Aug.02, 2004
Our competitiveness eroded
Indonesia's economic competitiveness has steadily been weakening, even in natural resource-based industries where local businesses are presumed to enjoy a strong comparative advantage.
Even in many farm commodities that do not require high technology nor large amounts of capital, we are no longer competitive. Witness how our supermarkets have increasingly been dominated by fruit from countries whose labor costs are already much higher than ours.
One may immediately point an accusing finger at major industrialized economies as the United States and several European countries, which have spent hundreds of billions of dollars annually in price support for their farmers to enable them to dump their surplus produce on emerging markets such as Indonesia's.
That is true to a certain extent, and insofar as farm produce such as corn, cotton and soybeans are concerned, dumping by industrialized countries could be part of the problem -- one of the main issues debated by the World Trade Organization in Geneva last week.
Yet, one may still find it mind-boggling to comprehend as to why our farmers cannot compete with rice, sugar, garlic and fruit from suppliers such as Thailand, Taiwan, India and China. Even our shrimp farmers have been complaining about fierce competition from China.
But more worrisome are the short-sighted, ad hoc higher tariff and nontariff barriers used by the government to address the problem, notwithstanding that our economy is increasingly linked to and benefits from the international market.
This, however, does not mean that our farmers do not need protection from unfair competition from foreign suppliers. The issue is the kind of protection and the institutional capability to enforce it.
The cold, hard reality is that the government simply refuses to admit that market-distortion policies, such as protectionist measures, are never effective in a country with such a vast coastline, a poorly equipped Navy and police force, and a customs service that is perceived to be notoriously corrupt. Such trade barriers, instead, create lucrative opportunities for collusive deals between smugglers and corrupt officials. The recent instances of textile, rice and sugar smuggling could simply be the tip of an imports-smuggling iceberg.
The government should have fully realized why our competitive edge has steadily been declining. Many studies and much research have identified the problems.
Indonesia has performed very poorly in all international ratings of economic competitiveness and always ranks much below the other founding members of ASEAN. For example, in the 2004 Economic Freedom of the World report, which was issued by Canada's Fraser Institute last month, Indonesia ranks only 86th of 123 countries measured in terms of good governance, access to sound money, freedom to trade internationally, regulations of credit, labor and business, legal structures and security of property rights.
Indonesia also ranked very low in both indices of the Global Competitiveness Report 2003 which was prepared and issued by the Geneva-based World Economic Forum last November. It was rated 66th of 102 countries surveyed in the growth competitiveness index and 58th in the business competitiveness index.
These indices measure the macroeconomic environment, the quality of public institutions and the use of technology, with dozens of subcomponents. These factors are fundamental to sound business development because sound macroeconomic policies create an enabling environment for the creation of wealth at the microeconomic level and boost the ability of companies efficiently to create valuable goods and services.
The government should take a more strategic view of all the weak aspects of our economy and realign its list of top priorities with a focus on sound business environment to woo new domestic and foreign investment.
What we badly need is direct investment and not short-term, portfolio capital that is highly vulnerable to outward flight at the slightest sign of trouble. It is direct investment that goes into factories, utilities, equipment and other fixed assets, which in turn create jobs. An economy can never be competitive if its business units are not highly productive, but the productivity of businesses is intertwined with the quality of the investment climate.
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