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Transformation of law

Transformation of law in the process of globalization of society: Indonesia

Globalization has forced countries who wish to become members of the globalized international community to have similar set of laws. This has been especially evident in areas such as banking law, competition law, bankruptcy law, copyright law, patent law, and arbitration law, among others.

Ngamapentelieu Lucrece, ЕО-204і, KNEU

Introduction

Every state requires a legal system for the normal operation of its society. There is no state that does not have a legal system.

However, depending on the progress of economic development, the legal systems of states can be distinguished into two types: namely, the legal system prevailing in the developed countries and the legal system prevailing in developing countries.

The legal system prevailing in a developed country can be characterized as a legal system that supports industrial society, as developed countries have long been industrialized.

Meanwhile a developing country’s legal system is characterized as a legal system that is undergoing transformation. This transformation is intended to change a legal system that supports traditional agrarian society into a legal system that supports a would-be industrial society.

Clearly, this is a consequence of developing countries pursuing their national development objectives of becoming industrial states. Since the end of 1980s, the transformation of the legal systems in developing countries has coincided with what is referred to as “globalization.”

Globalization has indeed become one of the primary driving factors in developing countries’ efforts to transform their legal systems. This article intends to analyze the influence of globalization in the transformation of developing countries’ legal systems.

For such purpose, this article will focus on Indonesia as one of those developing countries seeking to transform its current legal system. Despite the comprehensive nature of this reform in all fields of law this article will restrict its analysis to Competition Law as part of economic law.

The article will start by discussing how globalization has affected the national legal systems of developing countries.

Here, it will be argued that globalization in the field of economic law is practically a process of Westernization of developing countries’ legal systems.

The article will then analyze and discuss Indonesian competition issues by first examining the type of monopoly practices occurring in Indonesia.

Next, the article will make an assessment of Indonesia’s Competition Law and look closely at how it was implemented in a court case referred to as the “Indomobil” case. Finally, the article will conclude with some remarks on the effects of globalization on Indonesia’s legal system.

Globalization and Its Effect on Legal System of Developing Countries In the legal field, globalization has resulted in harmonization of national legal systems.

Globalization has forced countries who wish to become members of the globalized international community to have similar set of laws. This has been especially evident in areas such as banking law, competition law, bankruptcy law, copyright law, patent law, and arbitration law, among others.

Although Westernizing developing countries’ legal systems has been frequently opposed or resisted from part of the society, but such process appears to have become an almost unavoidable process. There are, at least, two reasons why Westernization is unavoidable.

First, the developing countries are aspiring to be industrial states similar to those of the West. To become industrial states, policy makers within the developing countries feel that there is a prerequisite to have a legal system that supports such society before they can truly claim to be industrialized or Westernized.

The legal system of agrarian society would not be suitable for industrial society. For a developing country to have a legal system that supports the ‘would-be’ industrial society does not require the invention of a new legal system. This differs from the Western countries when they first became industrial societies for which they needed to invent new laws to address new legal needs.

The developing countries have been adopting Western countries’ legal systems, and some are practically copying what Western countries have. This process is known as a legal transplant.

The second reason why Westernization is unavoidable is the result of the continuing economic globalization of the international community. Economic globalization has moved the multiple markets of the world into a single market from the perspective of firms and businesses of Western countries.

Hence, Western countries in the last three decades have been aggressively exploiting the market potential residing in developing countries, in particular Asia.

However, businesses and firms of Western countries have learned, quite often the hard way that developing countries legal systems are lacking.

In the last 20 years or so, under the banner of globalization, developed countries that have European traditions, such as the United States (US) and Australia, have had a great influence on developing countries’ legal systems.

One and foremost reasons in advocating the influence is a sufficient and sound legal system is the most important considerations for Western businesses and firms when investing in developing countries.

Westernizing the legal system of a developing country can be carried out in various ways.

