Prospects for exports to the enlarged EU

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.