the highway.

The findings of the survey show how seemingly hopeless the conditions of our road transportation services are and how incompetent the central government and regional administrations have been in coping with illegal levies on the highway.

Yet more damaging is how ignorant the government has been about the strategic role of efficient road transportation in logistics, as almost 70 percent of the country's cargo is hauled by trucks, and how crucial is superior logistics management to create efficient supply chains.

A 2005 study by LPEM-FEUI of 75 large export-oriented industrial companies at four of Indonesia's largest seaports in Java, Sumatra and Sulawesi concluded that logistics services accounted for an average 14 percent of total production costs, among the highest in Southeast Asia.

This finding confirmed what many businesspeople have long complained about; a high-cost economy that makes the country's exports less competitive in the international market.
The study found the high logistics costs derived mainly from poor infrastructure, illegal levies and arduous bureaucratic procedures.

International studies also have shown that logistics arrangements in Indonesia are still grossly inefficient, as evidenced by the high portion taken by distribution and logistics in the free-on-board prices of goods.

All these problems make Indonesia's logistics capability miserably low and consequently its supply chain grossly inefficient.

This is quite worrisome because efficient logistics -- low transportation costs, short transit times, reliable delivery schedules and careful handling of goods in cold storage chains -- are vital for trade and the smooth distribution of goods.

Globalization requires greatly increased coordination of transportation by road, rail, sea, air and lately also by an entirely new route to market -- the Internet. This makes logistics vastly more complex. The job of ensuring that all these things work together is known as supply chain management.

A study of 150 countries by the World Bank in 2007 concluded that facilitating the capacity to connect firms, suppliers and consumers is crucial in a world where predictability and reliability are becoming even more important than costs.

Being able to connect to global markets is fast becoming a key aspect of a country's capacity to compete, grow, attract investment, create jobs and reduce poverty, the World Bank said.
It is no coincidence that the most competitive economies also rank very high on the Logistics Performance Index drawn on the basis of the study. Most developed countries and Singapore, South Korea, Japan, China, India rank high on the index.

Many companies have reengineered their supply chains to gain a huge competitive advantage. What has made such giant retailers as Wal-Mart and Carrefour highly competitive is their superior logistics management. The market leaders all have supply chains that are more responsive to customer demand.

Things like transportation, purchasing and warehousing, once considered merely part of the cost of doing business and often managed as separate entities, are now seen by most managers as a strategic agenda.

Industrial companies cannot manufacture goods without the inputs they need and in the case of Indonesia most manufacturers still rely on imported materials and parts and components. Hence, if delivery times are expedient and reliable, manufacturers should not hold large inventories of inputs, thereby cutting their inventory costs.

Superior logistics management is the key to making Hong Kong and Singapore efficient shipping hubs for their neighboring countries. Besides their highly efficient port-handling systems, their auxiliary services like customs and freight forwarding are also smooth.

However, an efficient supply chain requires a minimum set of conditions, notably efficient transportation, expedient customs services and production standards to ensure the free flow of goods, services (including labor) and investments.

Without efficient logistics Indonesia will not be able to become part of the global supply chain.

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Only credible contingency measures can reassure the market

Monday, April 07, 2008 Vincent Lingga , The Jakarta Post

Finance Minister Sri Mulyani Indrawati told an emergency news conference after an unscheduled limited Cabinet session on the economy chaired by President Susilo Bambang Yudhoyono last Thursday that the Indonesian economy was under control and that escalating inflationary pressures were manageable despite the soaring food prices and fuel subsidies.

In a stronger bid to reassure the market, Sri Mulyani put the government's money where its mouth is, stating the government would buy back in cash its bonds maturing between 2008 and 2013.

However, the market will remain jittery, nervously waiting for concrete, credible measures to maintain fiscal sustainability and check the runaway inflation, which cumulatively reached 3.41 percent during the first quarter alone, as against the 6.5 percent inflation target for the whole year.

Year-on-year inflation in March surged to 8.2 percent, already higher than Bank Indonesia's benchmark short-term interest rate of 8 percent.

No wonder that investors, already skittish due to the global financial turmoil, became more worried over what they perceive as higher sovereign risks of the government.

This is reflected in the increase in the risk premium on Indonesia's international bonds to 300 basis points (over the U.S. Treasury bonds) last month from 130 bp last year.

The government's domestic borrowing costs also have risen, as shown by the increase in the yield on rupiah bonds to more than 12 percent from around 9 percent last year.

This is truly worrisome because the government plans to raise Rp 117.80 trillion (US$12.8 billion) from rupiah and dollar bonds this year to help plug its budget hole.

The miserable failure to get a single bid for its zero-coupon bonds auctioned late last month showed how widely different were the government and market perceptions of fiscal sustainability and economic outlook.

The government claims the economic situation is generally healthy and that the underlying assumptions in the revised budget are not much different from the reality.
However, the market sees things differently.

Market players believe the state budget will not be sustainable as long as it remains helplessly strapped to the nasty roller coaster of increasingly costly oil. How could the government still claim the budget is anchored on prudent fiscal management when fuel, power and food subsidies will take up more than 23 percent of total spending this year?

How could the budget be seen as politically viable when energy subsidies alone will exceed budgetary appropriations for capital investment and social expenditure?

The state budget is a communication system, conveying signals to the market and the people in general about behavior, prices, priorities, intentions and commitments. Budget reforms therefore should take particular account of these characteristics.

Even without so many inimical external factors, the budget system is already adversely affected by multiple, converging uncertainties, entrenched patterns of expenditure, severe inflation and structural imbalances between expectations and resources.

The budget system must be built to cope with these realities.

Unfortunately, most of the contingency measures pronounced by the government focus on austerity and high budget discipline, which sadly have so far been the main weaknesses of the government.

None of the measures is designed to reduce fuel consumption or slash fuel subsidies, thereby leaving the budget a helpless hostage to the wildly volatile international prices.

Another problem is that the fiscal stimulus -- more than US$17 billion in budgetary allocations for capital spending this year -- may again come in fits and starts, ill-timed and beyond the bureaucratic machinery's digestive powers. Last year, for example, almost 60 percent of the budget appropriations for capital expenditures was spent in the last quarter alone.

Without significant progress in budget execution, the economic growth target of 6.4 percent -- as against 6 percent forecast by the ADB and the World Bank and 6.2 percent by Bank Indonesia -- will not likely be achieved because private and government consumption remains one of the main drivers of economic expansion, besides investment and exports.

How the government maintains its prudent fiscal management and implements more concerted efforts to bolster exports and investment to offset the impact of the weakening global economy will determine the government sovereign risks and investors' risk appetite regarding its bonds, which in turn will influence the costs of its borrowing.

