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.