More barriers to entry

We accept the reality that our economic development lags behind Asian peers such as Malaysia, Thailand and China. We often joke around that we might have been overtaken by "new kids on the block" like Vietnam and Cambodia.

Now, we cannot joke anymore. Vietnam has really leap-frogged Indonesia, at least according to the Doing Business 2008 survey conducted by the World Bank and International Finance Corporation, which compared indicators across 178 economies from Afghanistan to Zimbabwe.

Indonesia ranks 123, behind Vietnam's 91. Our other peers are far ahead us. Malaysia, for example, sits 24, Thailand 15 and China 83. This is not to mention Singapore, which tops the list, and Hong Kong, which ranks fourth.

Indonesia only fares better than countries like the Philippines (133), Cambodia (145), Laos (164) and Timor Leste (168).

But there is always a consolation. Indonesia has experienced a steady, albeit slow, progress in improving its business environment. Indonesia's overall "ease of doing business" ranking improved from 135 last year to 123 this year.

This mild progress has been supported by macro economic stability, government reform packages in the real sector, passage of investment law, tax and customs reforms as well as introduction of one-stop service in some local governments.

Indonesia's low rank is especially related to cumbersome entry procedures. The survey shows starting-up a new business in Indonesia is getting more difficult. It now needs 105 days to set up a legitimate shop in this country, longer than 97 days last year. With this worsening situation, Indonesia now ranks at the bottom among Asian countries in terms of starting-up a business.

This result confirms a previous survey by University of Indonesia's Institute for Economic and Social Research (LPEM-UI), which shows processing time for a new start-up business slows down to 86 days from 80 days previously.

This reality is especially worrying for Indonesia's economy. Such increasing barriers-to-entry simply prevent those in the informal sector from entering into the formal sector.

If these informal businesses continue to operate in the informal sector, they will not be subject to taxes, and therefore, it would be hard for the government to increase the country's tax ratio.

It is a stark irony. While the government, through the tax office, is trying so hard to expand the coverage of taxes, at the same time, it is making it difficult for informal businesses to go formal.

That's why, the tax office cannot really expand the tax base. It's only targeting those who are already paying taxes -- just like hunting in the zoo. It cannot go after those in the informal sector, who like those in the illegal sector, such as gambling and prostitution, remain untaxed.

Barriers to entry are just many. Minimum capital requirement is one. This requirement is totally unnecessary because this automatically prevents micro businesses to go formal. In more advanced neighboring countries like Malaysia, Singapore, Thailand, Australia and Hong Kong, and even developing countries like Vietnam, a minimum capital requirement is just nonexistent.
So why do we require businesses to have a capital requirement in order to go formal? It might be just one of the ways to prevent new entrants into joining the lucrative tenders of the government procurements. This may satisfy existing contractors and also officials who regularly receive kickbacks from the contractors, but it is at the expense of more tax income for the government. So, the government needs to reconsider this minimum capital requirement.

Another problem, according to LPEM-UI, is the decentralization of licensing to the provincial office of the Justice Ministry. Inefficiency at these provincial offices added more than two weeks to the business start-up process, and led to more face-to-face contacts with officials, thus increasing likelihood of bribery and corruption.

Therefore, we suggest the government centralize again this licensing authority until the government is ready to implement safeguard measures to prevent corruption at local offices of the Justice Ministry.

The bottom line is cumbersome entry procedures in Indonesia are often associated with more corruption. Corruption is just at the root of the problem of doing business in Indonesia. As long as corruption remains rampant, we cannot expect our ranking in doing business to match the level of Malaysia or Thailand.

The latest survey by Transparency International Indonesia, which shows Indonesia scored worse on its latest corruption perception index, does not give much expectation. Unless we strive further to tackle corruption, we are afraid our standing in the Doing Business survey will not improve much -- or it could even worsen, and we would be eventually taken over by other new kids on the block like Cambodia, Laos or even Timor Leste.