Business in Indonesia: New Challenges, Old Problems

5 INVESTMENT PROSPECTS: A VIEW FROM THE PRIVATE SECTOR

72 Approaching its second democratic election in the post-Soeharto reformasi era, Indonesia is experiencing a degree of political stability and economic growth that few would have predicted when Soeharto’s 30-year New Order government collapsed in the rubble of the May 1998 riots. Indonesia’s strong currency and vibrant stock and bond markets may well surprise those who do not follow Indonesia regularly or who have not visited the country recently. Those who follow Indonesia mainly through international media headline events like the Bali terrorist bombings in October 2002, the Marriott bombing in August 2003 or the ongoing civil war in the resource-rich province of Aceh will be surprised by the high degree of social stability in Indonesia’s major cities and populous rural areas (MacIntyre and Resosudarmo 2003: 148–9). While Indonesia has not returned to the high-growth mode of the New Order, there is no doubt that the economy has been stabilised. Sound macroeconomic policies and prudent financial leadership have put the country back on a path of modest growth. Businesses can expect 3–5 per cent GDP growth and relatively low inflation for the next several years. These are respectable recovery numbers, but well below the 6–8 per cent GDP growth necessary to achieve a rapid increase in per capita incomes and a decrease in poverty. It is important to keep the last five years in perspective because, in a frank assessment of Indonesia’s failure to attract investment, it is easy to become pessimistic and forget how much the country has recovered since the collapse of the economy and the New Order government in 1998. THE GLOBAL ENVIRONMENT The World Investment Report 2003 (UNCTAD 2003) shows a sharp decline in cross-border investment globally since the peak of $1.4 trillion in 2000. In 2001 5 INVESTMENT PROSPECTS: A VIEW FROM THE PRIVATE SECTOR James Castle INVESTMENT PROSPECTS: A VIEW FROM THE PRIVATE SECTOR 73 it dropped by over 40 per cent to around $823 billion and then dropped another 20 per cent to $651 billion in 2002, the lowest level since 1998. During this period of sharp decline, the Asia Pacific region declined least, but this was primarily because of the strong performance of China ‘which with a record inflow of $53 billion became the world’s biggest host country’ (UNCTAD 2003: 8). Indonesia has shown negative foreign investment every year since 1998, which indicates that foreign investors have, on a net basis, withdrawn investments from the country. This is the worst performance of any large country during the period. Table 5.1 shows foreign direct investment (FDI) in selected countries from 1991 to 2002. Despite the weak investment climate of the past several years, most Asian countries have actually averaged more foreign investment per annum in the five years since the crisis (1998–2002) than in the six years preceding it (1991–96). Table 5.1 FDI in ASEAN and Selected Countries, 1991–2002 (annual averages, $ million) 1991–96 1998–2002 Singapore 6,856 10,907 Thailand 1,964 4,283 Malaysia 5,436 3,413 Vietnam 1,217 1,593 Philippines 1,226 1,357 Brunei 210 689 Myanmar 256 399 Cambodia 120 165 Laos 53 44 Indonesia 2,985 –1,296 Total 20,323 21,554 Total (excluding Indonesia) 17,338 22,850 China 25,476 44,763 Hong Kong 6,057 25,024 Taiwan 1,311 2,655 South Korea 1,234 5,395 Australia 6,238 7,942 Source: UNCTAD (2003: 251, Table B1). Given the decline in global investment flows since their peak in 2000, many countries have increased their efforts to improve their relative attractiveness. The drive to attract FDI is significantly more competitive globally today than at any time in the past decade. World Investment Report 2003 notes: Government policies are becoming more open, involving more incentives and focused promotion strategies … as well as participation in more investment and trade agreements … Converging patterns of FDI links and investment and trade agreements are generating mega blocks. To help attract FDI, countries increasingly conclude [International Investment Agreements] … at the bilateral, regional and multilateral levels … which, by their nature, entail a loss of policy space [author’s emphasis] (UNCTAD 2003: 11–23). The report presents data showing that the number of countries that introduced changes in their investment regimes increased from 35 in 1991 to 70 in 2002; over the same period, the...