'Cutting paperwork better for exports than incentives'

JAKARTA (JP): Fundamental policies to streamline trade and investment administration are more likely to increase exports than incentives for some exporters, trade expert William E. James said yesterday.

James, a consultant on trade policy programs at the Ministry of Industry and Trade, said there was usually a negative correlation between industry assistance and export performance because incentives introduced an anti-export bias in the allocation of a country's resources.

The Thai experience showed that industries receiving special incentives proved to be better at rent-seeking than increasing exports, he said.

"Rather than seeking to pick winners for selective incentives such as tax holidays, an alternative focus on more fundamental policy efforts to streamline investment and trade administration and procedures while continuing to deregulate the economy would be likely to yield better results," James told a seminar organized by ING Barings Securities.

He criticized the ministry's attempt to pick export winners for selective incentives as an infeasible strategy to promote future growth of non-oil exports.

In an effort to boost non-oil exports, the government is providing special tax, customs and banking breaks to exporters of textiles, textile-related products, shoes, electronics, wood and rattan products and leather goods.

He suggested the government cut back red tape for investment and international trade rather than provide incentives.

Although the investment climate had improved, James said, the country's investment process remained complicated by the presence of a cumbersome process of investment approvals, licensing, permits, regulations and paperwork.

Such complicated processes extended the lag between investment decisions and implementation, he said.

He observed that an analysis of the relationship between foreign direct investment and the export propensity of manufacturers revealed that manufacturers with foreign ownership of at least 90 percent were more export-oriented than other firms in the same industries.

Foreign investors had problems with land leases and limitations on the duration of investment licenses, which deter the implementation of investment plans, he said.

Indonesia still had many restrictions stopping foreign firms entering the domestic distribution system as well as divestiture or excessive performance requirements.

"Restrictions on foreign ownership or divestiture requirements are probably counterproductive if the aim is to promote export orientation in manufacturing industries," James said.

Growth of the country's non-oil exports has slowed in recent years while imports have increased rapidly.

Non-oil exports grew from US$27.1 billion in 1993, to $30.4 billion in 1994 and to $34.9 billion in 1995. Non-oil imports rose from $26.2 billion in 1993, to $29.6 billion in 1994 and to $37.7 billion in 1995.

James suggested that the government pay special attention to labor-intensive industries because their contribution to the growth of non-oil exports remained the largest.

In the first half of 1996, labor-intensive industries had the highest growth contribution of all non-oil manufacturers at 22.9 percent, compared with 17.2 percent for human capital-intensive industries, 12.2 percent for technology-intensive industries and a negative figure for natural resource-intensive industries.

"The analysis of growth contributions shows that labor- intensive manufacturers are still promising and it is wrong to consider them sunset sectors from the perspective of export development," James said. (rid)

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