Market stumps govt
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.