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Cash is king, money laundering is the game

Tuesday, March 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Profit, according to auditors, is an opinion, a matter of definition. You can state profit as gross earnings or net income, after-tax profits or earnings before interest and depreciation, depending on which of your stakeholders you want to impress.
But cash is real, which makes it the king.

So when senior state prosecutor Urip Tri Gunawan allegedly wanted a bonus for a "job well done" he demanded it in cash and in American dollars. Gunawan was arrested by a special team of the Corruption Eradication Commission (KPK) early this month with US$660,000 in $100 bills in a carton in his van as he exited the home of Sjamsul Nursalim, the former controlling owner of the now defunct Bank Dagang Nasional Indonesia (BDNI).

Two days before Gunawan's arrest the Attorney General's Office decided to clear Nursalim of all charges of corruption and other crimes related to the Rp 28.4 trillion ($3.05 billion) in liquidity credits BDNI obtained from Bank Indonesia during the banking crisis in 1998.
Gunawan led the team investigating Nursalim.

Earlier in September, Irawady Joenoes, a member of the Judicial Commission, was arrested by a KPK team at a house in South Jakarta with $30,000 cash in his pocket and Rp 600 million in bank notes stashed in a bag. The South Jakarta District Court ruled last week the money was a commission from businessman Freddy Santoso who had just sold a piece of land worth more than Rp 46 billion to the Judicial Commission.

Joenoes was sentenced by an anti-corruption court last week to eight years imprisonment.
In March, 2007, a joint team of the KPK and the AGO searched the home of Widjanarko Puspoyo, former chairman of the National Logistics Agency (Bulog), who was then facing corruption charges, and found hundreds of millions of rupiah stashed into a big bucket covered with wet laundry in a bathroom.

The South Jakarta District Court sentenced Puspoyo to 10 years in jail in February.
In 2003, after Bank Indonesia's (central bank) board of governors decided to give about Rp 31.50 billion to the House of Representatives to "facilitate" the deliberation of a central bank bill and to fund a public opinion campaign to improve the central bank's image, the money was delivered to House members in rupiah notes.

A senior central bank executive carried the cash in a big suitcase to a room at the Hilton (now the Sultan) Hotel.

Bank Indonesia Governor Burhanuddin Abdullah and two other senior executives of the central bank have been declared corruption suspects in relation to the case.

These are just a few examples of big cash transactions that we know about. Numerous other huge cash deals involving ill-gotten money derived from corruption and other crimes remain unknown or simply ignored by the authorities.

Welcome to the land where big cash transactions are still the rule rather than the exemption and money laundering is the big game in town.

Cash deals are one of the most popular modes of transaction for corruptors and other big criminals because the anonymity of cash limits exposure, does not leave a paper trail and cannot be uncovered by tax officials.

But how can all these huge cash transactions have continued after the enforcement of the 2002 law on money laundering, which restricts big cash withdrawals and scrutinizes other forms of dubious dealings?

Indonesia's anti-money laundering efforts have remained feeble due to a lack of cooperation from the National Police and AGO. Even though the Financial Transaction and Report Analysis Center (PPATK), which in other countries is commonly known as the financial intelligence unit, has reported thousands of suspicious transactions to the National Police, only two or three people have been brought to court on charges of money laundering.

The PPATK has spent almost six frustrating years practically fighting single-handedly against money launderers with little support from law enforcement bodies such as the National Police and Attorney's General Office.

The corrupt mentality within the law enforcement agencies, such as the National Police, rather than inadequate technical competence to investigate complex financial transactions, is mainly to blame for the weak enforcement of the law on money laundering.

Cooperation between law enforcement agencies and financial service companies and other government institutions such as the customs and tax services and the stock market watchdog is vital for effective enforcement of the money laundering law because information sharing is the brain of the anti-money laundering drive.

PPATK chairman Junus Husen came out with a major disclosure in August, 2005, saying there were strong indications of money laundering involving hundreds of billions of rupiah related to the personal accounts of 15 non-commissioned officers and generals of the National Police.
But not a single case has reached the court.

The problem is the PPATK is only authorized to analyze reports on suspicious transactions from financial institutions and to submit money-laundering cases to the police for further investigation and prosecution.

President Susilo Bambang Yudhoyono should act firmly to strengthen cooperation among all law enforcement agencies in the anti-money laundering drive. This campaign is truly an important component in the fight against corruption, tax evasion and numerous other crimes. The crimes covered by the law on money laundering are quite diverse, hitting almost all major sources of dirty money including corruption, drug trafficking, smuggling, bribes, banking crimes and human trafficking.

It is also easier to construct criminal cases through the law on money laundering than the anti-corruption law, because the former legislation puts the burden of proof squarely on those suspected of involvement in suspicious transactions.

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Entrepreneurship key to sustainable high growth

Monday, February 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Entrepreneurship, hardly a popular subject of scientific study at universities here, was the central theme of Djisman S. Simandjuntak's oration at a ceremony inducting him as professor of economics at the Prasetiya Mulya business school in Jakarta last week.

Djisman cited the acute lack of entrepreneurial firms from 1997 to 2005, when the number of companies decreased by 1.1 percent a year, as one of the main weaknesses of Indonesia's economy.

From 1977 to 1996, the economy grew robustly (over 7 percent annually), and the number of enterprises, small, medium and big, increased by an annual average of 6 percent. But the pace of economic growth fell sharply from 1997 to 2005, along with the financial crisis and the decrease in the number of entrepreneurs.

Studies by the World Bank and various business institutes in Europe and the United States have found a positive correlation 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 the continued dynamism of the modern economy because it is entrepreneurs that are capable of identifying business opportunities and staking out their capital in business start-ups, against all the risks.

Yet many countries like Indonesia erect regulatory barriers that make it extremely difficult to start up a new firm. Costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry rates, and consequently force new entrants to be larger.
Little 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 Jakarta city government, instead of creating an enabling environment for micro and small enterprises, has been working hard since early this year to kill the entrepreneurial spirit by evicting sidewalk entrepreneurs.

The Doing Business 2008 report from the World Bank, which rated 178 countries according to their performance in 11 categories for the ease of doing business, ranked Indonesia at 123rd. 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 research and development, and stunt firm growth. They can push 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, can discourage business start-ups.

Culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping attitudes toward risk-taking and reward.
Djisman cited an important role for the government in nurturing entrepreneurship, through formal education and training (including continued education), and fostering entrepreneurial attitudes.

In major developed countries, business schools at major universities also function as 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 entrepreneurial qualities. Hence, they look mostly for paid jobs in the private or public sectors.