When the government of a certain developing country wants to pass certain legislation, it may ask their scholars to produce the draft. These scholars are mainly trained in Western countries, such as the US, United Kingdom (UK), and France and have acquired knowledge of Western legal concepts.

In addition, when drafting economic legislation drafters have used Western countries’ legislation as reference.

Westernizing of a legal system also occurs when a developing country receives assistance from Western countries. Western countries have been providing assistance to developing countries in their pursuit of national development. The assistance includes legal assistance by the dispatch of experts. These experts give advice and are involved in the process of producing draft legislation.

The advice given and drafts produced have their origins in the legal system of the Western countries, as this is where the expertise of the experts rests.

Indonesia is one of those developing countries that have experienced the varying methods of westernizing its legal system. To begin with, Indonesia like many developing countries was the recipient of European influence on its legal system, wanted or not, from its former European ruler, the Dutch.

Soon after its independence in 1945, the constitution provided that the previous Dutch laws initially become the law of Indonesia. Even today, many Dutch colonial laws and regulations still prevail, including in the area of economic law.

The attempt to replace the now antiquated Dutch laws of the colonial period has been pursued by seeking assistance from legal scholars. On many occasions, law professors have served as the chairman or members of the drafting committees tasked with developing this new law.

Most of the professors involved undertook their postgraduate education and training in Western countries, if they are trained in Indonesia, they follow strictly Dutch and Roman legal principles.

In addition, the drafting team often uses Western countries’ law as an initial reference point. For instance, the Company Law when drafted had relied heavily on US Corporation Law and Dutch Company Law as its primary references.

Efforts to reform some of the Indonesian economic law have been carried out under the guidance of foreign experts. In some instances, foreign experts have been required to go as far as producing the actual drafts of legislation.

Indonesia has also had considerable experience in reforming its laws to meet international standards. Originally many of these reforms were due to external pressures from other countries demanding Indonesia conform to acceptable international standards.

Indonesia’s economic dependency has made it easier for donor countries and international financial institutions to request certain laws to be amended or introduced.

For example under the IMF loan conditions of late 1997 Indonesia had to amend its Bankruptcy Law. The same happened again in early 1998 when the IMF requested that Indonesia introduce a Competition Law.

Indonesia’s Competition Law and Globalization

One important law that deals with wider access to the market is Competition Law. The Competition Law was enacted in March 1999. The Law was the first of its kind in Indonesia and passed as Law No. 5 of 1999 concerning the Prohibition of Monopoly Practices and Unfair Competition (hereinafter referred to as “Law Globalization has often been quoted as one of the reasons behind the introduction of the Law.

The General Elucidation of Law describes as follows: Even though much progress has been achieved during the First Long Term Development Phase as shown by high economic growth, nevertheless there are still challenges and problems (to be encountered), in particular with the issues of economic development, amid the trend of economic globalization, and the dynamic and development of the private sector since the beginning of the 1990s.

Clearly this evidences an intent by the drafters that the Indonesian law should be one that would allow it to participate in the international community. Therefore the Competition Law cannot be different to those of developed countries. A one-size fits all approach was used rather than addressing local anti-competitive behavior.

In addition the drafters were also hesitant when drafting provisions that would be markedly different from the international standard of Competition Law. The substance of Law is similar to the substance of competition laws as adopted by Western countries.

First, in general, Law does not prohibit monopoly based on market structure or market share.

However, Law does prohibit practices of and by firms that unfairly restrict competition.

The prohibitions under Law are similar to those found in Western countries or model laws on competition designed by Western experts. There are three kinds of prohibited practice.

The first prohibition concerns agreements. Firms are prohibited from entering into agreements that have the purpose or effect of unfair competition; namely, oligopoly, price fixing, dividing territory, boycotting, cartel, trust, oligopoly, vertical integration, or exclusive dealing, as well as contracts with foreign parties that may result in monopolistic practices or unfair business competition. This prohibition is similar to the UNCTAD Model Law on Competition under Article 3 (I).

