Speed up reform, avoid return to protectionism

Speed up reform, avoid return to protectionism

Imelda Maidir, Centre for Strategic and International Studies
(CSIS), Jakarta

The government of Megawati Soekarnoputri throughout this year
has kept the IMF-supported program on track, but macroeconomic
targets fared better than structural reforms. The process of
reforms is being reverted to protectionism. More recently, there
have been considerable delays in the removal of tariff control
hiding behind protectionist barriers and in the privatization of
state assets and enterprises. Indonesia's new democracy has added
to the delays, and in this, the legislature has also prolonged
the process of reform.

Moreover, the public, including workers, have added to the
pressure in the attempts at policy reform made by the government.
The Semen Gresik sale, for example, was canceled following
regional pressure against the inclusion of two operating units of
Semen Gresik, Semen Padang and Tonasa, in the bid, and in turn,
the Semen Gresik workers' demands. With an injection of at least
US$ 530 million, about 85 percent of the privatization target
this year, the Semen Gresik deal would have subsequently enabled
the government to raise its capacity.

It has become clear that the full benefits of reforms will not
be realized until the country has adopted a more assertive
competition policy. This policy, however, should fit hand-in-
glove with other measures to liberalize the economy by completing
the vigorous deregulation of cross borders and entry barriers, as
well as streamlining.

Trade liberalization in the 1990s had already subjected the
manufacturing sector to heightened competition, but there are
still inconsistencies and non-transparent means of protection.

Raising import tariffs on sugar and other main farm
commodities could indeed help protect local farmers from unfair
competition resulting from dumping practices by foreign
producers. This trade policy instrument alone is not effective in
decreasing the country's dependence on imports. So far the local
sugar industry is only able to meet 53 percent of local
consumption.

Another case in point is partial liberalization and reform,
particularly in the service sector. While law No.20/2002, a
reform designed to create competitive wholesale and retail
markets for electricity was enacted on late September, primarily
to ensure sustainable growth of the power sector, the remaining
control over distribution became a non-tariff barrier to
competitive service.

Customers are still not allowed to have the choice of using
competitive retailers or continuing to procure services from
their local utility at a regulated rate. Likewise, the law does
not mention whether consumers will eventually be free to choose
any retail agent from whom they will buy electricity.

Competitive electricity markets cannot work properly if
consumers are completely insulated through regulations, from
variation in wholesale or retail market prices. Similarly, the
experience of California in America may be regarded as a partial
liberalization and proved to be unsustainable. In the California
case, the regulator allowed for the wholesale price to vary
according to market supply and demand, but put caps on retail
prices.

However, the introduction of competition has to be preceded by
a wide range of appropriate sequencing to ensure that, once
introduced, the competition will work as intended. A hasty
introduction of competition without all the necessary
institutions in place may be harmful for the industry itself.
This has been the case in the State of Victoria, Australia, where
an introduction in its Electricity Supply Industry (ESI), at
least initially, faced problems partly because there was no
liquid electricity market to enable efficient transactions.

Regulatory uncertainty during or immediately before the
transition may have a negative impact on investment, as potential
investors would delay their decisions until the new framework has
been defined. Regarding the long-standing regulatory process in
the "duopoly" of the telecommunication sector, the government
seems to lack efforts to ensure the policy to liberate the
industry. Should the deal not go through, not only will Telkom
lose the opportunity to get a much larger share of the cellular
phone industry, but Indosat will, in turn, enter full throttle
into the local fixed line industry, while the government will
miss the opportunity to foster good competition.

There is much work to be done at home in order to liberalize
trade and investment, not to mention curbing the rampant
smuggling that might be considered anti-competitive. According to
the Association of Indonesian Electronic Producers, the different
taxes levied on electronic goods, now reaching 52.2 percent, has
stunted the growth of electronic producers.

In addition, local producers are finding it difficult to
compete with cheaper goods smuggled into this country. The Sony
Corp. case illustrates that these practices were a turn-off for
foreign investment. Accordingly, it is important to remove
unnecessary administrative barriers that hinder the speedy
completion of reforms.

However, experience also shows that introducing greater
competition, whenever they have materialized, has a large
negative impact on the public perception of reforms. Thus,
governments have a key role during the transition in ensuring
that the appropriate safeguards are in place to sustain the
reliability of these reforms, and they also have a great
responsibility in minimizing risk.

Finally, when market problems do emerge, government officials
should act quickly and decisively to fix the problems.