Beyond well enough<\/p>\n
Arya B. Gaduh
\nJakarta<\/p>\n
The economy did rather well in 2005. Estimates by the Asian
\nDevelopment Bank put its growth above that of the regional
\n(Southeast Asian) average and its ASEAN-5 neighbors.<\/p>\n
Exports became one of the main sources of growth, contributing
\nto around 80 percent of total growth in the first two quarters of
\n2005. Non-oil-and-gas exports in the first three quarters of 2005
\ngrew by more than 23 percent from that in the same period in 2004
\n-- more than double the growth in the first three quarters of
\n2004.<\/p>\n
2004 2005 2006<\/p>\n
ADO*Update**ADO*Update**
\nSoutheast Asia6.35.455.65.4
\nASEAN-5
\n Indonesia5.15.55.76.05.9
\n Malaysia7.15.75.15.35.3
\n Philippines6.05.04.75.04.8
\n Singapore8.44.14.04.54.7
\n Thailand6.15.64.05.85.0<\/p>\n
Source: Asian Development Outlook 2005 Update. *Projection as
\nof April 2005; ** As of September 2005<\/p>\n
Yet, this rosy picture from the top was contradicted by a
\ndifferent picture on the ground. Exporters and businesses
\ncomplain daily about rising costs, both from policy action (e.g.,
\ndomestic fuel price increases) and inaction. All of these
\nfailings, they say, are eroding their international
\ncompetitiveness, particularly in the face of rising China,
\nVietnam -- and, to a lesser extent, India.<\/p>\n
How can we explain these conflicting pictures? In essence, I
\nthink they describe both the potentials and risks inherent in our
\neconomy. Undeniably, our economy, despite all the policy
\nproblems, has been performing well enough -- pointing to the
\nresilience of the economy. However, intensifying global
\ncompetition will soon make well-enough not enough. The leap
\nbeyond well-enough requires swift solutions to the problems on
\nthe ground.<\/p>\n
The evolution of Indonesia's export structure is illustrated
\nin the figure below. The vertical axis indicates the growth of
\nexports from Indonesia for the particular commodity, while the
\nhorizontal axis indicates world export growth for the commodity.
\nThe size of the bubble represents the share (in terms of value)
\nof a particular commodity's export to Indonesia's total export,
\nindicating its importance to Indonesia's export.<\/p>\n
Two things emerge from this figure.<\/p>\n
First, the growth of Indonesia's leading manufacturing sectors
\n-- notably electronics, textiles, wood and wood products, as well
\nas footwear and pulp-and-paper (not shown above) -- are either
\nstagnant or declining, despite the relatively strong growth of
\nthese sectors in the world market.<\/p>\n
Second, there is a marked shift from manufacturing products
\ntoward primary commodities. The three sectors whose share of
\ntotal exports increased the most between 2000 and 2005 are palm
\noils, base metals and natural rubbers, while the three whose
\nshare declined the most are textiles, electronics and wood
\nproducts.<\/p>\n
The changing structure of Indonesian exports reflects the
\nsignificance of China's entry into the global economy. Chinese
\nfirms become strong competitors in the low-cost manufacturing
\nsector, but provide a market for our primary commodities. The
\nlatter translates into some static gains for the Indonesian
\neconomy. However, the shift away from manufacturing toward
\nprimary commodities will sap the dynamism of the Indonesian
\neconomy.<\/p>\n
Direct competition with Chinese -- and, to some extent,
\nVietnamese -- manufacturing firms highlights an important fact:
\nIndonesia is losing its comparative advantage in low-cost
\nmanufacturing. The latest fuel-subsidy reduction policy, it was
\nargued, rubbed salt into the wounds of many manufacturers and
\nexporters of low-cost goods as it weighed down on their
\ncompetitiveness even further.<\/p>\n
In response to such an argument, one minister reportedly
\nreplied: \"In other ... countries with similarly high fuel-prices,
\n(firms can manufacture) competitive products. Why can't we?\" This
\nquestion was made more than 20 years ago by former minister of
\nindustry A.R. Soehoed. Even so, it is as relevant now as it was
\nthen -- especially since fuel prices in China -- and indeed, in
\nmost of Asia -- are significantly higher than those in Indonesia.<\/p>\n
Table 2. Prices of Diesel in Selected Asian Countries, November
\n2004
\nCountriesPrice per liter (US$)
\nChina, People's Rep. of43
\nSoutheast Asia<\/p>\n
Cambodia61<\/p>\n
Indonesia18<\/p>\n
Lao People's Dem. Rep.63<\/p>\n
Malaysia22<\/p>\n
Myanmar10<\/p>\n
Philippines34<\/p>\n
Singapore55<\/p>\n
Thailand37<\/p>\n
Vietnam32<\/p>\n
*Prices as of November 04. By November 2005, the Chinese
\ngovernment has adjusted fuel prices upward three times.<\/p>\n
Why is Indonesia losing competitiveness in low-cost
\nmanufacturing? One possible explanation is the natural
\nprogression of the economy: As the economy matures, high demand
\nfor low-skilled workers drives wages upward, making labor costly.
