Market stumps govt
The Indonesian government has often admitted to being flabbergasted by the market because what it reckons is often quite different from what the market forces say. The industry ministry conceded last week that it could not understand and even felt confused by the complaints about a shortage of newsprint. The government was also painfully surprised by the totally unexpected shortage of cement in the second half of last year and of cooking oil in the first quarter of this year.
What really happened (which the government obviously does not want to acknowledge) is that it has been beaten at its own game by the market forces.
The problem, we think, was caused by the market distortions created by the government itself as it tried to regulate the market and prices of commodities whose supplies are controlled by private companies. The market of those goods also was not widely exposed to import competition until recently.
Distortions in the cement market, for example, occurred because of the government intervention into the price formation. However, since cement import tariffs last year were still relatively high and new investors encountered barriers in entering the industry, the cement companies could easily rebuke the government by "manipulating their supplies" to jack up prices above the government set price references. Even when the import tariff on cement was reduced to 0 percent a few months after the engineered shortage, it took some time before the measure had a significant impact on the domestic market. The reason, of course, is obvious. Not many companies have developed ties with suppliers overseas, let alone domestic distribution networks. Hence, it is the cement producers themselves who are in the best position to import. And, of course, import competition is naturally against their best interests.
Before May 23, 1995, the cooking oil market was also distorted by the rules on exports and the requirement for state plantation companies to sell crude palm oil to private cooking oil mills at government-mandated prices. Since the import tariffs on other kinds of cooking oil were high and the entry into the cooking oil industry was hindered by the requirement to build new mills and to open oil palm estates of their own, the cooking oil producers, like the cement companies, could easily beat the government by manipulating their supplies to raise the prices.
The newsprint market also has been distorted by the barriers blocking the way into the industry and by the way the newsprint producers have been "bullied" by the Association of Newspaper Publishers into agreement on prices. It also seems strange that while most newspapers often criticize rent-seeking business practices, the association itself created one of its own in the form of PT Inpers which acts as the middleman between newspapers and newsprint producers.
The government would naturally deny the existence of any entry barriers. But the government often does not realize that entry barriers do not always appear in the form of regulations or the stipulation of particular business areas in the negative list of the Investment Coordinating Board. They could take the form of protracted processing of permits or strong lobbying by powerful businessmen, who are afraid of new competitors, in order to make things very difficult for new investors. The problem here is that the evaluation of investment project proposals often is not transparent and decisions are often made at the personal discretion of the officials in charge. Moreover, potential investors have no recourse for redressing their grievances in case their project proposals are "held up" somewhere in one or more of the multiple steps of the licensing procedures.
The most valuable lesson that can be drawn from those bitter experiences is that the government should not try to manage by regulating the market and prices of commodities whose supplies and distribution are controlled by the private sector. Instead of trying to rule the market, the government should unleash import competition on domestic producers and see to it that new investors do not encounter any barriers when entering particular industries. Smooth import flows and easy entry into the various industries to increase production capacity will prevent dominant producers from abusing their market power.