Follow-up deregulation aims at easing protectionism

Follow-up deregulation aims at easing protectionism

The government announced Monday a new deregulation package on
imports. While cautious about its implementation, economist Mari
Pangestu argues that there are other means to achieve the
objectives of the deregulation.

JAKARTA (JP): The June 27 deregulation package appears to have
two major objectives. The first is the reduction of input costs
and facilitating the sourcing of inputs from domestic suppliers
in order to assist exporters and develop small and medium scale
industries.

This is evident from the tariff reductions on inputs such as
machinery, parts, components and raw as well as processed
agriculture inputs.

It is also evident from the improvement in regulations that
will facilitate subcontracting of production and leasing of
machinery from outside the bonded zones and Production Entrepot
for Exports (EPTE). The value added tax on goods sold to bonded
zones and EPTE from outside has also been eliminated.

These improvements answer one of the frequent complaints of
exporters with regard to the difficulties in sourcing
domestically. Garment exporters for instance have indicated that
they would source 20-30 percent more domestically if the
administrative processing and costs were low.

It was faster and cheaper for exporters to import and obtain
the duty exemption than source domestically. In some cases the
products that they imported were actually made in Indonesia.

The development of competitive domestic suppliers of parts and
components is essential for the continued competitiveness of
Indonesia's manufacturing exports.

Domestic industries that have to supply exporters, many of
which can be small and medium sized, can grow and learn by having
to meet the high quality needs of exporters who have to compete
in the world market.

Many of these exporters will be foreign companies who can
supply them with continuous information on changes in needs and
technology, as well as provide technical assistance. The
improvements should also encourage foreign investment in supplier
industries.

However, the issue of processing the duty exemption for
indirect exporters still remains and needs to be resolved so that
the linkage between exporters and domestic producers will grow
and strengthen.

The second objective is to reduce protection by reducing
tariffs and phasing out non-tariff barriers and replacing them
with tariffs.

This is in accordance with the direction of trade deregulation
that has taken place since 1986 and is thus not surprising.

However, this package did not contain the expected significant
reduction in protection, either tariff reductions or elimination
of non-tariff barriers, that was expected in line with the
substantive investment package announced last month.

The major barometer of progress in trade deregulation is
whether non-tariff barriers or high tariffs in the agriculture
(e.g. rice, wheat, sugar, soybeans), food and beverage (e.g.
wheat flour), paper product and the automotive sectors are
reduced or at least phased out over some specified timetable.

These are the sectors which continue to be the most protected
and once again there seems to be little progress in these areas.
While the tariffs on rice, sugar and wheat have been reduced to
zero, the non-tariff barriers still exist so that the price to
users will continue to be higher than world prices.

The users include not just final consumers, but most
importantly the downstream users such as the food processing and
pharmaceutical industries. The higher cost of inputs is often
pointed out as one of the reasons for the lack of competitiveness
of these industries, not to mention the costs to final consumers
because of higher prices.

A final word about approaches to trade liberalization. Since
last year the government has indicated that there would be no big
packages anymore, but instead a number of smaller ones.

This package is an example of such an approach. The difference
is that there is an explicit mention of gradualism: tariff
reduction will be done in stages with a minimum reduction of five
percent each time. There is also an attempt to "curb" new demands
for protection by indicating that new entrants will not be able
to seek higher tariffs and be forced to follow the existing
tariffs.

While one can question the implementation of this approach, it
is still a positive development. However, one should also be
aware that there are other means to achieve the same ends. There
is a lot to be said for gradualism since too rapid a reduction in
protection will lead to high adjustment and dislocation costs.
But the issue is of course how gradually it should be done, and
how transparent the process should be.

There are alternatives to achieve the same objective of
gradual reduction in protection such as pre-announcing a schedule
of reduction of tariffs, as well as more importantly the phase
out of non-tariff barriers, over a certain period of time. This
approach makes the phasing out process more transparent and also
prevents new entrants from obtaining protection.

Another way to proceed is to gradually reduce Indonesia's
tariff binding under the Uruguay Round commitment from its
present level of 40 percent for over 90 percent of tariff lines.

Policy-makers may have chosen the present approach because of
the need to balance the interests of different parties that will
be affected, both within the government and in the private
sector.

However, there is also much to be said for greater
transparency and a bold commitment to reduce protection. In the
final analysis, both government agencies and the private sector
will have to adjust to increased competition and greater
openness. Why not start now?

The writer is head of the economics department of the Centre
for Strategic and International Studies and a lecturer at the
University of Indonesia.