Towards a free trade nation
The following is an excerpt from a paper by Ali Wardhana presented at the seminar of "Indonesia and the World at the Beginning of the 21st Century" jointly organized by The Jakarta Post and the Centre for Strategic and International Studies on Oct. 17 in Jakarta in connection with the 50th anniversary of Indonesia's independence. This is the first of two articles.
JAKARTA (JP): Indonesia began the process of securing the gains from integration with the global economy a long time ago. For twenty five years, for example, we have had an open capital account. The lack of exchange controls meant that we could benefit from the growing and increasingly sophisticated international capital markets. The results are reflected in the booming foreign direct investment figures, and in the more recent inflows of foreign funds into our stock exchange.
Integration with the world economy accelerated in the mid- 1980s, when we took actions to open our domestic market to international competition, and to encourage firms here to compete in export markets. By and large, these actions were independent of international trade or investment agreements. We reduced tariffs, non-tariff barriers, and investment restrictions unilaterally and voluntarily because doing so was in our interest; because we recognized the benefits of free trade and investment for our economy.
We were driven especially by the need to diversify our exports. At that time we were heavily dependent on oil and gas, which made up over three-fourths of our foreign exchange revenue. The success of the effort is apparent. In 1984 exports of manufactures amounted to less than US$2 billion and accounted for less than 8 percent of total exports. By 1994 less than one- quarter of our foreign exchange came from oil and gas. Manufactured exports had risen to over $20 billion and accounted for more than half the total value of exports.
Along with the boom in manufactured exports, the structure of our economy underwent a transformation. In 1983 manufacturing accounted for just 13 percent of GDP, while mining accounted for 21 percent and agriculture for 23 percent. By 1994, manufacturing's share had risen to 24 percent, while mining's share had fallen to 8 percent and agriculture's share to 17 percent. Less than half of labor force is currently employed in agriculture, a major milestone in development. As a result of this progress, Indonesia is well on its way to becoming a newly industrialized nation.
Although Indonesia began the journey towards free and open trade and investment long before the Bogor Declaration or the Uruguay Round, and will continue on this journey with or without progress on international agreements, building through international agreements has many advantages.
One advantage is that it is obviously better for us, and easier, if other economies move toward free trade and investment at the same time as us. As the Economist magazine recently noted, "thinking of free trade as a concession to others, rather than a boon for one's own citizens, is a cardinal error of trade diplomacy." Nonetheless, getting together with like-minded economies to discuss ways to lower trade barriers simultaneously magnifies the gains for all concerned.
Also, important, regional agreements can be especially helpful in our efforts to cooperate to counter some of the risks associated with the global economy. We believe that like-minded countries that trade intensively with each other can cooperate to reduce the instabilities that can emerge.
For all these reasons, we are committed to the progress of APEC and AFTA, as well as the WTO. Since it is so timely, with the Osaka meetings coming up soon, let me turn to APEC.
The decision taken at last November's APEC meeting in Bogor to realize free and open trade and investment in the Asia-Pacific no later than the year 2020 was potentially the most far-reaching of all recent international economic agreements. Although the various rounds of the GATT involved more nations than APEC and made major gains in reducing trade barriers, the GATT never had the goal of establishing free trade and was not much concerned with investment. If the Bogor vision can be translated into reality, and in particular if concrete and meaningful measures can be agreed upon for moving toward free trade and investment well in advance of the twenty-five year deadline, APEC will live up to its historic potential. Initiating this process will be the challenge for next month's APEC Economic Leaders meeting at Osaka.
Not only must we make progress on the steps we will take to implement the Bogor Declaration; we must do so while maintaining consistency with the fundamental APEC principle of "open regionalism." The Bogor Declaration explicitly rejects the notion of creating an inward-looking trading bloc, and asserts that barriers will be reduced not just among APEC members "but also between APEC economies and non-APEC economies."
Encouraging the principle of "open regionalism" is important for Indonesia, as some of our major export markets are in Europe and North America. Adherence to this principle helps limit the trade diverting tendencies of regional trade blocs, such as the EU and NAFTA. Maintaining "open regionalism" encourages others not to build exclusionary trade blocs.
Indonesia's commitment to an open world trading system can be seen from the non-discriminatory way that we have been lowering our own tariffs. We have adhered to the most favored nation principle in all our deregulation packages. Within AFTA, we have supported the creation of a free trade area, rather than a customs union or a common market so that there is no risk of AFTA's becoming inward looking, with a common external tariff to keep out goods from the rest of the world. In line with this, our most recent deregulation package generally followed the AFTA schedule, but made the benefits of tariff reductions available to all, members of AFTA and non-members alike. We will continue to urge other APEC members to reduce their trade and investment barriers in a way that supports the world trading system.
Not all of the issues that APEC must eventually resolve can be settled next month at Osaka. However, Indonesia will seek substantial progress in order to live up to the visions of the two previous APEC Leaders meetings -- at Seattle and Bogor -- and to prevent APEC from losing its momentum.
Indonesia can also support the APEC process by living up to the principles embodied in our existing international agreements. We cannot resort to the easy -- but costly -- policies of increasing barriers to import competition when we have, or want, an industry that is not efficient by world standards. On the other hand, our commitment to free and open trade and investment may require special attention to policies that help small and medium businesses, including small retailers, adjust to international competition.
Our commitment to a fair world trading system also means that we cannot subsidize our exports. Consequently, we cannot counter high costs caused by inefficiency at the firm level or due to government red tape. This will force us to push ahead with deregulation, to reduce the number of bureaucratic hurdles that a business faces in establishing itself and in its day-to-day operations. But it also means that we will have to do a better job in carrying out those functions that government must perform.
The growth of a rules-based world trading system also prevents us from being inward looking with respect to investment. World Trade Organization rules restrict "trade related investment measures". Under these rules, for example, we are committed to eliminate domestic content requirements. This will again mean that we will not be able to rely on administrative solutions that encourage inefficiency. Rather than telling investors what they must buy and from whom, we will have to make our products sufficiently attractive that firms will want to buy them. In fact, we know that firms such as shoe exporters are constantly seeking local suppliers of their inputs; this, without government pressure.
Sometimes they are constrained by the costs and quality of some local supplies. We believe that domestic suppliers will increase their efficiency and their quality as protection disappears. But again, government must also stop burdening these suppliers with extra costs in the form of unnecessary regulations and in the form of delays and costs in obtaining tax and tariff rebates, for example.
The growing mutual commitments within APEC will lead us toward more open policies on foreign investment. The vision of a region open to investment flows will eventually mean that our procedures for approving foreign investment will have to be transparent. The rules will have to be clear and open for all to examine. In fact, we will probably find ourselves considering the implications of growing competition for foreign investment, and the actions of a number of other developing countries in removing the hurdle of approval for all, or at least for broad classes of foreign investment.