Wednesday, June 13, 2012
Norway geared up for ‘big bang’-style trade and investment in Indonesia
Vincent Lingga, The Jakarta Post, Oslo | Wed, 06/13/2012 11:27 AM
Thursday, May 31, 2012
Commentary: Bank consolidation should be top priority for central bank
Except for the plan to introduce multiple licenses for banks, we do not see how the forthcoming package of bank regulations, especially those relating to bank ownership cap, will fit into the banking architecture that Bank Indonesia launched in 2004.
Tuesday, April 10, 2012
Commentary: Planned DBS-Danamon deal puts Temasek in the spotlight again
Vincent Lingga, The Jakarta Post, Jakarta | Tue, 04/10/2012 9:45 AM
The planned US$7.3 billion acquisition by Singapore DBS Group Holding of publicly listed Bank Danamon should be one more confidence-building step in Indonesia’s long-term economic advance, but equally it could turn into an ugly political controversy.
DBS chief executive officer Piyush Gupta made the business plan fully transparent in line with the best practices of good corporate governance by announcing it at a news conference here last week, but he has unintentionally set off what could be weeks of pointless political debates, whipped up by inordinately nationalistic grandstanding.
The transaction will not lead to any fundamental changes in terms of ownership, as both DBS, Southeast Asia’s largest bank, and Bank Danamon, Indonesia’s sixth-biggest, are by and large controlled by Singapore government investment company Temasek through subsidiaries.
But several narrow-minded and seemingly xenophobic lawmakers have embarked on what could develop into a nasty public-opinion campaign to sabotage the planned transaction by whipping up jingoistic sentiment.
As it happens, Indonesia’s largest banks (state-owned) have long complained about what they see as the regulatory discrimination they face in building operations in Singapore.
Misguided lawmakers and narrow-minded analysts may exploit these grievances as ammunition to strengthen their campaign against Bank Indonesia’s approval of the transaction.
But as both Singapore and Indonesia have a great deal at stake in the business plan, both governments should see to it that the planned takeover runs smoothly according to existing laws and regulations.
Poor handling of the issue could harm both countries.
Since DBS, already the largest in Southeast Asia, will never achieve its goal of being a leading bank in Asia without having strong positions in Indonesia, India and Hong Kong, Singapore’s government is well advised not to allow the local bankers’ complaints to sabotage the merger.
Simply ignoring these grievances could unnecessarily expose the planned DBS acquisition to noisy political posturing and set off weeks or even months of pointless public debates hyped by excessively nationalistic sentiments.
Singapore’s government should pay heed to the lessons learned from the Temasek experiences between 2006 and 2008.
Temasek decided in June 2008 to divest its entire 40.8 percent stake in PT Indosat and sell the asset to Qatar Telecom after suffering more than two years of bashing by politicians and trade unions in state companies as well as messy lawsuits.
On the other hand, however, the Indonesian government would look bad in the eyes of international investors if Bank Indonesia, the central bank, which has yet to approve the DBS-Danamon deal, succumbed to political pressure by delaying indefinitely the approval of the transaction.
As there is no current law in Indonesia against the DBS-Danamon transaction, refusing to ratify the deal could scare off new investors at a time when the country should be benefiting greatly from the investment grade it recently gained after a lapse of 14 years.
Fundamentally, the planned DBS acquisition is simply a normal business transaction.
It is Temasek’s strategy to build synergy between DBS with its extensive experience and expertise in corporate banking such as infrastructure, project and trade financing and sharia banking and Danamon, which has 6 million customers and operates more than 3,000 branches and 3,000 ATMs in Indonesia.
The strategy is certainly linked to the increasingly important role Indonesia, Southeast Asia’s largest economy, plays in the global economy, and is part of the DBS effort to gear up for the ASEAN Economic Community in 2015.
Indonesia, especially its banking industry, will benefit greatly from the transfer of skills, expertise in risk management and other good governance practices, along with greater access to sources of international finance.
Banks serve as the heart of the economy.
Strategic investors and owners such as DBS, with good reputations and huge capital resources, will accelerate the operational restructuring of Bank Danamon to provide comprehensive financial services, notably credit — the lifeblood of the economy.
Experiences in other countries such as Thailand, South Korea and even Malaysia, which like Indonesia were hit by the financial crisis in 1997, point to the great benefits derived from the entry of major international banks with strong reputations and vast capital to the development of a sound domestic financial sector.
The issue could be politically sensitive because a bank is not simply a business entity in an ordinary sense, given its fiduciary responsibilities, the multiplicity of transactions it is involved in and its key function within the economy.
Banks are institutions of trust. That is why the principles for good corporate governance for banks are much more elaborate than those for other commercial entities.
It is also why not everybody who can put up adequate capital is allowed to have a controlling ownership of a bank.
Those who want to become controlling owners and commissioners of a bank have to pass the fit-and-proper test set by the central bank to assess their technical competence and integrity.
However, what narrow-minded analysts or xenophobic lawmakers may forget is that whoever is the controlling owner of Bank Danamon, it, like every other bank, is still legally obliged to play by the rules made by Bank Indonesia.
DBS chief executive officer Piyush Gupta made the business plan fully transparent in line with the best practices of good corporate governance by announcing it at a news conference here last week, but he has unintentionally set off what could be weeks of pointless political debates, whipped up by inordinately nationalistic grandstanding.
The transaction will not lead to any fundamental changes in terms of ownership, as both DBS, Southeast Asia’s largest bank, and Bank Danamon, Indonesia’s sixth-biggest, are by and large controlled by Singapore government investment company Temasek through subsidiaries.
