Jetro vows support for Indonesia's revitalization efforts

The Japan External Trade Organization (Jetro) signed on Monday a memorandum of understanding with the Indonesian Chamber of Commerce and Industry (Kadin) on the expansion of cooperation in trade and investment. In a joint interview with Kompas and The Jakarta Post's Zakki P. Hakim, Jetro chairman and CEO Osamu Watanabe talked about the organization's future plans in the country and Japan's perceptions of Indonesia. The following is an excerpt of the interview.

Question: How do you see Indonesia's current ability to attract fresh investment?

Answer: Jetro is discussing and proposing a study suggesting that Indonesia focus on four major issues. First, the country needs to develop its infrastructure to support investment in the manufacturing sectors. Second is the labor issue, where wages are increasing faster than workforce productivity. Third, the need to curb corruption. And fourth, revitalizing industrial competitiveness.

These four issues need to be addressed to attract investment.

Has the new government done enough to improve the investment climate?

The Infrastructure Summit (in January) was a good step. Foreign investors are now looking. If you announce improvements, foreign investment, including from Japan's private sector, will come.

Second, the need for a new investment law, which was first proposed several years ago. But the former government did not address the issue seriously.

Then, we have corruption, which is notorious here. Indonesia has to solve this problem.

What is the possible role of Japan and Jetro in speeding up Indonesia's revival?

Indonesia has capital-intensive industries such as the automotive industry, labor-intensive industries such as the textile industry, and resource-based industries like the palm oil industry, but you lack the supporting industries.

Supporting industries are then very important.

Jetro has worked in this field for a long time. We have brought supporting industries to Thailand, small and medium-sized enterprises to support industries in Malaysia.

We have the so-called "Supporting Industry Promotion Planning", which we will use to examine the present supporting industries in Indonesia. This examination will begin in spring and be finished in October.

In October, we will work with the Ministry of Industry to hold an exhibition where Japanese carmakers will come and display the parts and materials they need.

During the event, domestic supporting industries will be able to discuss and show the carmakers which parts they can produce locally. Hopefully, they will end up getting business contracts.

We also want to improve the technical levels of local supporting industries. We will have local engineers trained in Japan. We have done this in Thailand and Malaysia. We have the know-how and experience to allow us to support Indonesia's supporting industries.

Indonesia has been assembling cars for the past 30 years, but the country is still unable to build its own automobile. Is there something wrong with the process of transferring technology?

Automobile manufacturing requires many parts, up to 30,000 parts. It is very difficult to produce these parts. Manufacturers purchase those parts and assemble them into a car.

In Thailand and China, they do not produce parts by themselves. They import the main parts from Japan and the rest are produced locally in joint companies.

Later on, local parts makers, for example in China, produce and supply components for the cars, but essential elements are still imported.

Indonesia does not have such assemblers while parts made here are also low in quantity. Therefore, we will bring out small and medium enterprises in your country to become supporting industries in producing parts.

China has been able to improve its exports from basic manufacturing products to higher quality goods. Why has this not happened in Indonesia?

The two countries are different.

Indonesia used to be rich in natural resources such as oil and gas, and foreign investors came to invest in that sector. But after the 1997 financial crisis, your economy stagnated.

The reform movement following Soeharto's downfall has made the economy and investment climate even worse.

As for China, after its 1992 economic reform it has prepared conditions to receive investment from overseas, such as preparing low labor costs, tax exemptions, tax incentives for investors and many types of government support, which resulted in foreign direct investment significantly increasing in the mid-1990s.

After the crisis, China's economy was not good either. But entering the new millennium, its economy improved and the country joined the World Trade Organization.

Indonesia, after seven years of stagnation, is returning and enjoys more than 4 percent GDP growth, although this has greatly depended on consumption. Considering your high level of unemployment, you need much higher economic growth, which will require more investment.

Indonesia and Japan had a joint study group assess possible free trade agreement negotiations. Do you think the study will be followed by actual talks?

I can't tell immediately, but ministers from both countries are discussing the issue. However, Japan already has ongoing FTA negotiations with the Philippines, Malaysia and Thailand and we will soon have agreements. Under such circumstances, I believe Indonesia will also enter negotiations.

Why would Japan want an FTA with Indonesia, because trade-wise it would benefit Indonesia more than Japan?

Both sides (will benefit). If you reduce your import tariffs, it will be good for Japanese exports. If Indonesia, under an Economic Partnership Agreement, deals with the issues of intellectual property rights and the harmonization of industrial standards, more Japanese investors will come.

Will increased liberalization include agricultural products?

I hope so.

The Japanese population is falling and it is hard to find new farmers.

Given this, it is difficult to maintain our self-production ratio. This is my personal opinion.

In the future, we have to liberalize some of the (farm) products or we have to cooperate with countries like Indonesia, where we can use our technology on Indonesian farms. Otherwise, we will have to consider importing farmers.