Bribes, regulatory constraints, and boosting Indonesian exports
Bribes, regulatory constraints, and boosting Indonesian exports
Mudrajad Kuncoro, Yogyakarta
Problems with regional autonomy and increasing demands for
bribes are further slowing Indonesia's exports in a highly
competitive regional market, a survey of 100 top executive
managers says.
The managers were surveyed in six industrial centers in Java
(Jakarta, Bogor, Tangerang, Bekasi, Bandung, Jepara, Surabaya)
Sumatra (Batam), and Bali (Badung, Denpasar, Gianyar).
They outlined some key constraints undermining Indonesia's
competitiveness. They also had solutions to supply-side factors
that hindered export performance.
Bribes -- illegal charges, special gifts, and extra costs
beyond those for production and distribution -- demanded by
government officials were also major causes for complaint.
The most striking feature of Indonesia's non-oil export data
is that unskilled labor-intensive (ULI) exports made the largest
contribution to total manufactured exports during 1994-2003
period. ULI has historically contributed from about 36-45 percent
of Indonesia's manufacturing exports. However, major ULI exports,
in particular textiles, garments, and footwear, have declined
steadily since 1994.
Textile and garment exports accounted for a total of 71
percent of ULI exports in 1990 but this share has declined to
about 61 percent, or 26 percent and 35 percent respectively
today. Footwear exports registered an upward trend from 1990-1996
but have been declining since 2000. The decline in footwear
exports is directly linked to the number of shoe manufacturers
that closed down during that period.
Various studies have attempted to identify some major factors
underlying this steady decline in ULI.
One factor is the slower demand from Indonesia's major export
destinations, although structural factors such as increasing
competition and declining productivity are also important
contributors.
An appreciation of the real rupiah exchange rate in the order
of 20 percent between 1995 and 1997 was also a cause for the
slowdown.
And experts believe the ULI export decline is likely to
continue to come under pressure in the post-crisis period with
increasing competition from other low-cost producers. During
1997-2002, China and Vietnam significantly outperformed Indonesia
in Indonesia's top 30 non-oil exports, including yarn, fabric,
furniture, garments, and footwear production.
Many argue that implementation of regional autonomy in
Indonesia since 2001 has exacerbated the problem. The relatively
low quality of government services, a lack of legal certainty,
and regional regulations which are not "pro-business" are
identified as the main reasons for the unfavorable assessment of
the business climate. Businesses here are often uncertain about
the costs and the timing of government services and confused by
the sometimes complex procedures.
One striking finding of the survey was the direct link
managers made between corruption and the slowdown of labor-
intensive manufacturing exports in the regions. Illegal
charges/levies, licensing by central government, local government
regulations, rising government administered rates -- especially
for electricity and fuel -- and taxes/local charges are those
that business players considered the key constraints. These
problems result from businesses interaction with both central and
local government and confirm common complaints about taxes, local
levies, illegal charges, and uncertainty about government
administered rates and licensing that businesses have long been
airing.
Other constraints mentioned include a scarcity of raw
materials, a lack of national security, a lack of capital and
inadequate marketing.
Some other key findings of this study can be summarized as
follows:
We found that key barriers to export chain have also raised
export costs and undermined competitiveness.
The barriers have been found in all stages in the export
chain. In procuring inputs, the barriers include restrictive
import regulations, the effect of illegal logging and the
imposition of the value-added tax. The application of income and
luxury taxes, the continuous rise in the minimum wage, and the
increasing costs of establishing businesses are some of the
others mentioned.
Between factories and ports companies encountered problems,
including illegal transport charges, weaknesses in customs
valuation procedures and electronic data interchange (EDI)
implementation, and unreasonable container parking and transit
charges.
Regional autonomy is being interpreted by businesses as
"auto-money" for officials -- from increased local charges for
raw materials, the costs of dealing with additional levels of
bureaucracy, local regulations and additional licensing
requirements. These barriers have brought extra costs to
companies, decelerated export activities and greatly reduced
their competitiveness.
However, the most striking feature of firms' cost structures
is the predominant role played by raw material and labor costs.
The relatively high proportion of raw material costs to total
costs was given as the key constraint. These included the
scarcity of raw materials -- a frequent complaint from businesses
involved in the furniture, timber and bamboo industries; along
with problems obtaining imported raw materials -- a major concern
for the textile, garment, footwear, and electronics industries.
As the second-largest expenditure for labor-intensive
manufacturing firms, labor costs accounted for about 24 percent
of total costs, ranging from 13 percent for the textile industry
to 35 percent for furniture. The increase in regional minimum
wages in all regions substantially impacted the cost of labor.
Finally, widespread extortion in the form of bribery has been
found in all of the surveyed regions. This includes illegal
charges, special gifts, and extra costs in terms of money and
goods given to government officers.
In many cases the government acts as a predator not as a
facilitator of business activities. Coordination among government
ministries is a starting point to launch deregulation measures
nationally and locally. This might include eliminating all
regulations that not only hinder the flow of goods and services
but also create an unhealthy business climate.
Our findings imply there is an urgency to simplify procedures,
reduce charges/taxes, and increase transparency of administrative
costs. Our field surveys indicate that 63 percent of the
respondents requested the simplification of rigorous permit
processing procedures, 28 percent called for a reduction of
charges/taxes collected by local and central governments, and 9
percent called for transparency about the cost of processing
permits.
The writer is a researcher at Gadjah Mada University,
Yogyakarta.