A recent survey by the Central Statistics Agency found more than 700,000 university and vocational college graduates remained unemployed in 2007, more than double the number in 2006. But the actual number of jobless university graduates could be much larger because many simply do not bother to register with local manpower offices as job seekers.

Entrepreneurship thrives mostly among SMEs. Even in industrialized countries, SMEs still account for more than 85 percent of enterprises and some 65 percent of total employment, according to the secretariat of the Organization of Economic and Cooperation Development.

The role of small businesses cannot be underestimated. Nor 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.

Yet, if the government focuses more on SMEs, so much could be achieved and a broader equity could be improved in the owners of economic assets. By encouraging more SMEs to flourish, we can realize other economic and social objectives, such as expanding worker skills and alleviating local pockets of poverty.

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There are lies, damned lies and statistics

Wednesday, February 13, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Conferences on corruption or climate change and political party conventions are all headline-generating events. The National Press Day celebrations, like the event in Semarang last Saturday, are spectacular occasions for media coverage.

President Susilo Bambang Yudhoyono, who attended the press gathering, knew its importance, its ability to generate a vast amount of publicity and TV footage.

But statistics? What a boring and dry subject. Hence, most of the mass media simply ignored the national conference on statisticians, which Yudhoyono opened in Jakarta early last week.

It is glad to know that the President, amid his tight schedule, could still spare some time to open the national conference of the Central Statistics Agency (BPS). Yet more encouraging is that he fully realizes and reiterates the importance of reliable and accountable statistics for the policy and decision making processes.

A statistics office, being a government institution, is often suspected of engineering or tampering with figures to satisfy particular parties. During Soeharto's authoritarian rule the BPS was often accused, though never with any strong evidence, by government critics of fixing data or figures to massage the performance records of the government in all fields.

A fitting aphorism commonly attributed to Benjamin Disraeli states: "There are three kinds of lies: lies, damned lies and statistics."

Even now when the BPS has publicly been perceived to be strongly independent, the agency still often comes under attack from critics. More recently, for example, several analysts rejected the government's claim of a significant reduction in poverty figures as being based on flawed data provided by the BPS.

But Yudhoyono rightly reaffirmed the crucial role of the BPS in gathering reliable and accountable data which is needed for policy making, pointing out that complete, reliable data gathered with a credible methodology represented 50 percent of the whole process of policy making.

"I always believe the data collected by the BPS through surveys or censuses even though the data does not bode well for the government," the President said.

Reliable data indeed underlies our knowledge and hence our actions. The point is that the role of statistics goes well beyond the production of figures. It touches upon people's everyday lives.

When a government prepares a new budget, when businesses decide on investments, stock brokers make recommendations to clients, even when families decide which school their children should attend, all their decisions are mostly based on some sort of statistical information which is converted into knowledge and use to inform their decisions or choices.

Even one of our democratic tools, general elections, depends on statistical data on voters and the reliable counting of ballots.

The main challenge for the BPS is maintaining quality data under heavy demands: The process of defining and gathering the statistics, ensuring relevance, veracity and comparability, supplying the right metadata, such as definitions, sources and disseminating and updating, all in a fast-moving technological environment.

We live in a data-rich world in which ordinary people have become familiar with notions like inflation, imports, gross domestic product, or interest rates.

Statisticians do not take decisions but they do an important job as statistics represent a fundamental tool in developing knowledge, which in turn is vital for making evidence-based decisions.

Needless to say the government should always help safeguard the independence of the BPS and give it adequate resources to improve the quality of its surveys or censuses, which in turn determine the reliability and quality of its statistical data.

Without sound data, advice sounds rhetorical, and policy prescriptions ideological.

Many of our problems -- a sudden steep rise in the prices of certain commodities or services or an unexpected shortage of food -- are often caused by policy measures that were based on inaccurate statistical information which in turn caused an incorrect analysis.

The BPS undertakes methodological surveys and research on various aspects of our economic and social life and produces statistical data on a national, provincial, regency basis for use by the government, the people and businesses in making decisions.

Certainly, a number of critics sometimes wonder whether all of the statistical data work is nothing more than statistical overindulgence. We do not rule out the risk of statistical overload and of attaching too much importance to certain figures to create a perception or impression as desired.

While the importance of quality data cannot be overestimated, quite often it is the handling and interpretation of the data by both users and suppliers that causes problems.

One can see a half-empty glass as a half-full glass or the other way around.

But obviously what counts most is to know how to treat numbers and to develop the knowledge we need to act on them. Good decisions depend on good judgment. But there are too many things, the uncertainties of life, that we do not know.

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Corrupt governance damages Soeharto's economic legacy

Monday, January 28, 2008 Vincent Lingga The Jakarta Post Jakarta

Only an economic crisis could bring down President Soeharto, a political analyst once commented in the early 1990s when the authoritarian ruler began serving his sixth consecutive term with an ever stronger autocracy.

President Soeharto's regime fell along with the economic collapse in May, 1998. That showed how crucial his economic achievements had been in maintaining his political legitimacy for some 32 years despite a stunted political system.

In March, 1967, Soeharto took over from Sukarno a bankrupt economy ruined by a decade of mismanagement and succeeded in developing it within less than 15 years into one of the economic miracles in East Asia.

The conventional explanation for Soeharto's popularity until his miserable fall in 1998 was that his authoritarian rule delivered growth, stability, security and lifted tens of millions people out of absolute poverty, though at the cost of democracy. That was what he mostly did during at least the first 15 years of what later turned out to be his autocratic rule of 32 years.

Soeharto's forceful reassertion of state power was indeed key to restoring order and stability -- the prerequisites to economic development -- because his rise to power coincided with a state breakdown and economic chaos.

But Soeharto left behind an economy in shambles causing one of the most massive destructions of wealth in modern history and plunging almost 35 million people into dire poverty.
Assisted by a strong economic team of like-minded, U.S-educated professionals under the leadership of Widjojo Nitisastro, Soeharto, immediately after taking over from Sukarno, launched what was then termed the New Order economic management and anchored in basic-needs policy measures.

With the full trust and support of the president, the closely knit team designed and implemented the whole sequence of economic policies -- from the stabilization and rehabilitation in 1967-1969 to the development stage, thereby securing policy coherence and consistency.

Soeharto's New Order regime, as his administration was eventually popularly known, succeeded within one year in controlling inflation which exceeded 600 percent in 1966 and restoring some order in government finances and international trade.

The new government regained the confidence of international creditors under the auspices of a creditor consortium called Inter-governmental Group on Indonesia (IGGI) which was later changed into Consultative Group on Indonesia and reintegrated the country into the global economy.

Encouraged by the foreign investment law that was enacted in 1967, foreign capital and technology began flowing in to the country, tapping its rich natural resources, notably oil and gas and other minerals as well as forests and fisheries and import-substitution manufacturing industry.

