A case for import substitution policies<\/p>\n
By Rajiv Sondhi<\/p>\n
JAKARTA (JP): The emergence of a trade deficit in June, the
\nfirst monthly deficit in five years, has sharply focused the
\nrecent performance of exports and the supporting policy
\nframework. The policy support extended by the government to
\npromote non-oil or gas exports has brought rich dividends to the
\ncountry in the last five years.<\/p>\n
Non-oil gas exports, in particular manufactured exports, have
\nrecorded double digit growth rates. They have very effectively
\ncushioned the economy from the effects of declining exports of
\noil and gas, and the demands of a growing economy. The sharp
\nreduction in the country's reliance on oil and gas export
\nrevenues has been justifiably called a success.<\/p>\n
Faced with a declining trade balance, or even a deficit,
\nquestions arise about the inadequacies of the existing policy
\nframework. What kinds of policy responses need to be formulated
\nto deal with this situation?<\/p>\n
Before dwelling on the future, let us briefly look at recent
\nperformance.<\/p>\n
The following trends emerge:<\/p>\n
1. Exports of non-oil and gas products increased sharply.
\nSupportive government policies helped increase growth rates to a
\npeak of 28 percent in 1992, as comparative economic advantages
\nencouraged a wave of industrial relocation from elsewhere in the
\nregion to Indonesia. These growth rates have however been
\ndeclining since 1992, leading to alarm bells ringing.<\/p>\n
2. Imports have also grown. In the non-oil and gas group,
\nimports exceeded exports right up to 1992-1993. Only in 1994 did
\nthis trend reverse. The non-oil and gas sector in fact recorded a
\nnegative balance of trade up to 1992, and finally began to pay
\nfor itself in forex terms in 1994, after breaking even in 1993.<\/p>\n
3. The growth rates of imports, on the other hand, have been
\nhigher than those of exports in three of the last five years.
\nWith a steep increase in project imports expected in the coming
\nyears, the aggregate import growth threatens to overtake export
\ngrowth rates.<\/p>\n
4. The aggregate increase in value of total exports in the
\nlast five years, at US$ 17 billion, has only marginally exceeded
\nthe aggregate increase in imports over the same period ($ 16
\nbillion). The gross value addition in forex terms has thus been a
\npaltry $ 1 billion. After taking into account the related forex
\nflows normally categorized under "service", even this value may
\ndisappear.<\/p>\n
The bottom line is that while the policy of promoting
\nexports in the non-oil and gas sector have been demonstrably
\nsuccessful, growing imports have substantially eaten away the
\nadditional foreign exchange brought in. To be sure, over 85
\npercent of the country's imports comprise raw materials,
\nintermediate goods and capital goods, all of which no doubt have
\nsupported the impressive growth in exports.<\/p>\n
Future trends may be influenced by the following
\ndevelopments, which national policy planners may need to bear in
\nmind.<\/p>\n
First, foreign investment approvals are soaring. The year
\n1994, saw a record approval of $ 24 billion. And this year,
\napprovals of $30 billion have already been announced. If
\naggregated with domestic investment approvals, the increase in
\ntotal approved investments is similarly large. Such investments
\nwould be gradually realized over the next few years. Inevitably,
\nthere would be a spurt in imports of project items to support
\nsuch investment.<\/p>\n
This is what seems to explain the trend of trade balance in
\nthe first six months of 1995. Upon implementation of the
\nprojects, the increase in imports could continue unabated, with
\nadditional demand for raw materials or intermediate goods coming
\nin. Unless exports grow spectacularly, the country may need to
\nbecome used to a trade deficit for the next few years.<\/p>\n
Secondly, with the imminent move towards free trade within the
\nASEAN region, and later within the APEC framework, international
\ncompetition may intensify. As a result growth in exports could
\nbecome moderated.<\/p>\n
Thirdly, if the growth in exports is inadequate to finance
\nsteeply growing imports, large capital inflows will be required
\nto pay the bill. This would require a conducive monetary policy
\nenvironment, for instance the continuation of attractive interest
\nrate differentials and a regime of relative monetary stability,
\nso that the required amounts of capital can be attracted to the
\nright price.<\/p>\n
Fourth, this option of capital inflows will naturally tend
\nto be limited. The inflows can be as debt or equity. The
\ncountry's offshore debt is already at a high level. From the
\nviewpoint of prudence, any further increases in the absolute
\namount of national debt should be such that the debt levels bear
\nsome correlation to a combination of macroeconomic factors, like
\nthe growth in the size of the national economy, exports and the
\ndebt service capacity.<\/p>\n
The name of the game, then, is not merely export growth, but
\ngeneration of forex surpluses from the current account. Without
\ndiluting the policy support to promote growth in non-oil exports,
\nattention may now be required towards the other component of
\ntrade, namely, imports.<\/p>\n
In the context of fast disappearing tariff barriers, a policy
\nframework necessary to deal with burgeoning imports must focus on
\nimport substitution as a policy objective. The development of local
\nmanufacturing capabilities for goods hitherto imported could be
\nsupported or actively encouraged by appropriate policies on
\nseveral fronts. Some of these are:<\/p>\n
a. Providing concessional financing for investment proposals
\nwhere the output's provide opportunities for import substitution,
\nparticularly those projects that involve large capital outlays.<\/p>\n
b. Development of an ancillary program for certain large
\nscale industries. The ancillary industry, very often medium
\nscale, could be developed as a network for the supply of
\ncomponents or intermediate raw materials at economical prices.
\nSuch an ancillary program may need to be supported with
\nappropriate incentives, for instance for the development or
\ntransfer of technology. Fiscal reliefs to encourage this would be
\nvery effective.<\/p>\n
c. With a country as resource rich as Indonesia, it would make
\nperfect sense to target manufacturing industries for products
\nthat are closest to the natural raw material resource in the
\ndevelopment chain. This does seem to turn conventional wisdom on
\nits head, inasmuch as it provides encouragement for the domestic
\nmanufacture of lower value added items.<\/p>\n
But the availability of viable locally manufactured raw or
\nintermediate goods can start a chain reaction of forex savings,
\nstarting from the lower end of the value added chain. Incentives
\nfor such industries could be in the form of easier or
\nconcessional allocation of industrial land, power or supply
\ncommitments for natural raw materials.<\/p>\n
In the past, strong export growth and a manageable import
\ngrowth has helped to contain Indonesia's current account deficit.
\nHowever, the time may have come to shift the policies to a higher
\ngear, and to focus on value addition in forex terms as the driving
\nforce behind industrial licensing and growth. Let us take a long
\nhard look at why we import what we do and what can be done to
\nreduce it.<\/p>\n
The writer is director of Lippo Pacific, Jakarta.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/a-case-for-import-substitution-policies-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }