Reduce transaction costs to boost exports: Experts

JAKARTA (JP): Economists said yesterday that trade transaction costs must be reduced if the country is to improve the competitiveness of its exports.

"Problems like transaction costs are escaping our attention and are already hurting our economy, especially exports," Fuad Bawazier, the Jakarta chapter chairman of the Indonesian Economists Association, told journalists after attending a lecture at the University of Indonesia.

He said the government is driven to boost the country's exports of goods but has ignored increasing transaction costs in the form of insurance fees, freight costs, financial charges, information and search costs, standards as well as property rights.

Fuad, who is also tax director general, noted that while Indonesia has enjoyed a trade surplus for many years, it continuously suffers deficits in current accounts, which include trades in both goods and services.

In the last 1995/1996 fiscal year, for example, Indonesia enjoyed a trade surplus of some US$5 billion but suffered a current account deficit of $7 billion.

The government predicts that the current account deficit for the current (1996/1997) fiscal year will widen to $8.7 billion.

"This means that we bear all the transaction costs, which, on the other hand, are enjoyed by our trading partners," Fuad said, adding that transaction costs account for between 15 percent and 20 percent of Indonesia's total international trade.

Fuad explained that Indonesia's exported goods are usually sold in importing countries for prices that are four to ten times higher than their production costs.

"That makes our export products less and less competitive in the world market," Fuad said after attending a lecture on international transaction costs by John Adams from the economics department of Northeastern University in Boston, Massachusetts.

Fuad suggested that Indonesian businesses focus not only on making their production lines more efficient but on reducing freight charges, insurance rates, banking fees and other transaction costs.

"Efficiency is deadly important, but it is not enough. We must be smart in dealing with international trade," Fuad said, adding that the Indonesian government and businesses should oppose any measures introduced by developed countries to inflate transaction costs.

John Adam pointed out that Indonesia, along with the more than 120 countries grouped in the World Trade Organization, has tried to reduce tariff and non-tariff trade barriers but failed to deal with the transaction costs that hinder trade growth.

Reduction

He suggested that governments in developing countries, like Indonesia, spearhead the effort to reduce transaction costs because businesses in those countries, many of which are small and medium size, are not capable of doing so.

Many countries are involved in multilateral efforts to reduce trade impediments, but only the countries that are successful in reducing transaction costs will become champions of international trade, said Adams.

In the late 19th century, he said, total exchange costs added around 50 percent to production costs, while the level was closer to 35 percent in the beginning of this century.

"Today the level of transaction costs remains high. If somebody said that the level was below 15 percent I would be very surprised."

Adams explained that international transaction costs include transport charges and risks; financial charges and risks; information and search costs; weights, measures and standards; property rights and contract enforcement as well as languages and communication.

"Language does matter. But economists often underestimate the significance of language and communication in framing market and exchange behavior. Unless you speak in the same language, you will face difficulties in trading," Adams said.

He noted that the most expensive element in transactions costs is information and search costs. "Unless you get the right information you will not be able to sell your products abroad."

Standards, on the other hand, can facilitate trade, if most countries use the same standards. However, when they employ different standards they will inflict additional transaction costs.

Adams warned that such standards can also be used as non- tariff barriers by those who want to protect their domestic markets from imported products.

As transport charges get cheaper, Adam said, freight insurance fees could inflate overall freight costs and make transaction costs higher than ever.

As for financial charges and risks, innovations in banking and financial intermediation have helped bring down the costs of financial services. However, in the absence of a true world currency and accounting unit, traders are compelled to hedge themselves against exchange rate fluctuations, which means higher transactions costs. (rid)