Luck was on also Soeharto's side. The quadrupling of the international oil prices set off by the political instability in the Middle East in 1973 pumped windfall profits into the state coffers.
With the influx of foreign investment, combined with a surge in oil revenues, steadily increasing foreign development assistance from IGGI donors and, yet more importantly, prudent economic management, the government accelerated infrastructure development and bolstered the pace of economic growth.

With the state coffers flush from the oil windfall and foreign aid and investment pouring in, the government built more roads, dams, power generation, telecommunication and transport infrastructure.

Being himself the son of a farmer and familiar with abject poverty in the rural areas, Soeharto put agriculture and rural development on top of his policies right from the outset when his first five-year development plan was launched in 1969.

He allocated a great portion of the state budget for building irrigation networks, the provision of agricultural extension services and fertilizers, pesticides and the development of high-yield rice strains.

He was honored by the United Nations Food and Agriculture Organization in Rome in 1985 for his outstanding achievements in making largely populous Indonesia self-sufficient in rice supply.
Soeharto poured a similarly huge investment into the development of education by building more schools, into health by building more rural health service centers and promoted family planning to control population growth.

This strategy -- basic-needs economic programs with emphasis on agriculture and rural development anchored by prudent fiscal and monetary management -- generated an annual average economic growth of more than 7 percent from 1968-1980. Growth declined to about 5 percent a year from 1981-1988 due to falling oil prices and a weakening global economy but rose again to an annual average of almost 7 percent between 1989 and 1996.

The broad-based growth lifted tens of millions of people out of dire poverty.
However, Soeharto's economic management began to suffer from market-distortion policies in the mid-1980s as his six children who entered the business world demanded monopolies in various sectors. Assisted by Soeharto's business cronies (mostly Chinese Indonesians), the Soeharto extended family and his relatives built up an economic empire at the cost of prudent economic management.

Corruption, collusion (between Soeharto and his business cronies) and nepotism increasingly seeped into Soeharto's administration as he became even more authoritarian and increasingly depended on a patrimonial power structure.

His economic management further suffered from more bad policies in the early 1990s after Soeharto diluted the role and influence of U.S.-trained technocrats, who quietly showed their uneasiness with the ever-expanding rent-seeking activities of his children and relatives.
He replaced the technocrats with nationalists and technologists led by B.J. Habibie, then notoriously as a big-spending minister behind several high-tech yet commercially unfeasible projects.

The corruption became a brake on growth and a drain on Soeharto's legitimacy.
Yet, the economy was still able to continue growing amid all the bad governance practices due to the steady flow of foreign soft loans from sovereign and multilateral creditors and foreign direct investment and favorable global economic conditions.

However, as the East Asian economic crisis -- which began in Thailand in July, 1997 and spread to Indonesia later in the same year -- panicked foreign investors and creditors rushed to pull out their money. This capital flight bared all the weaknesses of the economy, triggering first the melting of the rupiah and then the collapse of the financial system, causing an unprecedented destruction of wealth.

So fragile had been the foundations of the economy left behind by Soeharto that growth deteriorated to a contraction of almost 14 percent in 1998 and the rupiah exchange rate plunged to as low as Rp 10,000 to the dollar from Rp 4,000 in late 1997.

More than 25 years of steady growth generated new challenges in income inequality and weak institutions and a basic need for democratic system of checks and balances.

However, pressures from his greedy family members and relatives and business cronies and his patrimonial system made Soeharto blind to these new concerns and eventually caused his downfall, leaving behind a soup of a broad-based economy floating on a corrupt bureaucratic system as his legacy.

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Obituary: Sadli among New Order's architects

Friday, January 11, 2008 Vincent Lingga, The Jakarta Post

Modesty was the foremost impression of many who met the professor Mohamad Sadli -- despite his role among the nation's decision makers and his wealth of knowledge.
Born in Sumedang, West Java on Jan 10, 1922, he died at the Cikini General Hospital in Central Jakarta late Tuesday at an age of 85.

Perhaps the most outstanding member of, and spokesman for, the so-called Berkeley Mafia -- the selected group of Indonesian economic scholars educated at the University of California, Sadli was one of the few technocrats who always spoke their mind even under Soeharto's authoritarian rule.

He is survived by his wife Prof. Saparinah Sadli, whom he married in 1954. Former leader of the national women's human rights body, like her husband she was also a professor at the University of Indonesia.

Sadli and his economist colleagues, including Widjojo Nitisastro, Emil Salim, Ali Wardhana and J.B. Sumarlin played a key role in fashioning Indonesia's economic development for more than three decades until the mid-1990s.

Sadli contributed to his nation, more than any other, through his decades at the university and government. He continued contributing to public policy debates long after he left both institutions, through newspaper articles and comments he regularly made until the last few months of his life.

Indeed, few have written more economic and socio-political analyses or have given so generously of their time and energy toward the interests of their nation.

As chairman of the Technical Committee for Capital Investment, the embryo of what is now known as the Capital Investment Coordinating Board, in 1967-1973 Sadli was responsible for promoting foreign direct investment immediately after the enactment of the 1967 foreign investment law (recently replaced by the new investment law).

His impeccable integrity and high ability to candidly and honestly explain the full perspective of Indonesian economic prospects and challenges and its social and political problems has been widely regarded as responsible for regaining foreign investor interest in Indonesia soon after the anti-Western campaign by the then president Sukarno in the mid-1960s.

He simultaneously held another important portfolio as the minister in charge of manpower development in 1971-1973, before being appointed the minister for mining in 1973-1978, after which he had remained outside the government. He continued making his great contribution to the national economy through his lectures and analyses in various newspapers and periodicals.

Different from most of his economist colleagues, Sadli was an engineer, graduating from the School of Engineering at the Gadjah Mada University in Yogyakarta in 1952, before he pursued his graduate economic and engineering studies at the Massachusetts Institute of Technology in 1954-1956 and post graduate economic studies at the University of California in Berkeley. He went on to gain a PhD in economics at the Jakarta School of Economics, University of Indonesia, in Depok in 1957.

It was his engineering background that perhaps enabled Sadli to consistently come up with straight, direct-to-the point answers to almost any economic issues, unlike most other economists who tend to ramble with long explanations and without much substance.

While a champion of the market economy as the most efficient mechanism for resource allocation for the benefit of the people, Sadli recognized the constantly competing camps of market efficiency and social justice, comprehending the inter-linked nature of economics and politics.

For more than four decades until 2006, he still wrote regularly for Kompas and Tempo and Business News bulletin and became perhaps the most widely-quoted analyst, because he made himself available to journalists with his valuable commentaries on economic and political issues.

