Competitiveness: Reforms and quick fixes
Competitiveness: Reforms and quick fixes
The government introduced a new reform package last week to
boost the country's exports. Economist Mari Pangestu argues that
quick fixes to improve the nation's competitiveness are no longer
the answer since more fundamental issues are at stakes.
JAKARTA (JP): The Jan. 26 deregulation package reflects a
continuation of the pattern of past deregulation packages; a
reduction of tariffs and non-tariff barriers as well as opening
up some sectors to private and foreign investment.
Furthermore, there is a focus on increasing the efficiency and
competitiveness of exports, and streamlining administrative
procedures and bureaucracy to reduce the high cost of doing
business. It was also announced that further deregulation with
regard to manpower, transportation, land, agriculture, mining and
energy will follow.
While announcing what will be done next should be commended,
it is a pity that not much more is known about further
deregulation. The private sector needs to be given a clear signal
as to what can be expected to change in the medium term so that
adequate preparation can be made in terms of technology and
management, and more importantly so that protection and unfair
practices will not continue indefinitely.
The response has been lukewarm with critics pointing to what
the package does not address such as further reductions of the
high-cost economy, dismantling domestic distortions in production
and distribution, and ensuring that the principles of non-
discrimination and transparency, which hold for liberalization
vis a vis foreign players, also hold between domestic players.
These comments sound very familiar because they have been the
subject of endless discussions, seminars and studies, and the
theme has not varied in the last few years.
It would appear that other than deregulation fatigue, we are
also suffering from fatigue in commenting on deregulation. What
is at the crux of this fatigue?
Indonesia has done much in terms of economic adjustment and
liberalization. So much so that growth is by and large determined
by the private sector and there is not much the government can do
to influence growth and the direction of growth directly.
However, there is a discrepancy in government thinking over
what is the real situation compared with what ministers perceive
it to be and so what they feel can be "fixed" by gradual
deregulation and what actually can.
It is true that in the past, deregulation measures, especially
those undertaken in the 1986-89 period, were accompanied by rapid
non-oil export growth, booming investments, and a restructuring
of production towards non-oil industries as well as exports.
But we cannot expect the same jump start anymore. Quick fixes
are no longer the answer. The underlying problems affecting
competitiveness of exports are more fundamental and structural in
nature, and as a result need a more comprehensive and consistent
approach.
Look at the export problem in relation to the deregulation
package, it can be seen that this package will go some way to
boosting export growth and contributing to its sustainability.
The immediate effect on exports will be felt through the
reduction of the costs of doing business: a simplification of
procedures including movement of goods, especially between bonded
zones and export production entrepots; elimination of the textile
quota administration fee, and pre-payment of indirect taxes for
domestic inputs used in export production (thus removing the
hassles involved in obtaining restitution).
A weakness of Indonesia's exports is their concentration on
light manufactured goods with weak backward linkages and heavy
reliance on imported inputs. A positive aspect of this package is
that finally the importance of indirect exporters in increasing
products' value and reducing the import dependence of non-oil
exports has been recognized.
The main change is to fully extend free trade access to
imported inputs to indirect exporters, who by definition are the
suppliers of goods and services to export production.
In the past it was easier and cheaper to obtain the inputs
abroad. Of course implementation is still an issue and it is
hoped that supporting exporting institutions will ensure the
procedures are conducted in a speedy and transparent manner.
This is all well and good. However, we should remind ourselves
that providing free trade status to exporters, and now indirect
exporters, is an intermediate step until such time as the
protection of domestic industries can be reduced. The final
objective should be efficient and innovative producers who can
compete with imports selling in the domestic market, and compete
in the global market, by exporting.
How can this be achieved?
The 'what to' do can be gauged by making an inventory of the
recommendations of the numerous studies undertaken to sustain and
diversify Indonesia's exports. The result would be the following
list: macroeconomic measures needed to ensure macro stability,
ensuring that wage increases do not exceed productivity
increases, and the development of a sound financial sector; a
clear and pre-announced schedule of protection reduction;
increasing domestic competition by creating contestable markets
and a level playing field; strengthening technological
capabilities including skills development; enhancing the
performance of export supporting institutions; reducing red tape
and the high cost of doing business; attracting and maximizing
the benefits of quality foreign and domestic investments;
overcoming infrastructure bottlenecks; market intelligence; and
improving the role of trading companies.
It is the 'how to and when to' that are still unclear.
Indonesia still has time and the availability of rich resources
on its side, but not for long. The results desired are unlikely
to be felt for some time; but the efforts have to start now.
The writer is Head of the Economics Department at the Center
for Strategic and International Studies and a lecturer at the
University of Indonesia.