Reform setbacks, not KPK, can hamper investment

Thursday, 10 Oct 2019
Reform setbacks, not KPK, can hamper investment
Students protest in Bandung on Monday, Sept. 23. (JP/Arya Dipa)

As tens of thousands of students thronged around the House of Representatives complex this week, exercising their right to freedom of speech and loudly denouncing policies and practices they regard as harmful to the Indonesian people and the country’s democracy, quiet but important meetings were taking place at the State Palace.

These meetings were less well publicized but concern an issue of great interest to President Joko “Jokowi” Widodo, who is looking to answer the ultimate question: What can be done to boost investment as Indonesia’s economic risks rise and potential global recession looms?

So much has been done, planned and talked about by policymakers to shore up investment and consumer spending, perceived as the key to survival in any potential global economic catastrophe, especially following the slump in Indonesia’s growth to the lowest level in two years in the second quarter this year. 

Bank Indonesia has relaxed lending rules to encourage banks to lend and consumers to borrow, while also easing policy rates for the third consecutive month in support of a low interest rate environment. On the government front, incentives have been granted in various sectors, from super deductible tax for businesses providing vocational training to waiving VAT and luxury tax for goods used in the oil and gas exploration process.

But as President Jokowi’s key economic team obsesses about policies to boost investment – including an omnibus law in the pipeline – Presidential Chief of Staff Moeldoko, once again, said the unexpected: The Corruption Eradication Commission (KPK) is a hindrance to investment.

Although the former Indonesian Military (TNI) chief later amended his statement by saying that it was not the KPK itself, but the old KPK Law, that hampered investment, it remains a stain on the Presidential Office’s perspective on investment. It is also a stain on government and central bank efforts to open up the economy and attract investors. 

Much like a stain on our clothes, we try to erase it, but will move on if we cannot. This time, however, there is a great risk that the stain will widen, making the clothing unwearable, given the many controversial bills and growing threats to civil rights that could create setbacks to Indonesia’s democracy, and reform.

The students’ demands underline these threats. The Criminal Code revision is a threat to freedom of speech, personal affairs and basically civil rights – as is the continued security approach in Papua and the criminalization of activists, among other issues that students have been protesting against.

The planned Criminal Code revision highlights the tendency toward conservatism and setbacks to reform. For investors that uphold good corporate governance, this unstable territory appears unnerving, and will only add to risk and compliance costs. 

Subjecting corporations to criminalization, as oppose to limiting crimes for individuals only previously, is the biggest problem for businesses. Meddling with personal affairs such as criminalization of sex before marriage and homosexuality will cripple tourism, touted as one of the promising sectors for future Indonesian development. And so much more.

“The KPK hinders investment” may just be a miscommunicated message by the Presidential Office, but government and the House’s firm stance on defanging the KPK to turn it into a toothless government body is worrisome from the economic perspective. Taking into account arguments that public institutions cannot be a superbody, making the KPK part of the government would raise questions about the neutrality of the body in overlooking the government and taxpayers’ money.

Corrupt countries collect fewer taxes and divert taxpayers’ money from more important things such as schools, roads and hospitals, according to an International Monetary Fund (IMF) analysis. Students in countries with less corruption have higher test scores, it has shown. Currently Indonesia’s corruption perception index is midway compared with the rest of the world, in 89th place out of 180 countries.

Multinational companies are also bound by anticorruption laws from their respective governments such as the US Foreign Corruption Practices Act (FCPA) and the EU’s Criminal Law Convention on Corruption, hence making them reluctant to invest in a country with rampant corruption. 

Paramount to all the issues is the democratic process behind these items of legislation. After five years of slow deliberation of 187 priority bills, the House decided to accelerate deliberations of the controversial bills to be passed into law in its final weeks before its term finishes at the end of this month.

Regulatory uncertainty and weak rule of law discourages foreign direct investment in emerging countries, according to scholars and businesspeople. Also of great interest to investors are stable democratic institutions and reforms that are strongly upheld by a country so as to maintain checks and balances in the rules relating to business.

Although in the short-term the controversial bills and reform setbacks are likely to have little direct impact on investment, in the longer run they will create an unfavorable business climate that increases the risk related to investing in Indonesia, from regulatory uncertainty to a deteriorating democracy. 

If the President does not step up and address these issues, Indonesia may no longer stand among its liberal, or at least more open, regional peers, which live up to international standards despite having their own domestic issues.

Finding the right policies to boost investment is key to avoiding further economic decline but maintaining a stable democracy and further advancing reform – fighting against reform setbacks – would be most relevant to quality and sustainability of investment.

Pak Jokowi, we do not seem able to speak to you from political, security, human rights or diplomatic angles, this time we will try to get through to you from the business perspective. You were once a businessman. Listen to the people, protect them, uphold democracy, advance reforms! Investments shall follow, and you’ll have roads and dams built, while micro, small and medium enterprises and human capital will develop as you wish.



This opinion piece also appeared in The Jakarta Post, Sept.  28, 2019 edition

The views expressed are her own.