But several narrow-minded and seemingly xenophobic lawmakers have embarked on what could develop into a nasty public-opinion campaign to sabotage the planned transaction by whipping up jingoistic sentiment.
As it happens, Indonesia’s largest banks (state-owned) have long complained about what they see as the regulatory discrimination they face in building operations in Singapore.
Misguided lawmakers and narrow-minded analysts may exploit these grievances as ammunition to strengthen their campaign against Bank Indonesia’s approval of the transaction.
But as both Singapore and Indonesia have a great deal at stake in the business plan, both governments should see to it that the planned takeover runs smoothly according to existing laws and regulations.
Poor handling of the issue could harm both countries.
Since DBS, already the largest in Southeast Asia, will never achieve its goal of being a leading bank in Asia without having strong positions in Indonesia, India and Hong Kong, Singapore’s government is well advised not to allow the local bankers’ complaints to sabotage the merger.
Simply ignoring these grievances could unnecessarily expose the planned DBS acquisition to noisy political posturing and set off weeks or even months of pointless public debates hyped by excessively nationalistic sentiments.
Singapore’s government should pay heed to the lessons learned from the Temasek experiences between 2006 and 2008.
Temasek decided in June 2008 to divest its entire 40.8 percent stake in PT Indosat and sell the asset to Qatar Telecom after suffering more than two years of bashing by politicians and trade unions in state companies as well as messy lawsuits.
On the other hand, however, the Indonesian government would look bad in the eyes of international investors if Bank Indonesia, the central bank, which has yet to approve the DBS-Danamon deal, succumbed to political pressure by delaying indefinitely the approval of the transaction.
As there is no current law in Indonesia against the DBS-Danamon transaction, refusing to ratify the deal could scare off new investors at a time when the country should be benefiting greatly from the investment grade it recently gained after a lapse of 14 years.
Fundamentally, the planned DBS acquisition is simply a normal business transaction.
It is Temasek’s strategy to build synergy between DBS with its extensive experience and expertise in corporate banking such as infrastructure, project and trade financing and sharia banking and Danamon, which has 6 million customers and operates more than 3,000 branches and 3,000 ATMs in Indonesia.
The strategy is certainly linked to the increasingly important role Indonesia, Southeast Asia’s largest economy, plays in the global economy, and is part of the DBS effort to gear up for the ASEAN Economic Community in 2015.
Indonesia, especially its banking industry, will benefit greatly from the transfer of skills, expertise in risk management and other good governance practices, along with greater access to sources of international finance.
Banks serve as the heart of the economy.
Strategic investors and owners such as DBS, with good reputations and huge capital resources, will accelerate the operational restructuring of Bank Danamon to provide comprehensive financial services, notably credit — the lifeblood of the economy.
Experiences in other countries such as Thailand, South Korea and even Malaysia, which like Indonesia were hit by the financial crisis in 1997, point to the great benefits derived from the entry of major international banks with strong reputations and vast capital to the development of a sound domestic financial sector.
The issue could be politically sensitive because a bank is not simply a business entity in an ordinary sense, given its fiduciary responsibilities, the multiplicity of transactions it is involved in and its key function within the economy.
Banks are institutions of trust. That is why the principles for good corporate governance for banks are much more elaborate than those for other commercial entities.
It is also why not everybody who can put up adequate capital is allowed to have a controlling ownership of a bank.
Those who want to become controlling owners and commissioners of a bank have to pass the fit-and-proper test set by the central bank to assess their technical competence and integrity.
However, what narrow-minded analysts or xenophobic lawmakers may forget is that whoever is the controlling owner of Bank Danamon, it, like every other bank, is still legally obliged to play by the rules made by Bank Indonesia.
Sunday, April 01, 2012
The week in review : $25b for artificial stability
Vincent Lingga, The Jakarta Post | Sun, 04/01/2012 12:43 PM
|
The government, with its popularity eroded by corruption scandals, succumbed on Friday to popular outrage against its planned fuel-price increase by raising the amount allotted for fuel and power subsidies this year by almost 35 percent to Rp 225 trillion (US$25 billion).
The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.
The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.
The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged.
However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.
This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.
The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.
The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible.
We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.
More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy.
It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.
And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.
The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.
However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.
Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.
Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.
Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.
The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.
Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately.
We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices.
In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.
Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.
Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.
The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.
The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.
The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged.
However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.
This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.
The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.
The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible.
We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.
More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy.
It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.
And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.
The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.
However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.
Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.
Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.
Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.
The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.
Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately.
We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices.
In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.
Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.
Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.
Thursday, February 23, 2012
The week in review: The fuel-policy uncertainty
Vincent Lingga, The Jakarta Post | Sun, 01/22/2012 7:00 AM
|
For such an important policy reform that has been on and off the national agenda since late 2007, the debates on the need to limit subsidized-fuel sales that dominated the nation’s attention this week seemed pointless and a waste of time and energy.
As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.
But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.
Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.
That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.
Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.
Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.
The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.
Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.
Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).
No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.
Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.
Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.
The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.
Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.
But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow.
The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.
This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.
Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.
The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.
However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.
The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.
In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management.
As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.
But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.
Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.
That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.
Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.
Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.
The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.
Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.
Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).
No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.
Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.
Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.
The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.
Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.
But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow.
The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.
This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.
Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.
The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.
However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.
The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.
In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management.
Monday, December 26, 2011
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
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
Monday, November 28, 2011
Going beyond the law to spur sustainable palm oil
Vincent Lingga, Kota Kinabalu | Thu, 11/24/2011 10:10 AM
|
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.
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.
Friday, October 07, 2011
Transforming China
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).
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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