Second, firms are prohibited from carrying out activities that can result in unfair competition. The prohibited activities are monopoly, monopsony, market dominance, and conspiracy. Unlike prohibited contracts, prohibited activities can apply to a single firm.

Lastly, firms are prohibited from abusing a dominant position. The prohibition against the abuse of dominant position centers on interlocking directorates, share ownership, and corporate actions of mergers, acquisitions, and dissolutions.

Law provides exemptions from its scope. The exemptions are (a) contracts implementing preexisting law; (b) contracts concerning intellectual property rights, trade secrets, and franchises; (c) contracts on technical standardization that do not restrict competition; (d) contracts that do not require resale or redistribution at a subsequently lower price; (e) research contracts designed to promote or improve the general welfare of citizens; (f) government-ratified international agreements; (g) export contracts that do not affect domestic markets; (h) small businesses; and (i) cooperatives that exclusively serve members.

There are, however, Indonesia-specific exemptions. The exemption on small businesses and Cooperatives can be considered as Indonesia-specific. The reason for such exemptions is the government at the time Law was debated, had an economic policy that centered on an economy driven by the business activities of the common people and referred to as ekonomi kerakyatan (people’s economy).

The people’s economy required that the government protect and promote small businesses and cooperatives. Law also establishes an enforcement agency similar to the US Fair Trade Commission, referred to as Komi’s Peng was Persaingan Usaha or the Business Competition Supervisory Commission (hereinafter abbreviated as “KPPU”).

Looking at the substantive provisions of Law, it can be concluded that Law has generally met with the standard of developed countries’ Competition Law. Having law that meets the international standard in developing countries does not mean the behavior of the society will instantly change in accordance with the enactment of such law.

Indonesia has been encountering problems with its legal transplants, including Competition Law. There are, at least four, major problems regularly encountered with respect to implementation.

Firstly, legislation is drafted not for the right reason; namely, not to address social issues faced by society. Law is written for other purposes, such as for the sake of wanting to have a legal system like the developed countries or meeting demands from international pressure.

Second, the problem owes to the fact that when drafting legislation the drafter sometimes lacks understanding of the intricacies of the issues. Understanding the intricacies is important since at the implementation stage the law enforcement agencies will rely mostly on what is written in the provisions.

In addition, the problem of inaccuracy has been added to by another problem; namely, legal drafters in Indonesia have the habit of translating, instead of making reference to, other countries’ legislation.

Translating provisions, although that will result in the legislation, neglects to take into account the local conditions.

Third, drafting legislation to meet the international standard often neglects the supporting legal infrastructure that is paramount for the legislation to be smoothly implemented and enforced.

To write a provision on the establishment of the KPPU, for example, is easy. The challenge, however, lies in its implementation, such as how will the institution be financed, how will the members be recruited, what is the relationship with other governmental agencies, to name but a few of the issues. Drafters of Law seem to have not given thorough consideration to these issues.

Fourth, having legislation that meets the international standard has been considered as resulting in an abrupt changing of society’s values. The legislation may be seen as unfit for the local society as the society is not familiar with or does not have a good understanding of the new values embedded in the legislation.

In addition, law enforcement can be lenient and compromise due to the law enforcer’s sympathy toward this gap issue.

Types of Monopoly Practice in Indonesia

The nature of monopoly practices in Indonesia is different from those of developed countries. Most monopolies in Indonesia have not been the result of unfair competition between firms, which is referred to as industrial monopoly. Rather, they have been the result of the Government’s intervention in the market.

The first type of monopoly practice has been for the Government to grant economic privileges to firms that have close ties with high-ranking Government officials.

The second type resulted from State owned enterprises (SOEs) monopolizing various lines of business based on Article 33 of the Constitution.

The third type of monopoly practice is that firms engaged in a sort of ‘price fixing’ under the blessing of the government as the government frequently asked their association to give input on tariffs. The recommendation from the association most of the time is accommodated as government policy without any public debate.