Sadli was one of the technocrats who saw the great importance of developing adequate capabilities for industrial associations to hold policy dialogs with the government on an equal footing.

On an invitation, he became the secretary general at the Indonesian Chamber of Commerce and Industry in the early 1980s. There he remained for almost 10 years, acting as the chief of the chamber's policy think-tank (research department) which, from time to time, made policy recommendations and came out with sharp analyses of government policies and state budgets.

Rest in peace Pak Sadli.

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It really isn't such a bad investment climate

Wednesday, December 12, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The public debates over the role of tax holidays in attracting investment that Chairman of the Investment Coordinating Board (BKPM) Muhammad Lutfi revived last week could distract the government from the real reforms needed to reinvigorate the economy.

After a limited Cabinet meeting last Wednesday on economic policies chaired by Boediono, Lutfi told reporters the many investors in capital-intensive industries might flee Indonesia to Singapore or Malaysia because the latter two countries offered tax holiday facilities. Lutfi was quoted by Kompas daily as saying a bio-diesel producer in Riau was considering moving its plant to Singapore, which offered a 15-year tax holiday.

Boediono asserted the next day the government had no plan to provide tax-holiday incentives to investors, arguing that such a facility was not the main factor considered by businesspeople in making investment decisions.
Boediono said most investors looked primarily at the quality of the investment climate -- the political and macroeconomic stability, policy predictability and legal certainty.

He said the government, therefore, was still focusing its reforms on developing good governance practices in areas such as tax administration, customs service, licensing bureaucracy and other components of regulatory and legal frameworks.

Tax incentives, Boediono added, were now limited to tax allowances offered to particular investment ventures in the form of a deduction from taxable income -- up to 30 percent of the investment amount -- and accelerated depreciation of fixed assets.

He said the tax holiday offered during the 1980s failed to significantly attract the kind of investment the government wanted to promote in designated sectors and locations.

In fact, many investors, in collusion with BKPM and tax officials, had misused the tax holiday facility by manipulating the dates of the start-up of commercial production, thereby extending the period of the tax relief.

Indeed, the tax holiday incentive has never ranked prominently in the list of grievances aired by domestic and foreign investors in opinion surveys. Their main considerations for investment decisions covered the main factors Boediono cited above.

After all, tax is paid from profit or income. And most companies lose money anyway in the first year of operation.

Investors in the country often complain about tax issues relating to inefficient and corrupt tax administration and taxation regulations that put taxpayers at a disadvantage vis-a-vis tax officials.

The tax holiday incentive has a negligible impact on investors' decisions when such basic issues as the effectiveness of the judiciary and the ability to uphold and enforce contracts still rest on uncertain ground as they do in Indonesia.

It is these non-economic factors, in addition to excessive red tape, not tax policies, that have been the main reasons behind the lack of foreign direct investment in the country.

Reform measures in tax administration, customs services, labor regulations and strong law enforcement -- currently the main target areas of government reforms -- will have a much larger impact on attracting investment.

Low corporate income tax rates contribute significantly to attracting investment. The 30 percent tax allowance incentive the government recently gave to 52 companies could also help direct investment to particular locations or business areas.

But even such tax incentives would be meaningless if the tax administration is largely inefficient and corrupt.
The government is well advised to realize that special incentives, such as tax allowances for investment, are not substitutes for good governance and sound macroeconomic policies.

Unfortunately, Indonesia is still ranked very low in most of the key building blocks for good investment climate.
The World Bank 2008 Doing Business report, which rated 178 countries according to their performance in 11 areas relating to ease in doing business, ranked Indonesia in 123rd place. Even among ASEAN countries, Indonesia's performance was among the worst, better only than the Philippines.

Investors prefer good governance because this factor reduces the costs and risks of doing business and minimizes barriers to sound competition. The rationale is that strong and consistent law enforcement is key to minimizing government policy-related costs and risks as those regarding regulations on taxation, customs, labor, local autonomy and basic infrastructures.

Strong legal certainty in turn helps build the credibility and certainty of government policies, which is important for both domestic and foreign investors because direct (not portfolio) investment is basically forward-looking or long-term in nature.

Investors expect risks associated with changes in such factors as market competition and customer behavior but the government can offset these risks by helping maintain a stable and secure regulatory environment for doing business. Not by granting tax-holiday incentives.

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Anti-monopoly body shoots Temasek, hits govt

Wednesday, November 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The market may simply ignore the Business Competition Supervisory Commission (KPPU)'s ruling against Temasek, its subsidiaries and Telkomsel. It will most likely be business as usual for Telkomsel, which was found guilty of breaching the anti-monopoly law on Monday by a panel of KPPU judges.

The KPPU ruling that Temasek and its subsidiaries shall divest themselves entirely of their stake in either Indosat or Telkomsel will not either have an adverse impact on the shares of these two mobile operators.

After all the market has become too familiar with the many questionable or even absurd rulings of the Indonesian antitrust body. In fact many of the KPPU's previous decisions in high-profile cases, though seemingly constructed from well-documented evidence, have been overturned by appellate courts either on technical or procedural grounds.

We understood that some bizarre rulings were unavoidable during the first few years after its launch in 2000, as KPPU staff and commissioners were still learning the ropes of their jobs. But the KPPU should have by now built up an adequate body of expertise to competently judge anti-monopoly cases.

However, its latest verdict, on the high-profile antitrust case against the Temasek group and Telkomsel, which is majority-owned by government-controlled Telkom, raises a lot of questions not only about its technical competence but also the integrity of KPPU commissioners.

Certainly, Temasek will appeal to the district court and the Supreme Court, though entering the court system in the country may plunge the Singapore government-owned investment company into another imbroglio.

The problem is that, unlike in many developed countries, there are no specific district courts here assigned to handle antitrust cases, which usually involve complex business deals. Hence, there is not a single court which has enough judges with an adequate body of expertise to examine cases related to the law on business competition.

But simply paying the fines and divesting its indirect stake in either Indosat or Telkomsel means acknowledging it has committed business sins and such an admission will damage its reputation all over the world.

A ruined reputation would adversely affect Temasek investment operations overseas on which this government's investment holdings have relied increasingly for incomes.
The KPPU ruling indeed puts Temasek in a very delicate position.

Therefore there is no other alternative for Temasek but to fight it out up to the Supreme Court, even with all the uncertainty about the legal proceedings and final results.

Since the KPPU ruling also requires divestment, this case may also be eligible to be filed with the World Bank's arbitration body, the International Center for the Settlement of Investment Disputes (ICSID) in Washington. The question, though, is whether Temasek -- which in the perception of the Indonesian government and general public is synonymous with the Singapore government -- is willing to pursue such a lawsuit at the risk of causing severe strains on bilateral relations.

