Investors ask, who's the boss? - and stay away
By Richel Langit

JAKARTA - The implementation of regional autonomy in Indonesia has created new conflicts between the central government and regional administrations, which does not help the country's effort to dig itself out of a stifling economic crisis.

The central government accuses regional administrations of abusing their new authority, while regional administrations slam the central government for backpedaling on autonomy and returning to a heavily centralized, authoritarian regime. For the public, and especially the business community, the rifts mean fresh uncertainties which continue to keep badly needed foreign investment at bay.

The latest data issued by the country's Investment Coordination Board (BKPM) show that foreign investment approval in the first eight months of 2002 stands at US$3.55 billion, a sharp decrease of 40 percent from $5.79 billion over the same period in 2001. The bulk of foreign direct investment in 2002 went to transportation, warehousing, and telecommunications sectors with a total investment value of $1.29 billion. And to make the country's economic agony complete, only a very small fraction of the approved foreign investment had been realized.

In the meantime, capital outflow continues, though at a slowing rate. A report released recently by the United Nations Conference on Trade and Development showed that capital flowing out of Indonesia reached $3.27 billion in 2001. That was slightly better than the previous year's figure of $4.55 billion.

Clearly, Indonesia is the only country in East Asia that still suffers capital flight in the wake of the 1997 financial crisis. All other countries that were hit by the crisis, such as Thailand, Malaysia, the Philippines, and South Korea, are now enjoying positive foreign direct investment. Thailand, for example, recorded foreign direct investment worth $3.8 billion in 2001, Malaysia $554 million, Singapore $9 billion, and the Philippines $1.8 billion.

The picture is even gloomier if short-term, portfolio outflows are also taken into account. According to the Finance Ministry, Indonesia had suffered even greater private capital outflow if short term funds were counted. In 2001, for example, capital flowing out of Indonesia reached $8.2 billion, down from $10 billion in both 2000 and 1999, and $13.8 billion at the height of the economic crisis in 1998.

What all these figures show is that economic recovery remains elusive for the country of 215 million people. Indonesia did record meager economic growth in 2001 and is predicted to book 3-percent growth this year, but this growth is driven by strong domestic consumption rather than investment.

It is yet to be determined, however, to what extent the rifts between the central government and regional administrations have contributed to falling foreign investment. One thing is certain, though, conflicts between the central government and regional administrations have brought about a new, hostile investment atmosphere that could deprive the country of early economic recovery.

The conflicts mainly stem from unclear power distribution between the central government and regional administrations. Law Number 22/1999, known as the Autonomy Law, limits the power of the central government to four main issues: foreign policy, defense, monetary and fiscal policy, and religion. The law does not specifically spell out the power and authority of regional administrations and the power and authority of central government, allowing them to interpret the law subjectively, with both sides claiming to have the most authoritative interpretation.

Regional administrations - provinces and regencies - presume that all other authority outside the four stipulated in the Autonomy Law would be handed over to regional administrations. The central government seems to be unwilling to relinquish its old power, while regional administrations are anxious to flex their new-found muscle. But since greater autonomy was introduced in January 2000, the central government has stripped local administrations of their authorities one by one under the pretext of preserving the country's unity.

First, the government stripped local administrations of their authority over forestry "in order to avoid overexploitation". Then, it  withdrew the regions' rights over investment approval. Now, the Ministry of Home Affairs is now drafting a regulation that would allow the central government to reclaim its rights over land use in the regions. The new regulation is expected to complement Presidential Decree Number 10/2001, which prohibits regions from having control over the land until the government issues guidelines of Law Number 25/1999 on fiscal balance between the central government and regional administrations. This decree has been criticized by analysts as preventing regions from running their administrations autonomously.

The new regulation, curtailing further the authority of regional administrations over land use, will undoubtedly hamper economic growth as the regions cannot offer businesspeople investment without the full right to control land.

Several provinces and regencies have fired their governors or regents for alleged corruption, but the central government still recognizes those ousted leaders as the legitimate authority. Jakarta has also issued a regulation requiring officials from provincial and regency administrations to secure presidential approval before embarking on a working visit to a foreign country.

Undoubtedly, the country's regional autonomy palns are in a mess. The central government is tightening its grip on regional administrations instead of loosening it. Fears are rising that regional autonomy, which was introduced to quell secessionist movements, will only prompt more provinces to fight for independence from Jakarta. On top of that, autonomy conflicts have also worsened legal uncertainty, keeping foreign investment away.

By now, regional administrations must have learned that they have lost power rather than gaining it.

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