Reduce transaction costs to boost exports: Experts

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)