But the KPPU's decisions are also a rebuke to the Indonesian government, as they reveal how utterly incompetent it has been in appointing directors and commissioners (supervisors) to Indosat and Telkomsel.

The fact is the government-controlled Telkom owns 65 percent of Telkomsel and 14.5 percent of Indosat, while Temasek, through its subsidiaries, holds only around 19 percent of Telkomsel and around 31 percent of Indosat. In addition, the government also owns a golden share in Indosat that provides it with a veto right over major corporate actions.

How could the government-appointed directors and commissioners, which make up the majority of the boards at both mobile telecommunications companies, allow Temasek to collude with Telkomsel in abusing its market dominance and committing other monopolistic acts?

But all in all, we should give credit where credit is due. The KPPU should be commended for its ruling that each buyer of the stake Temasek and its subsidiaries will sell either in Indosat or Telkomsel cannot acquire more than five percent.

This ruling at least will kill the rumor that a big foreign investment company, eagerly looking for investment opportunities in telecommunication in Indonesia, was behind the KPPU move on Temasek.

However, national and foreign investors eying stakes in Indosat or Telkomsel should have patience because, based on the KPPU ruling, Temasek shall complete its divestment within two years after the KPPU rulings become final and binding. This means more than 27 months from now (after all of the appeal process is completed) or even much longer if Temasek brings the case to the ICSID in Washington.

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Oil prices only going up, analysts warn

Wednesday, November 14, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Shell International BV analysts Choo Khong and Peter Snowdon forecast here Tuesday that international oil prices would go nowhere but upwards, and that fossil fuels -- oil, natural gas and coal -- would continue to dominate the energy mix until 2025.

"What matters is not the actual number, whether it is US$100 or something else, but the direction of oil prices, which is firmly upwards with some volatility," noted Choo when presenting Shell Global Scenarios to 2025.

They shared the views of the International Energy Agency that China and India, given their sheer sizes and robust economic growth, would play increasingly important roles in the international energy markets.

The Shell report says that China, having doubled its oil demand over the last decade to 6.4 million barrels per day at the present time, has become the world's second largest oil consumer, accounting for almost 40 percent of the increase in global oil demand.

Yet more worrisome in terms of oil demand is that the energy intensity of China's economic growth, like that of most other developing nations, will continue to increase until the next decade, reaching as high one barrel of oil equivalent for each US$1,000 of output.

So what governments do in the policy field now in order to improve energy efficiency will determine the global energy landscape, energy security and rate of climate change ten years down the road, Snowdon said.

"Measures to improve energy efficiency are the cheapest and fastest way to curb demand growth," he said, while urging governments to put in place incentives and policies that stimulate energy efficiency measures and investment in fuel conservation.

According to the Shell report, the annual increase in proven oil reserves in the world has slowed down from 4.5 percent in the 1980s to one percent in the 1990s, and new oil discoveries have been getting smaller in size.

Hence, Snowdon added, there is now a tightening in the supply-demand balance.
The message from the IEA's World Energy Outlook, which was issued last week, is even starker.

It warned that if governments around the world stick to existing policies, the world's energy needs could well be more than 50 percent higher in 2030 than today, with China and India together accounting for 45 percent of the increase in global energy demand.

Snowdon said that fossil fuels -- oil, gas and coal-- continue to dominate the energy mix worldwide. Of these, coal is set to grow most rapidly, driven largely by power-sector demand in China and India.

The IEA predicts that the consuming countries will come to increasingly rely on imports of oil and gas from the Middle East and Russia, while net oil imports in China and India combined will jump from 5.4 million barrels/day in 2006 to more than 19 million barrels/day in 2030, which is larger than the combined imports of the U.S. and Japan today.

According to Shell, the question now is which price mechanism can be relied upon to generate the appropriate signals, investment and technological developments.

The IEA is more blunt in its policy recommendation, urging governments to let market forces do their job more effectively by removing fuel subsidies that hide the true energy costs.

In many countries, including Indonesia, oil prices often do not reflect the real and full costs of the energy because of government subsidies, thereby hindering the viability of investments in energy efficiency and renewable energy.

Government subsidies keep the gasoline price in Indonesia half the price as that paid by people in Singapore.

But because of the generous subsidies for oil fuels, the oil market in Indonesia has failed to function well as there is no significant demand response to price signals.

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Antitrust body's report is an embarrassment

Thursday, October 25, 2007 Vincent Lingga, The Jakarta Post, Jakarta

After about four months of controversial investigations, a special team of the Business Competition Supervisory Commission (KPPU) has concluded that Singapore's Temasek Holdings Pte. Ltd., PT Indosat and PT Telkomsel conspired in price-fixing practices in the mobile telecommunications industry, thereby violating the anti-monopoly law.

However, the KPPU report is unlikely to do any damage to Temasek's international reputation. It instead embarrasses the Indonesian government and causes great concern about the quality of governance at our state companies and the competence of their managements and supervisors.

I will not bore or confuse you with all the telecommunication, cellular or financial jargon used in the KPPU report. The 109-page document looks professionally impressive, showing the hard work of the five-member investigation team, which was assisted by eight investigators and two notaries public.

The essence or central message of the report is that Temasek, through its cross-ownership in Indosat and Telkomsel, was found to have masterminded price-fixing practices by both cellular operators and that Temasek deliberately obstructed Indosat's sound growth to allow Telkomsel to maintain its market dominance.

These findings, if they prove to be true -- the final ruling will be made in the middle of next month -- would be damaging to the government, especially the state minister for state companies.

The government controls PT Telkom, which in turn owns 65 percent of Telkomsel, the country's largest cellular operator, and consequently appoints the majority of its directors and commissioners.

Temasek, through its subsidiaries, owns only 18.9 percent of Telkomsel.
On the other hand, Temasek, also through its subsidiaries, holds 30.61 percent of Indosat, the country's second largest mobile operator, with 14.29 percent owned by the Indonesian government, 10.20 percent by the Qatari government and 44.89 percent by the investing public, including foreign institutional investors.

Even though the Indonesian government owns only 14.29 percent of Indosat, it succeeded in appointing five of the nine members of the board of directors, including the president director. More than half if its nine-member board of commissioners were either representatives of the government or independent commissioners.

The government holds a golden share (A share) in Indosat which gives it veto power over important corporate decisions.

What then is the logic of the KPPU findings? Wouldn't those allegations also insult the intelligence of the investing public, including foreign institutional portfolio investors, who own 44.89 percent of Indosat and 47.77 percent of Telkomsel?

If the conclusion of the investigation team is true, which theoretically should be the case because, as the vanguard and defender of fair business competition, the KPPU is supposed to come out with an assessment that has logic and makes economic sense, that would be worrisome indeed.

