chapter  6
23 Pages

Foreign investment in Indonesia: the problem of legal uncertainty

BySIMON BUTT

For most of Soeharto’s 32-year reign, Indonesia’s eco nomic de velopment was outstanding. Within a few years of Soeharto taking power from Indonesia’s first pres id ent, Soekarno, the Indonesian eco nomy was growing at an average of around 7 per cent per annum – a rate that con tinued until 1996. Soeharto’s self-titled New Order (Orde Baru) signi fic antly reduced pov erty (World Bank 1990) and markedly improved living and educational stand ards (Thee 2008). Progress was so good that in 1994 the World Bank pro claimed Indonesia one of the eight ‘High Performing Asian Economies’, alongside Japan, South Korea, Tai wan, Hong Kong and Singapore (World Bank 1994). By 1997, how ever, many Soeharto-era eco nomic and de velop mental gains had unravelled. Commencing in that year, and for several years there after, Indonesia suffered one of the world’s biggest eco nomic and monetary crises in the post-Second World War era (Levinson 1998). The so-called Asian Financial Crisis, a flow-on from the collapse of the Thai baht in July 1997 that had caused many foreign investors to re-examine their port folios, hit Indonesia harder than any other coun try (McLeod 2004: 95). Indonesia lost 13 per cent of its GDP in 1997 alone, and its currency plummeted from Rp2,000 per US dollar to almost Rp20,000 by Febru ary 1998. Hundreds of com panies could not ser vice their US dollar loans and went bankrupt as Indonesia’s foreign debt ballooned to US$80 billion (Hosen 2010: 50). Around half of Indonesia’s approximately 200 million people faced pov erty and one-quarter faced unemployment (Levinson 1998). The legitimacy of the Soeharto regime had been tied to Indonesia’s economic performance, and the resulting improvement to the lot of ordinary Indonesians. While the eco nomy was booming, the New Order had been able to jus tify its author it arianism and repression as neces sary for eco nomic de velopment. It could do so no longer. Pressure for wide-ranging polit ical, social and eco nomic reform intensified as riots broke out across Indonesia. Soeharto was forced to resign on 21 May 1998 and the era of reformasi began. Indonesia’s sub sequent recovery – eco nomic, polit ical and legal – has been remark able. Indonesia has, by most accounts, transformed itself from being

one of Southeast Asia’s most repressive and centralized polit ical sys tems to its most decentralized, free and demo cratic. Indonesia’s eco nomic growth has steadily increased since 2000 to almost pre-crisis levels (Thee 2008). Though FDI did not begin to flow readily again until 2004, it too has recovered to pre-1997 levels (OECD 2010: 19). Significantly, post-1997 reforms, particu larly to the banking sector, appeared to largely insulate Indonesia from the Global Financial Crisis, which interrupted, but has not signi fic antly reduced, Indonesia’s eco nomic growth and FDI flows. FDI was US$8 billion in 2005, US$4.5 billion in 2006, US$7 billion in 2007 and almost US$10 billion in 2008 (OECD 2010:46), as shown in Figure 6.A. The Indonesian gov ern ment and many inter na tional fin an cial institutions con sider, how ever, that these FDI rates are in ad equate. More FDI, they claim, will enable Indonesia to meet its infrastructure needs, and will increase employment and export-led growth (OECD 2010: 19). To improve Indonesia’s investment climate for both foreign and do mestic investors, the Indonesian gov ern ment has enacted a number of laws in recent years. This chapter will discuss some of them, such as the 2007 Investment Law. Yet, despite improvements, many obs tacles to attracting and maintaining foreign investment remain. Indonesia may have abundant nat ural resources and a large in ternal market (OECD 2010: 24), but inter na tional business perception indic ators do not portray Indonesia’s investment climate in a pos it ive light. The World Bank’s Doing Business 2011 indic ators rank Indonesia 121st out of 183 countries for overall ease of doing business.1