\nWhile this might have been true prior in 1996, it is no longer
\ntrue. (Unemployment rate)<\/p>\n
Another possible explanation, which seems to fit Indonesia, is
\nrelated to Indonesia's \"business climate\". A good business
\nclimate can be defined as an environment that gives ample
\nincentives for all actors to engage in productive activities.
\nThis notion can be interpreted in many ways, but it essentially
\nrefers to an environment with a relatively high-level of
\ncompetition and low cost of doing business -- of which, Indonesia
\nis not.<\/p>\n
A good illustration of this is the problem of trade
\ninfrastructure in Indonesia's ports. Indonesia had the most
\nexpensive terminal handling charges (THC) amongst its Southeast
\nAsian neighbors. Under pressure to \"reduce the high-cost
\neconomy\", the Ministry of Transportation issued a regulation that
\nslashed the THC to US$ 95 in order to make the business climate
\nmore competitive.<\/p>\n
THC per container size(US$)<\/p>\n
20 feet40 feet
\nIndonesia150230
\nThailand6598
\nMalaysia90135
\nSingapore107158
\nSource: JICA (2005)<\/p>\n
Yet, the THC is but one of many problems infesting Indonesia's
\nports. JICA (2005) points to the quality of service and
\ninfrastructure as one of the reasons why many ships avoid Tanjung
\nPriok Port. The reason for this poor infrastructure and service,
\nit argued, was the lack of competing ports in the area -- hence
\nit recommends improvement through the introduction of a second
\nport.<\/p>\n
Arguably, no major improvement in economic policy-making
\noutside that of macroeconomic policy has happened in the past
\nyear. Yet, despite this, the economy grew well enough. The
\nresilience of the Indonesian economy, not to mention its
\nendowment of natural resources, somewhat compensates for the
\nrelative incompetence of policymakers.<\/p>\n
As such, we are living in what MIT (Massachusetts Institute of
\nTechnology) economists called \"an 'age of diminished
\nexpectations'...in which our economy has not delivered very much
\nbut in which there is little political demand that it do better.\"
\nThis kind of \"policy of no policy\" was good enough in the absence
\nof intense competition from abroad. But now, good enough is
\nsimply not enough.<\/p>\n
To move beyond good enough, productivity needs to improve.
\nIndeed, the most important policy to boost exports is not located
\nin trade policies, but in productivity-improving policies. For an
\neconomy such as Indonesia, it is not too difficult to find such
\npolicies. Reducing corruption, illegal fees, and other
\ntransaction costs is one. Investment in infrastructure --
\nincluding in the \"knowledge infrastructure\" through basic
\nresearch -- is another. Creating a predictable business regime
\n-- particularly with regards to taxes, for instance -- is another
\none.<\/p>\n
All of these policies require good coordination. But more
\nimportantly, a sense of urgency is required across the
\nadministration, chiefly in the technical departments -- not only
\nin ministries traditionally associated with exports and the
\neconomy -- and the legislature. Politicians need to be reminded
\nthat the era when good enough is enough is (almost) over.<\/p>\n
The writer is a researcher at the Centre for Strategic and
\nInternational Studies (CSIS), Jakarta. He can be reached at
\nabgaduh@cbn.net.id.<\/p>",
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