Doing business indicators -- why matters?

dHani, a frequent visitor and commenter of the Café sent me this piece. The email subject reads "my own stupid analysis". So I read it, and I thought, why not sharing this with you all. I, however, won't give her the right to use my "my own stupid analysis" subject -- that one is reserved for my analysis. - Manager

Doing Business Indicators - Why Matters?

by dHani

Sometime around the third week of September, IFC will have a global launch of Doing Business 2008, at exactly 00.00 Greenwich Time. At around the same time, you all can access the result from this website. About the same day, LPEM will report their findings on “Monitoring Investment Climate Indonesia 2007” in the so called ‘Investor Forum Indonesia”.

The questions then, what’s with all the effort? People are getting frenzy over investment climate. Just a recap, Indonesia was ranked at 135 over 175 countries surveyed (or judged?) by IFC. We are far worse than Vietnam (104), slightly better than Mozambique (140).

There have been so many efforts and initiative put to resolve this matter, some now ask the importance of improving Doing Business indicator. According to a famous Indonesian economist (he-who-shall-not-be-named), Malaysia who ranked much better last year only gained 20% contribution from Investment to their GDP, while Indonesia scored 24%. His hypothesis is thus investment climate might not have anything to do with investment, especially with FDI, foreign direct investment. It is just "business as usual". And even if Investment Climate did matter, Employing Workers (Labor) contributes much bigger problem than Starting Business or Dealing with License, for instance. Businesses complain because that’s what they do, they’re professional complainers. Again, it is business as usual. FDI showed a decline trend everywhere in the world except China, India and Vietnam, they say. It is a global trend, nothing to do with Investment Climate.

Well, here’s what I think. “Doing Business” is not meant for foreign investment. It’s not even for large-size businesses. Doing Business actually deals with SME, small and medium enterprises (and I also mean the micro ones -- the assumption used by the surveys is limited liability with not more than 50 domestic workers, owned by at most 5 domestic shareholders). Investment climate i n Indonesia does not have anything to do with foreign investment which mostly done their business in large scale and scope. Doing Business is for SME.

Question is then, why do we need to focus on SME? Aco often points out to me that dealing with the smallies (it’s not English, I know, but I use it) is tricky. You don’t want the small vendors grow in number larger and larger, because it's just not a characteristic of what a developed country is, if you want to become one . Further, it is not easy to deal with them, because they are mostly informal. They are, well, the smallies. Here’s the Catch-22; they’re informal because they cannot afford to be formal. They cannot contribute more because they are mostly in the form of sole ownership rather than limited liabilities. They become small because they cannot ask for credit because they are informal. That’s why dealing with business indicator matters.

Starting Business and Dealing with business licenses in Indonesia is complicated, costly and takes an enormous resource. Most of our SMEs choose to become informal, simply because they cannot afford to be formal entities. How much contribution if we can fix this, you might ask. Well, I’m not really sure. I might have to turn this into a doctoral thesis. But, let me show you something, there are many medium and small-scale businesses in Indonesia. They outnumber the large ones.

OK, I’ll just stop here. Otherwise, this will become my proposal.