The most pervasive type of monopoly practice has been Government-sanctioned monopolies. This is carried out when individuals occupying high Government position issue legislation or decrees sanctioning firms to monopolize certain businesses. The legislation and decrees gave firms their privileged positions.

The owners of the firms were members of families and the cronies of the high-ranking Government officials with the responsibility for such business fields. This phenomenon was pervasive, not only at the central government level, but also at much lower levels of government.

Such anti-competitive behavior by the Government has prevented other firms from entering markets. As a result, the market practically had been closed to most Indonesians who did not enjoy close ties with high-ranking Government officials.

Access to the market, at that time, meant having an ‘acquaintance’ with a high-ranking Government official or entering relationships with firms who had special connections.

It should be noted, however, that the term ‘closed access market’ here should not be associated with the term ‘closed access market’ under the discussion of international trade.

The term closed access market under international trade has the connotation that a country is protecting its domestic businesses with the result that foreign firms have difficulty in penetrating the market of their goods and services.

Meanwhile, the term closed Indonesian market, as said earlier, meant access to the market is closed to those, foreign or local firms, who do not have ties with high-ranking Government officials.

In sum, monopoly practices in Indonesia have been the result of Government-sanctioned monopolies. To end this anti-competitive behavior, Indonesia needed to have a Competition Law that provided sufficient provisions to address Indonesia’s specific monopolies.

Unfortunately, Indonesia was more concerned with having a Competition Law that met the perceived international standard and not one that met Indonesian needs. The domestic force to enact Law was public demand to end Government-sanctioned monopolies.

Although the Law was enacted for that purpose, unfortunately, substantively Law did not deal with public expectations. This is most evident in the fact that there are only two Articles that deal with Government-sanctioned monopolies. The first is Article 51, which in short provides that monopolies granted by the Government to SOEs or firms must be based on legislation in the form of a Law.

This recognizes the fact that in the past monopolies could be granted by legislation issued by the President, Minister, Governor, or others and this will provide an opportunity for public debate as Parliament is involved in the passage of the Law.

The second Article is Article 35(e) concerning the KPPU’s task of providing recommendations and comments on Government policy that has a bearing on monopoly practice and unfair competition.

In addition, there is an Article that deals with anti-competitive behavior in the form of bid rigging as stipulated under Article 22. This Article has been frequently employed by KPPU when examining and deciding a case.

If the public demand to end Government-sanctioned monopolies is the enactment policy, Law should have stipulated a larger number of provisions that expressly addressed this issue.

The two Articles alone are noticeably insufficient. Law should have accommodated provisions such as, what to do with past legislation granting monopolies, how to deal with firms that had Government sanctioned monopolies, what are the exit provisions of firms that were previously granted monopolies, should the KPPU be given the responsibility of reviewing past legislation granting monopolies, how to end monopolies granted by local governments and how to anticipate their re-occurrence, and what happens if recommendations by the KPPU are not followed by Government.

IMF

The external influence for enacting Law came from the IMF. The government had no choice but to pass the Law or face the consequences of not receiving the promised loan disbursements a delay in loan disbursements would have had serious effects on the economy and foreign investors’ confidence in doing business in Indonesia.

All of these would undoubtedly have resulted in a further deterioration of Indonesia’s economy. The question is why was the IMF so keen to push Indonesia to adopt a Competition Law?

Was it because they wanted to see Indonesia’s economy efficient and growing again? Increasing the efficiency of the Indonesian economy may have been an underlying theme of the IMF push towards a Competition Law however that was not the only purpose.

There are other purposes, which unfortunately are not so open. One possibility would be Indonesia is seen as a potential market for foreign firms.

However, as discussed earlier, the market is closed. The most obvious way of opening up the Indonesian market to foreign influence is to introduce a Competition Law.

Transformation of the law under globalization

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