But the question then is how could Temasek, despite its cross-ownership at Indosat and Telkomsel, control both companies and dictate their prices while the Indonesian government simply sat back and relaxed, acting as a seemingly innocent bystander.

What then is the function of government-appointed directors and commissioners at both cellular operators, and why did the Telecommunications Regulatory Body close its eyes to the alleged price fixing?

Has the government been ignorant or grossly incompetent in recruiting and appointing directors and commissioners?

Is the way the government treats and oversees Indosat and Telkomsel typical of its management and supervision of the other 128 state companies?

It is Telkomsel, which is 65 percent controlled by state-owned Telkom, that would benefit the most if Temasek deliberately hampered Indosat's business growth, as the KPPU team concluded.

What is the logic of this? It simply insults the intelligence of even the man on the street, because Temasek indirectly holds only 18.9 percent of Telkomsel.

These are just some of a layman's questions about the logic of the most important conclusions of the KPPU report.

But then, the events that led to the KPPU investigation of Temasek, Indosat and Telkomsel were controversial and full of political intrigue right from the outset. The KPPU also seemed to have departed from its standard procedures and practices in handling the case.

Departing from the KPPU's normal practice, Benny Pasaribu, a member of the KPPU investigation team who disagreed with the conclusions of the team, was not included in the five-member panel of judges.

Very rarely has the KPPU chairman talked to the media about a case still under investigation. But over the past few months Muhammad Iqbal has often been quoted in the media about the case even though he was not a member of the investigation team.

Given the KPPU's reputation for absurd rulings -- many of these rulings were simply overturned by district courts or the Supreme Court -- the KPPU panel of judges that is scheduled to make its ruling in the middle of next month may simply adopt the findings of the investigation team.

Temasek and its subsidiaries will certainly appeal to the district court and up to the Supreme Court, and may even bring the case to the international court if unsatisfied.

Whatever ruling the KPPU panel of judges makes next month, the controversy and political maneuvering surrounding the Temasek business group's investment in Indosat and Telkomsel has damaged the investment climate in the country.

The Qatar government, which owns 10.20 percent of Indosat, may in retrospect ask itself, "Why in the first place should I have put my money in this Indonesian asset?"

The KPPU report will not affect the international reputation of the Singapore government's investment company, given the notorious image of Indonesia's law-enforcement system and, by implication, the integrity and technical competence of the KPPU.

All in all, the biggest victim will be Indonesia's investment climate and the Indonesian government, which was made to look silly by the report.

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Trade expo opens with an attitude of optimism

Wednesday, October 24, 2007 Vincent Lingga, The Jakarta Post, Jakarta

President Susilo Bambang Yudhoyono opened the annual Trade Expo Indonesia at The Kemayoran fair grounds here Tuesday amid fears of a weakening global economy that could dampen international demand for the country's commodities.

The President cited the International Monetary Fund's downward revision of world economic growth from 5.2 to 4.8 percent next year and the steep rise in oil prices, warning "this could affect our exports, the state budget and the whole economy".

"But the government is fully aware of this challenge and has taken preemptive measures to minimize its impact on our economy," he said.

He said less favorable international market conditions should lead to stronger cooperation between the central government, regional administrations and the business community to improve the country's economic competitiveness and its exports.

The President urged all government institutions to improve public services and expedite the licensing process for businesses, saying the competition on the international market and for investment would only get tougher.

"It is a big sin to deliberately make things difficult for businesses," Yudhoyono said to the applause of businesspeople, foreign buyers and exhibitors attending the opening ceremony.
Trade Minister Mari Elka Pangestu said the five-day trade expo was being attended by more than 1,000 exhibitors and was expected to be visited by 4,000 foreign buyers and book US$200 million worth of export deals.

During the opening, the President also honored 29 small and large companies with the Primaniyarta export award for their outstanding performance in the international market.
Among those honored was PT Musim Mas, an integrated palm oil company in Medan, North Sumatra, which won the award for the eighth time. Its affiliate PT Megasurya Mas in Surabaya, also a palm oil industry, won that award for the third time especially for global brand promotion.
Most of the winners are natural resource-based exporters that process such commodities as palm oil, bamboo, rattan, rubber, wood, ceramic, pulp and coal.

Yudhoyono said Indonesian exports last year for the first time exceeded $100 billion, or almost 18 percent higher than 2005, and are expected to continue expanding by nearly 16 percent this year.

According to the Central Statistics Agency, non-oil exports totaled $59.9 billion in the first eight months of the year, up 19 percent from a year earlier, but most of the gain was generated by steep rises in the prices of primary commodities such as palm oil, rubber, coffee, wood, coal, pulp, copper and other minerals.

The President said exports were not the sole responsibility of the Trade Ministry because the competitiveness of export products was influenced by numerous factors under the jurisdiction of other ministries.

"The projected decline in global economic expansion should force all of us to work together to strengthen the competitiveness of our exports to make our economy more attractive to foreign investment. Customs service should be expedient, taxpayers should pay their taxes in full," he said. Inefficient logistical arrangements related to roads, transportation services and seaport handling have often been cited as one of the biggest difficulties facing Indonesian companies seeking to expand exports.

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Market mechanisms, not government, should enforce CSR initiatives

Friday, October 05, 2007 Vincent Lingga, The Jakarta Post

Good reputation in the community is a company's best defense against business risks and its strongest competitive advantage to gain market share and increase corporate value for shareholders and stockholders.

That is the most outstanding message conveyed by business and civil-society leaders from more than 25 countries who shared their managerial successes and mistakes at the sixth annual Asian Forum on Corporate Social Responsibility (CSR) in Ho Chi Minh City last week.

They asserted that merely abiding by the laws is no longer sufficient to secure smooth business operations as firms are now required to expand their social responsibility and do more to protect the environment and empower the communities around their operational areas.

However, the CSR concept is not about philanthropy, which will only create a sense of artificial prosperity. Nor is about throwing money around or simply writing a check for a foundation which is not sustainable in the long term.

The core of CSR is the process of empowering the local community through programs that gradually transfer business, technical and social competence.

Highly profitable companies are not automatically great or admired by the public. Cases of successful businesses presented here testify that businesses, which have fulfilled their social obligations and care much about the natural environments are the most admired companies.

The mainstream thinking on CSR is converging on two basic issues: The ethical conduct of business and the contribution of business to sustainable development involving all stakeholders. Sustainable development itself is regarded as another term for the triple bottom line -- social, environmental and economic lines.

For example, honoring human rights, meeting labor, occupational health standards and fulfilling environmental regulations are simply good corporate governance practices. That is obeying the laws not CSR in its broadest sense.

