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.