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.