Prospects for exports to the enlarged EU

Tony Agus Ardie, Jakarta

Pessimists may see the May 1 enlargement of the European Union, with ten new members -- eight Central and Eastern European countries along with Cyprus and Malta -- as a threat to exports from Indonesia and private and official capital inflow to Indonesia, because the 25-member EU will become more inward- looking.

The ten new members -- which are way less developed than the older EU countries -- would become favorite places for new investment from Western Europe, as their labor costs and market potential are about similar to what Indonesia can offer foreign direct investors.

As the enlargement turned EU into a market of 450 million people, its 25 member countries will naturally prefer trading with each other, due either to the benefits of preferential treatment or geographical proximity. Non-oil exports from Indonesia to the EU totaled US$7.6 billion in 2003, up slightly from $7.5 billion in 2002.

This is indeed a very serious challenge for Indonesia, especially for the textile and garment industry -- a major foreign exchange earner with annual exports of more than $7 billion.

Since the global agreement on textiles and clothing will expire in December, Indonesian exporters -- which have, so far, been enjoying virtually captive markets in developed countries under the quota system -- will have to compete openly on the international market, with such highly competitive suppliers as China, India, Vietnam.

The virtual absence of new investment in the textile and clothing industry over the past eight years has made Indonesian products much less competitive.

But, is the outlook so gloomy? Not really, especially in so far as the products of local resource-based small and medium- scale enterprises (SMEs) are concerned.

A study conducted by the Yogyakarta Task Force for the Empowerment of SMEs in Austria, Slovenia, Germany, France and Britain between January and February identified market opportunities for a wide variety of products from Indonesia.

Indonesian companies, for example, still have big market opportunities in the less-developed members of the EU, notably Cyprus, Malta and the eight Central and East European countries -- Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia.

In fact, Cyprus and Slovenia, thanks to their geographical location, could become a good beachhead for Indonesian exporters of processed food, artifacts, clothing and a wide variety of other manufactures to tap markets in Africa, the Middle East and Eastern Europe.

As the coordinator of the study team, I followed up the team's findings with the Cyprus high commissioner to Indonesia (also to Australia and South Korea), Achilleas Antoniades , at a meeting in Jakarta last month and got a very positive response.

What is urgently needed, though, is the actual implementation of the political commitment to develop SMEs and empower the grassroots economy, through integrated technical assistance in production and marketing and easy access to soft-term loans.

Indonesia needs to strengthen financial and business- development service institutions which serve SMEs, and one of these institutions may take the form of clusters of industries, or single-industry clusters focusing on a specific group of products

Single-industry clusters in leather or agribusiness -- such as the integrated shrimp farming of Indokor Indonesia, which has been implemented in Yogyakarta -- can generate the localization of economies arising from specialization and focus that extend to suppliers, labor markets, infrastructure and logistics.

Clusters of industries could reduce the costs of transportation and significantly improve supply-chain management. This in turn could decrease the costs of distribution and other logistical arrangements that usually take up more than 15 percent of free-on-board prices of export commodities in Indonesia.

Superior logistical capability in clusters of industries allows companies to revamp their supply-chain management to ensure the smooth movement of goods to the final users.

Clusters of industries also enable assemblers and big retail chains to gain maximum cost savings by rationalizing when and where they want to procure products and how they organize production.

The importance of SMEs has again enjoyed plenty of lip service, especially in the run up to the presidential runoff, yet government policies remain overwhelmingly in favor of large industries and conglomerates. Consequently, most banks, including state banks, while readily financing big deals, avoid dealing with SMEs.

Whoever takes over the national leadership later in October should realize that, like in most other countries -- even in such capitalist nations as the U.S. -- the development of SMEs can be effective only with strong political commitment to the implementation of integrated programs covering their production, marketing and financing aspects.

The writer is coordinator of the Yogyakarta Task Force for the Empowerment of SMEs and also chairman of the Indokor Indonesian Group. The article was a revised version of a presentation Tony made at a two-day workshop on the strategic impact of the enlarged European Union organized by the Ministry of Foreign Affairs in Yogyakarta last week.