New deregulation agenda

New deregulation agenda

The three-day conference on the deregulation of the Indonesian
economy co-sponsored by the World Bank in Jakarta last week
recounted the great achievements of the massive packages of
economic reform measures over the past 10 years, while also
charting out the next agenda of future reforms.

We cite here two of the most noteworthy issues discussed at
the meeting, which was held to commemorate Indonesia's 50th
anniversary of independence this year. The first is related to
the negative impacts of government-sanctioned monopolies and the
second to the emergence of private-sector monopolies and
oligopolistic practices.

Reports on sectoral and commodity studies presented by
Indonesian analysts and economists of the World Bank concluded,
among other things, that the pace of trade deregulation
(reduction of trade barriers) had slowed considerably since the
initial burst of reform initiatives from 1985 to 1990.

They noted pervasive restrictions on domestic competition
which hobbled the growth of progressive, efficiency-seeking
entrepreneurship. They identified the barriers as cartels, price
controls, entry and exit controls, exclusive licensing, public-
sector dominance and ad hoc intervention by the government. Some
restrictions were imposed by the government and others by trade
associations. Among the commodities studied were plywood, steel,
pulp and paper, garments, cement, sugar, sheet glass, wheat
flour, fertilizer, automobiles and cloves.

The consequences are obvious. In many industrial lines,
Indonesian companies have been paying much more for their raw
materials and intermediate inputs than they would have at
international prices. Naturally that has been eroding their
competitiveness.

The analysts came out strongly against the various forms of
private-sector anti-competitive arrangements which are sanctioned
and sometimes even enforced by the government. They cited the
adverse impacts of government ad-hoc intervention in favor of
particular business groups and of non-transparent transactions
between the government and selected elements of the private
sector.

These practices, besides causing economic inefficiency, have
also increased the levels of concentration in subsectors of
manufacturing as measured by the share of the top four companies
in total output. Using 1991 figures as the data base, the
analysts concluded that the level of concentration in Indonesia's
manufacturing industry averaged 47 percent. That was higher than
the average 36 percent concentration rate in the United States
which pursues a liberal economy.

We think, apart from the government-sanctioned monopolies,
that there is a major reason behind the increasingly pervasive
cartel-like or oligopolistic business practices. Put another way,
those practices are the side effect of the massive deregulation
measures that have increasingly been unleashing market forces.
The problem, though, is that the massive deregulation has not
been supported by rules to ensure open and fair competition or
sound business practices. In the absence of competition laws, a
business group can dominate more than 50 percent of the market of
a particular commodity and can abuse its market dominance at the
expense of new competitors and the consumers without any legal
penalties.

Such a market condition is obviously detrimental to
Indonesia's economy as whole in facing up to the increasingly
competitive international market and fulfilling the multilateral
trade rules under the World Trade Organization. Neither is such a
distorted manufacturing industry structure conducive for the
country's entering the ASEAN Free Trade Area by the year 2003 and
the Asia Pacific free trade in 2020.

All this, we think, is the main agenda of future reform
measures.