INDONESIA INSIGHT

The new SEZ could attract foreign investors

IT HAS been painfully clear for years that Indonesia needs to change its approach in trying to attract foreign investment. Since the 1997 financial crisis, the country has been trying hard to re-establish itself as a regional powerhouse economy but without much success.

Investors, especially in the manufacturing and industrial sectors, have for many reasons found it just too cumbersome and financially onerous to put up facilities in the country.

This has resulted in what some economists have described as a process of de-industrialisation as investors shifted their operations to other, more welcoming destinations. In the process, hundreds of thousands of jobs have gone, and they have not been replaced by new jobs.

It can in fact be argued that Indonesia has taken its eye off the ball during its transformation into a democratic state, with different interest groups pulling in different directions. With people engrossed in sorting out its domestic politics, Indonesians turned inward and failed to learn from what has been happening elsewhere in the region.

Instead of cutting bureaucracy, Indonesia made it more difficult for foreign investors to set up operations by passing laws that were misguided in their intentions to protect certain interest groups such as organised labour.

Now the government of President Susilo Bambang Yudhoyono is trying a new approach in the hope of attracting foreign investment, by bypassing the bureaucracy and vested interest groups. Mr Yudhoyono and Singapore Prime Minister Lee Hsien Loong over the weekend witnessed the signing of a framework agreement for economic cooperation to establish special economic zones (SEZ) on the islands of Batam, Bintan and Karimun. The agreement - which outlines seven key areas in which Singapore and Indonesia will cooperate - in essence re-establishes the islands as a good place to do business and invest, just as in the days before politics took over. If successful, the newly established SEZ will pave the way for more such economic zones to be established in other regions of the nation.

Indonesia's potential has never been in doubt. Given its vast natural resources, plentiful labour and relatively modern economy, it has much to offer investors. What has been in question is the country's commitment to carrying out what it promises.

Some businessmen even feel that Singapore's involvement in the new SEZ is crucial, not because of the expertise and international experience the Republic will bring, but because it will exert some pressure on the Indonesians to deliver, especially since a joint steering committee responsible for the implementation of the agreement will be established soon.

Perhaps Sofyan Wanandi, a prominent businessman and chairman of the National Employers Federation, put it best when he said that Indonesia sometimes needs outside pressure to make it sit up and take notice. Mr Wanandi has been pushing for revision to several pieces of legislation that have hampered investments.

'We have to change our attitude as a nation if we want to revive our economy,' he said. 'We promise a lot but often we do not deliver - but this time we simply must.'

Indonesia can use the SEZ to attract the foreign investors it so badly needs to accelerate economic growth, while the president, with one eye on the next elections less than two years away, knows only too well that he is now running short of time to deliver on his campaign promises.