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.