indonesia domestic politic aspect in business

7/27/2019 Indonesia Domestic politic aspect in Business

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Background

According to International Finance Corporation (2013) Indonesia ranks 166th out of 185

countries in terms of ease of starting a business, based on a report in 2013 while Singapore sits in

the first place. Indonesia ranks 129th in terms of ease of obtaining credit. It shows significantbackwardness of Indonesia compared to neighboring countries. It also shows urgent need for

Indonesia to reform its regulation and legislation (Republika, 2013). Indonesia has huge potency

of market, over hundred millions of human capital and look likes unlimited natural resource to be

a magnet for investor to come and invest for global partnership. Based on Government

Effectiveness data from World Bank, Indonesia scored -0.43 in 2004, -0.37 in 2006 and -0.29 in

2008 and steadily same in 2012 (World Bank, 2012). Scale of data is from -2.5 to 2.5, the highest

numbers imagine the greatest effectiveness of government run in that country, and the highest

data is vice versa. Even Indonesia moves slowly to positive numbers of government

effectiveness, Indonesia government still left behind when compared to progress achieved by the

neighboring countries. This condition reflects there are problems in government activity to

supported business activity as well. The problems arise such as national bureaucracy quality,

public service and competency of government apparatus.

National Politics Elements that Impact Business Activity

Human Capital

Indonesia is characterized by a dual labor market: a small formal market and a large informal

one. The formal-sector workers are protected through severance payments and relative high

minimal wages. The letter is an incentive for employers to hire workers from the informal

sector where there is a lack of social insurance. Extensive informality is detrimental to long-term

growth and undermines the collection of tax revenues (needed for investments in the country's

infrastructure, healthcare and education).

For Instance: One of famous shoe manufacturer suspected utilizes informal labor (children

labor) rather than formal labor in repetitive work area. That will be the ways to hidden cost of

paying labor force to company.


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Infrastructure

The quality and quantity of Indonesia's infrastructure is in a worst condition than the other

regional countries. This applies to both hard infrastructure (roads, railways, bridges) and soft

infrastructure (education, social welfare and health). There has been a serious shortage ofbusiness investments in this field. For that matter, the Indonesian government has put

investments in infrastructure as a top priority of its Medium Term Development Plan (RPJMN

20102014), most of which is envisaged to be financed through private capital in the form of

public-private partnerships (PPPs). However, as Indonesia's current regulatory framework and

business environment are not optimally conducive, it might be a too ambitious strategy of the

government at this point (until further reforms are initiated). Conflicting law and regulation are

currently hurdles for Indonesia's infrastructure development.

For Instance: One of private distribution company loss their order from international fish

restaurants because the flood that immobilize the tool road of Jakarta in 2012. This problem tend

not only increasing cost to maintenance and idle of the containers but also loss the opportunity

cost and trust from international customers.

Land Acquisition

One of the main obstacles to infrastructure development in Indonesia has been the issue of land

acquisition. The underlying reason for this situation is legal impediments to agree on fair

compensation for land-owners and, as a result, endless legal disputes over valuation (on

various occasions, business expansion has led to tensions with local communities). A new land

acquisition law has applied by Indonesian government in 2010 but its results are yet to be seen.

For Instance: One of huge mining and energy group in Indonesia faced problem in valuation of

the land acquisition in Banjarmasin, they tend to revaluating and paid more cost for court and

pending of land utilization to running business.

Energy Subsidies

A major concern of international institutions is Indonesia's ever increasing amount of energy

subsidies, which entail significant budgetary costs. Initially, these energy subsidies were

introduced to support basic needs of the poor. However, by keeping these energy prices


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artificially low, price signals are blurred, consumption and investment decisions are distorted,

and the vulnerability of public finances to international oil-price volatility is increased. It is also

assumed that richer households benefit more of these subsidies than poorer households do. These

subsidies have become a huge burden on the government budget and therefore the government is

aiming to slash them. However, cutting energy subsidies is a politically-sensitive issue in

Indonesia and will bring about serious criticism and demonstrations. It will also put great

pressure on the achievement of inflation targets. Knowing that in 2014 new elections are held,

the government will not be too supportive of reducing the subsidies as it will come at the price of

popular support.