CSR requires companies to share a portion of their profits for programs to empower the people or at least the local communities around their areas of operations.

Accounting investments or spending in CSR programs as part of production or operation costs (hence tax deductible), as Indonesia's Limited Company Law No.40/2007 stipulates, will reduce the meaning of the concept.

Certainly, companies must abide by regulations in any country where they operate, but implementing CSR should not depend on a specific law. It should be inspired by the strong commitment of the shareholders and management to create sustainable development. Making CSR mandatory may shift the focus of attention to the amount of spending, not the outcome.
No wonder, there have been many international initiatives launched to promote standards of business conduct which are all designed to create sustainable development.

The United Nations Global Compact, which was formed in 2000, brings companies together with UN agencies and civil society groups to promote universal principles on human rights, labor, the environment and fighting corruption.

Then there is the World Business Council for Sustainable Development and the Dow Jones Sustainability Index. Other well-known initiatives include the Business Charter for Sustainable Development drawn up by the International Chamber of Commerce, the Charter for Good Corporate Behavior drawn up by Keidanren in Japan and the Consumer Charter for Global Business developed by Consumers International, which links 200 consumer groups in more than 80 countries.

Memberships in these organizations are mostly based on invitations, meaning that only companies which have good records in CSR or honor their principles or codes of business conduct they are entitled to join.

However, the implementation of the business codes of the organizations is voluntary, not legally binding. But even though voluntary in nature, the business codes have made positive impact because companies which join the CSR organizations impose the codes and standards on their business partners within their respective supply-chain management.

Such a kind of arrangements, though without law enforcement mechanism, has unleashed market pressures to force companies to implement the business codes or CSR principles pursued by the various organizations oriented to the promotion of CSR.

The emphasis of the CSR principle certainly differs from one company to another, depending on their areas of operations. Environmental concerns, for example, are the top priority for businesses engaged in the extraction of natural resources. But labor rights are the main concerns for such labor intensive industries as shoes and garments.

However, enforcing CSR principles through legislation as Indonesia did with its new corporate law in July could be counter-productive and even cause a new source of uncertainty in the business world.

The stipulation of mandatory CSR for natural resource-based businesses in the 74th article of the Limited Liability Company Law simply reflected the muddled thinking about CSR among the politicians at the parliament.

Making CSR mandatory only makes doing business in Indonesia unnecessarily more complicated, especially if regional governments join the fray and come up with their own standards or guidelines of CSR.

There are already too many laws governing the conduct of business and fulfilling these laws alone is already an uphill challenge for most companies. And in so far as Indonesia is concerned, these numerous laws, instead of strengthening the legal frameworks and law certainty, have often incited conflict, caused bribery due to acutely inadequate enforcement, caused either by technical incompetence or high venality among officials.

How is then to contain the damage already done by the 74th article of the company law?.
Simply by not issuing regulations on its enforcement. This particular article stipulates its implementation shall be governed by a specific regulation. Hence without the desired specific implementation regulation, the specific article will not be effective.

Let the market mechanisms -- pressures from shareholders and stockholders such as suppliers, consumers, civil society organizations -- work to enforce the CSR principles.

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UN, WB seem more determined to trace Soeharto's assets

Friday, September 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The World Bank-United Nations joint initiative to help developing countries recover assets stolen by corrupt leaders could be a tremendous boost to the Indonesian government's efforts to hunt down the billions of dollars allegedly stolen by Soeharto between 1967 and 1998.

However, the final results of the campaign to trace and recover the embezzled funds will still depend on the integrity and performance of our law enforcement agencies, notably the court and anti-money laundering systems.

The experiences of countries such as Nigeria, Peru and the Philippines, which have succeeded in tracing and recovering billions of dollars of state assets stolen by their former heads show that strong domestic political will and the ability to implement legislative reforms and prosecute former corrupt officials is fundamental to successful asset recovery.

However, none of our presidents -- B.J. Habibie, Abdurrahman Wahid, Megawati Soekarnoputri or incumbent Susilo Bambang Yudhoyono -- seem to have the political courage required to prosecute Soeharto.

It is a further disgrace to the integrity of our justice system that the World Bank-UN report puts Soeharto at the top of the 10 most corrupt former leaders, alleging he stole anywhere between $15 billion and $35 billion.

Even the latest legal move -- the US$1.50 billion civil lawsuit filed by the attorney general against Soeharto at the South Jakarta District Court in early July -- appeared to be simply a public relations ploy to assuage the public's frustration with the government's indecisiveness regarding the former authoritarian ruler's alleged crimes.

But how could the new initiative of the UN and the World Bank help strengthen the hands of our law in tracing and recovering the billions of dollars allegedly hidden by Soeharto and his family?
After all, the World Bank itself has acknowledged it closed its eyes to corruption within its multi-billion-dollar projects in Indonesia during Soeharto's rule.

First of all, the new program, called the Stolen Asset Recovery (StAR) initiative, will step up legal action against corrupt government leaders from bilateral to multilateral battle under the World Bank-UN umbrella.

Hence, the 140 countries that have signed and ratified the UN Convention Against Corruption (UNCAC), are obliged to provide mutual assistance to each other to trace and recover stolen assets.

Under StAR, the World Bank and the UN Office of Drugs and Crime will help such countries as Indonesia with technical assistance and grants to improve its institutional capacity to trace and recover stolen assets, and will see to it that countries on the receiving end of the stolen assets comply with the UNCAC provisions.

The initiative will thus foster much needed cooperation between developed and developing countries and between the public and private sectors to ensure that looted assets are returned to their rightful owners.

Yet more importantly, the UN-World Bank joint battle could strongly deter countries from becoming havens for corrupt money, and corrupt leaders will find it increasing difficult to hide their ill-gotten gains.

Many developing countries have been hindered by their inadequate capacity to prepare indictments, collect and present evidence, properly adjudicate cases and win convictions, trace the proceeds of corruption and obtain valid freezing and confiscation orders.

The problem, as Indonesia has encountered, is that asset tracing and recovery always entails a host of complications and difficulties, including conducting investigations in two or often more jurisdictions, legal differences between common law and civil law between countries or dual criminality conditions.

Herein lies the importance of UNCAC, the legal foundation for the StAR initiative. State parties (signatories) to UNCAC are obliged to extend mutual legal assistance in investigations, prosecutions and judicial proceedings for the return of embezzled public funds on the basis of a final judgment in the requesting state.

It is thus quite clear that any action involving cooperation of other countries within the UNCAC framework still depends on the final (court) judgment in the requesting state.

Other countries, notably developed ones, where our stolen assets are hidden, may not cooperate because they do not trust our court decisions and the credibility of our court system.

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