1 Political Economy of Local Investment Climates: A Review of the Indonesian Literature PAPI Background Paper 'Political Economy of the Local Investment Climate in Indonesia ' Project*

A look into investment climate in Indonesia will not be sufficient without a careful elaboration on its political economic ambience. Indonesia is the only country in Asia that radically reformed both its economic and political system in a big bang manner: abandoning both its authoritarian and centralized system and embracing democratic and decentralized system in an abrupt way. Not surprisingly this has significant impact on the political and economic stability. The ability of the government to attract foreign investment to Indonesia is highly dependent on political stability and the ease of doing business in the country (Basri and Patunru, 2008). Political instability, labour problems and local taxes can increase the cost of doing business in Indonesia (LPEM-FEUI 2002a, 2007). Furthermore, there is a growing tendency by the government to collect extra money according to the ability of businesspeople to pay. Parallel with the distribution of power in the bureaucracy through the policy of autonomy, corruption has also been decentralised (Basri, 2004). Although the amount of bribery may be less than in the * For a general literature review, see von Luebke (2007)