For Instance: Based on instability of consumers purchasing power that caused by increasing of

energy prices, Customers Goods product tend to more expenses to holding products and loss

margin in order to increasing the energy price.

Bureaucracy

Indonesia's bureaucracy is known to be long and complicated and seems to have become a

'power centre' in its own right, thus effectively resisting efforts toward reforms: bribery remains

rife and there is no sustained progress in building institutions that enhance the business climate,

such as credible courts. As such, the country contains various business uncertainties that harm

the business climate.

For Instance: One of Government Company suspected to give some billion rupiahs in order to

smoothing the proposal of tender to ministry and also the commission of parliament. These are

the application of corruption that looks like regularly happen in Indonesia business that related to

the government, and that cost define as the other expenses and usually hidden by company.

Conclusion

The emergence of Indonesias Reformation Period after Suharto stepped down from the

presidency in 1998 implied a significant break with the past. Indonesian politics changed

profoundly from a centralized authoritarian regime to a decentralized democracy, and with this

change came important economic implications. Around half of total public spending came from


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sub-national government control. This ongoing journey towards a full effective democracy has

been accompanied by both successes and difficulties, while major challenges remain ahead:

improving the countrys infrastructure, education, healthcare, and employment opportunities.

An agenda of state reformation must be followed with reforming of the executives bodiesof government. This is an important part to realize the vision of Indonesia. But the changes of

democratic systems are observed to be unparallel to the capacity of the Government bureaucracy.

It can be seen from the bureaucratic capabilities that are resulting less improvement in public

service sectors and government apparatus competency. Obviously it will be the obstacle to

accelerate the national welfare development. The phenomenon of poor quality in public services

showed that the bureaucratic reform does not affect to the fundamental rights of the community

that is justice. A variety of opinions showed the existence of the four causes1

:

1) There is a problem on the input of the public service in Indonesia. The state governmentof manpower at the range of education and training to deliver the quality of public

services. This can be seen from the large number of practices of corruption, collusion,

and nepotism at the planning of public policy which seemed abuse the importance of

interests of society at large.

2) The working culture of the bureaucracy known as mal-administration such as delayedjob, un-discipline, unfriendly to the business, abuse of authority, incompetent, illegal

charges, and many others.

3) Public participation in planning and monitoring to the government is still at low level,and then the societies do not have courage to claim their rights for having proper public

service.

4) The supervision and prevention against mal-administration practice have not beenadequate.

1Girindrawardana, D. Public Services Reform in Indonesia


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Bibliography

Girindrawardana, D. (2012). Public Services Reform in Indonesia [electronic version]. The

Speech Text.

Indonesia-Investments. (2012). Governance in Indonesia. Accessed in September 24, 2013, from

www.indonesia-investments.com/doing-business/risks/governance/item242.

Republika Online. (2013). IFC Help Indonesia Improve its Investment Climate. Accessed in

September 25, 2013, fromwww.republika.co.id/berita/en/jakarta-region-

others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climate.

World Bank. (2012). Worldwide Governance Indicators. Accessed in September 24, 2013, from

www.info.worldbank.org/governance/wgi/index.aspx#home.
http://www.indonesia-investments.com/doing-business/risks/governance/item242http://www.indonesia-investments.com/doing-business/risks/governance/item242http://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.info.worldbank.org/governance/wgi/index.aspx#homehttp://www.info.worldbank.org/governance/wgi/index.aspx#homehttp://www.info.worldbank.org/governance/wgi/index.aspx#homehttp://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.republika.co.id/berita/en/jakarta-region-others/13/09/11/msxos6-ifc-to-help-indonesia-improve-its-investment-climatehttp://www.indonesia-investments.com/doing-business/risks/governance/item242

indonesia domestic politic aspect in business

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