Speed up reform, avoid return to protectionism<\/p>\n
Imelda Maidir, Centre for Strategic and International Studies
\n(CSIS), Jakarta<\/p>\n
The government of Megawati Soekarnoputri throughout this year
\nhas kept the IMF-supported program on track, but macroeconomic
\ntargets fared better than structural reforms. The process of
\nreforms is being reverted to protectionism. More recently, there
\nhave been considerable delays in the removal of tariff control
\nhiding behind protectionist barriers and in the privatization of
\nstate assets and enterprises. Indonesia's new democracy has added
\nto the delays, and in this, the legislature has also prolonged
\nthe process of reform.<\/p>\n
Moreover, the public, including workers, have added to the
\npressure in the attempts at policy reform made by the government.
\nThe Semen Gresik sale, for example, was canceled following
\nregional pressure against the inclusion of two operating units of
\nSemen Gresik, Semen Padang and Tonasa, in the bid, and in turn,
\nthe Semen Gresik workers' demands. With an injection of at least
\nUS$ 530 million, about 85 percent of the privatization target
\nthis year, the Semen Gresik deal would have subsequently enabled
\nthe government to raise its capacity.<\/p>\n
It has become clear that the full benefits of reforms will not
\nbe realized until the country has adopted a more assertive
\ncompetition policy. This policy, however, should fit hand-in-
\nglove with other measures to liberalize the economy by completing
\nthe vigorous deregulation of cross borders and entry barriers, as
\nwell as streamlining.<\/p>\n
Trade liberalization in the 1990s had already subjected the
\nmanufacturing sector to heightened competition, but there are
\nstill inconsistencies and non-transparent means of protection.<\/p>\n
Raising import tariffs on sugar and other main farm
\ncommodities could indeed help protect local farmers from unfair
\ncompetition resulting from dumping practices by foreign
\nproducers. This trade policy instrument alone is not effective in
\ndecreasing the country's dependence on imports. So far the local
\nsugar industry is only able to meet 53 percent of local
\nconsumption.<\/p>\n
Another case in point is partial liberalization and reform,
\nparticularly in the service sector. While law No.20\/2002, a
\nreform designed to create competitive wholesale and retail
\nmarkets for electricity was enacted on late September, primarily
\nto ensure sustainable growth of the power sector, the remaining
\ncontrol over distribution became a non-tariff barrier to
\ncompetitive service.<\/p>\n
Customers are still not allowed to have the choice of using
\ncompetitive retailers or continuing to procure services from
\ntheir local utility at a regulated rate. Likewise, the law does
\nnot mention whether consumers will eventually be free to choose
\nany retail agent from whom they will buy electricity.<\/p>\n
Competitive electricity markets cannot work properly if
\nconsumers are completely insulated through regulations, from
\nvariation in wholesale or retail market prices. Similarly, the
\nexperience of California in America may be regarded as a partial
\nliberalization and proved to be unsustainable. In the California
\ncase, the regulator allowed for the wholesale price to vary
\naccording to market supply and demand, but put caps on retail
\nprices.<\/p>\n
However, the introduction of competition has to be preceded by
\na wide range of appropriate sequencing to ensure that, once
\nintroduced, the competition will work as intended. A hasty
\nintroduction of competition without all the necessary
\ninstitutions in place may be harmful for the industry itself.
\nThis has been the case in the State of Victoria, Australia, where
\nan introduction in its Electricity Supply Industry (ESI), at
\nleast initially, faced problems partly because there was no
\nliquid electricity market to enable efficient transactions.<\/p>\n
Regulatory uncertainty during or immediately before the
\ntransition may have a negative impact on investment, as potential
\ninvestors would delay their decisions until the new framework has
\nbeen defined. Regarding the long-standing regulatory process in
\nthe \"duopoly\" of the telecommunication sector, the government
\nseems to lack efforts to ensure the policy to liberate the
\nindustry. Should the deal not go through, not only will Telkom
\nlose the opportunity to get a much larger share of the cellular
\nphone industry, but Indosat will, in turn, enter full throttle
\ninto the local fixed line industry, while the government will
\nmiss the opportunity to foster good competition.<\/p>\n
There is much work to be done at home in order to liberalize
\ntrade and investment, not to mention curbing the rampant
\nsmuggling that might be considered anti-competitive. According to
\nthe Association of Indonesian Electronic Producers, the different
\ntaxes levied on electronic goods, now reaching 52.2 percent, has
\nstunted the growth of electronic producers.<\/p>\n
In addition, local producers are finding it difficult to
\ncompete with cheaper goods smuggled into this country. The Sony
\nCorp. case illustrates that these practices were a turn-off for
\nforeign investment. Accordingly, it is important to remove
\nunnecessary administrative barriers that hinder the speedy
\ncompletion of reforms.<\/p>\n
However, experience also shows that introducing greater
\ncompetition, whenever they have materialized, has a large
\nnegative impact on the public perception of reforms. Thus,
\ngovernments have a key role during the transition in ensuring
\nthat the appropriate safeguards are in place to sustain the
\nreliability of these reforms, and they also have a great
\nresponsibility in minimizing risk.<\/p>\n
Finally, when market problems do emerge, government officials
\nshould act quickly and decisively to fix the problems.<\/p>",
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