Our competitiveness eroded

Our competitiveness eroded

Indonesia's economic competitiveness has steadily been
weakening, even in natural resource-based industries where local
businesses are presumed to enjoy a strong comparative advantage.

Even in many farm commodities that do not require high
technology nor large amounts of capital, we are no longer
competitive. Witness how our supermarkets have increasingly been
dominated by fruit from countries whose labor costs are already
much higher than ours.

One may immediately point an accusing finger at major
industrialized economies as the United States and several
European countries, which have spent hundreds of billions of
dollars annually in price support for their farmers to enable
them to dump their surplus produce on emerging markets such as
Indonesia's.

That is true to a certain extent, and insofar as farm produce
such as corn, cotton and soybeans are concerned, dumping by
industrialized countries could be part of the problem -- one of
the main issues debated by the World Trade Organization in Geneva
last week.

Yet, one may still find it mind-boggling to comprehend as to
why our farmers cannot compete with rice, sugar, garlic and fruit
from suppliers such as Thailand, Taiwan, India and China. Even
our shrimp farmers have been complaining about fierce competition
from China.

But more worrisome are the short-sighted, ad hoc higher tariff
and nontariff barriers used by the government to address the
problem, notwithstanding that our economy is increasingly linked
to and benefits from the international market.

This, however, does not mean that our farmers do not need
protection from unfair competition from foreign suppliers. The
issue is the kind of protection and the institutional capability
to enforce it.

The cold, hard reality is that the government simply refuses
to admit that market-distortion policies, such as protectionist
measures, are never effective in a country with such a vast
coastline, a poorly equipped Navy and police force, and a customs
service that is perceived to be notoriously corrupt. Such trade
barriers, instead, create lucrative opportunities for collusive
deals between smugglers and corrupt officials.
The recent instances of textile, rice and sugar smuggling could
simply be the tip of an imports-smuggling iceberg.

The government should have fully realized why our competitive
edge has steadily been declining. Many studies and much research
have identified the problems.

Indonesia has performed very poorly in all international
ratings of economic competitiveness and always ranks much below
the other founding members of ASEAN. For example, in the 2004
Economic Freedom of the World report, which was issued by
Canada's Fraser Institute last month, Indonesia ranks only 86th
of 123 countries measured in terms of good governance, access to
sound money, freedom to trade internationally, regulations of
credit, labor and business, legal structures and security of
property rights.

Indonesia also ranked very low in both indices of the Global
Competitiveness Report 2003 which was prepared and issued by the
Geneva-based World Economic Forum last November. It was rated
66th of 102 countries surveyed in the growth competitiveness
index and 58th in the business competitiveness index.

These indices measure the macroeconomic environment, the
quality of public institutions and the use of technology, with
dozens of subcomponents. These factors are fundamental to sound
business development because sound macroeconomic policies create
an enabling environment for the creation of wealth at the
microeconomic level and boost the ability of companies
efficiently to create valuable goods and services.

The government should take a more strategic view of all the
weak aspects of our economy and realign its list of top
priorities with a focus on sound business environment to woo new
domestic and foreign investment.

What we badly need is direct investment and not short-term,
portfolio capital that is highly vulnerable to outward flight at
the slightest sign of trouble. It is direct investment that goes
into factories, utilities, equipment and other fixed assets,
which in turn create jobs. An economy can never be competitive if
its business units are not highly productive, but the
productivity of businesses is intertwined with the quality of the
investment climate.