M. Chatib Basri

Institute for Economic and Social ResearchFaculty of Economics University of Indonesia

Keeping Trade Policy Open: The case of Indonesia

Outline

Questions to be addressed Indonesia’s export performance Trend of trade protection Factors determine the change of

trade protection over time How to keep trade policy open

Question to be addressed

How conflict over trade policy takes place in Indonesia?

How to keep trade policy open?

Current trade performance

Exports performance: mainly driven by commodity prices

5

Constant prices Current price

Price effect

Growth Growth Growth Growth

90-96

96-06

Categories90 96 98 99 04 06*

90-'96 96-061990-'96 1996-'0

6    

Total non-oil/gas 11.1 33.2 101.1 55.4 58.3 68.0 20.0 7.4 26.3 6.8 6.4 -0.6

Labor intensive manufactured exports                  

Textiles & footwear 2.2 8.0 7.8 11.0 10.3 12.1 23.6 4.2 23.3 1.6 -0.3 -2.6

Furniture 0.2 0.8 0.5 1.4 1.8 1.8 22.4 8.5 23.5 5.6 1.0 -2.9

Total-labor intensive manuf. 2.5 8.8 8.3 12.4 12.1 13.9 23.5 4.7 23.3 2.1 -0.2 -2.6

6

Trend of trade protection: Indonesia’s protection is low

0 5 10 15 20 25

Mongolia

Chile

Indonesia

Philippines

Korea

Malaysia

China

Turkey

Brazil

Poland

Vietnam

Cambodia

Thailand

Mexico

1997

2002

average tariff in percent

Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

Structure of tariff

TariffWeighted

tariff*

  MeanStd. Dev Mean

Std. Dev

Sector:agriculture 4.14 3.67 2.28 5.20mining 3.83 2.13 1.97 2.44manufacturing 7.29 11.33 3.73 5.01Goods:consumer goods 10.84 16.19 8.53 7.33intermediate goods 5.72 5.61 3.62 4.07capital goods 3.48 5.42 1.92 3.68*Weighted by import valueSource: MOIT

Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

Tariff has declined and dispersion has improved

(1.8

%)

(39.

0%)

(20.

2%)

(12.

8%)

(13.

6%)

(11.

2%)

(1.5

%)

(1.0

%)

(21.

9%)

(46.

2%)

(15.

3%)

(13.

0%)

(0.4

%)

(1.9

%)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Duty free >0- 5 >5-10 >10-15 >15-20 >20-25 >25

Number of tariff lines

1998 2002

02468

10121416

Agric

ultu

re a

nd h

untin

g

Fore

stry

and

logg

ing Fi

shin

g

Coal

min

ing

Crud

e pe

trole

um &

…

Met

al o

re m

inin

g

Othe

r min

ing

Food

, bev

erag

es a

nd

…

Text

iles

and

leat

her

Woo

d an

d fu

rnitu

re

Pape

r prin

ting

and

…

Chem

ical

s

Non

-met

allic

min

eral

…

Basi

c m

etal

s

Fabr

icat

ed m

etal

pro

d.

…

Othe

r man

ufac

turin

g

1998 (average: 9.5%)

2002 (average: 7.2)

percent

Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

Trade reform pre crisis Combination of the drop in oil price and

the rupiah’s devaluation raised the price ratio of traded to non-traded goods, thus raised the profitability of all other non-oil traded sectors.

Technocrats won support from Soeharto The role of media, academic

Various contending groups in Indonesia’s trade policy

Ministry of Finance: tends to support trade liberalization

Ministry of Trade: tends to support trade liberalizaton

Ministry of Agriculture: tends to be protectionist Ministry of Industry: tends to be protectionist KADIN (Indonesia Chamber of Commerce): unclear Industry association, unclear Media: tends to be protectionist Academics: majority tend to be protectionist Fragmentation decision making process

Creeping protectionism? Raising wages and rigidity in the labour

market High cost economy Appreciation of rupiah High commodity price in the international

market tend to push government to impose export tax

Tend to blame the economic liberalization as the cause of economic crisis; economic nationalism

Case of Rice: Poverty and rice price

Source: Basri and Patunru, 2006; World Bank 2006

Trend of new export tax?

Case of Coal (has been phased out) Case of CPO Case of natural gas

Unilateral, multilateral or FTA?

Unilateral: strong pressure for trade protection

Multilateral: prospect of WTO and DDA ? FTA: - 2nd best solution for reform? - Rule of origin issues? - Low rate of utilization - Divert the focus from multilateral

How to keep trade policy open

Keep inflation low Reduce high cost economy: economic

deregulation Revise the current labour law The role of media, success story

Thank you

Severance payments and lay-off procedures are perceived as the most severe constraints Labor problems are more severe for export oriented firms and large firms

Percentage of Respondent reporting labor regulation to be severe and very severe contrains, by type of

regulation

7

7

9

9

9

10

15

25

28

8

5

7

11

7

6

11

20

23

0 5 10 15 20 25 30

Government Monitoring

Female workers regulation

Social security regulations

Regulation about using local worker

Foreign worker regulation

Overtime regulations

Minimum Wages

Laid off Procedure

Severance Pay

Round 3 Round 2

Source: LPEM, 2006

Cost to Handle Labor Problems as % of Production Cost

3.74.0

4.6

0.0

1.0

2.0

3.0

4.0

5.0

Round 1 Round 2 Round 3

%

Cost to handle labor problems has increased from 3.7% to 4.6% of production costAbout 35% of respondents stated that labor regulations reduce their firms’ competitiveness (slightly higher than the previous survey value of 30%)

Source: LPEM, 2006

Logistics Costs in Indonesia

LPEM/JBIC 2005.9.12 20

7.22

2.82

4.04

0.00 2.00 4.00 6.00 8.00

Input Logistics

In-houseLogistics

OutputLogistics

Actual Logistics Cost 7.22 2.82 4.04

Input Logistics In-house Logistics Output Logistics

Informal Payments to Government Officials

Bribes to Government Officials as % of production cost

1.7 1.81.6

0.0

0.5

1.0

1.5

2.0

Round 1 Round 2 Round 3

Informal payments to government officials have slightly declined Frequency of harassment visits by government officials remains unchanged:

on average firms are visited 15 times in 6 months the most frequent visits are from police/military

21Source: LPEM, 2006

Appreciation in the RER increase the demand for trade protection

ShockTo

ResponseIn

Cumulative IRF up to

1 period 4 periods 8 periods

DLPOIL DLAVT 0.76 0.41 0.21

DLRER DLAVT -1.15 -0.51 -0.82

Source: Basri and Hill, 2004