Services Trade Liberalisation: Observations on Indonesia

Trade liberalisation has never been a popular policy in Indonesia despite its economic advantages. In contrast, protectionist policies are often believed as a good way to achieve the country’s national priorities. Take for example one of the Indonesia’s priorities to be self-sufficient in food. Import ban is seen by many Indonesians as a good policy to assist farmers. It might be partially true. However, according to Professor Peter Warr of the Australian National University, such a ban will reduce the availability of imported rice and therefore increase the domestic price. Who’s the most affected? Professor Warr suggests “the households for which rice is the highest proportion of their budgets – the poorest consumers. This includes not only the urban poor but also most of the rural poor, a surprising majority of whom are net buyers of rice.” In such a case, policy instruments should have been better targeted to assist the poor (Raskin or ‘rice for the poor’ might be more effective to directly impact on the poor) than a blunt trade instrument in addition to improved productivity.

How about trade in services?

Whilst the progress of multilateral or regional trade agreements seems to be focused on manufacturing and agricultural sectors, there has been a proposal on a services-only agreement. If such an agreement is made, how will Indonesia fare in the global market? Its relatively high annual growth rate of share of trade in services in total GDP; at around 6-7% per annum suggests that services sectors play a very important role in the economy. Yet, challenges with the quality of human capital and the lack of infrastructure development raise concerns over the country’s competitiveness in the global market.

What is the Indonesian government approach to services trade liberalisation?

Indonesia has been quite actively engaged in discussions on services trade liberalisation at both unilateral and regional/multilateral forums. For example, in a recent press conference on Indonesia-Australia Comprehensive Economic Partnership Agreement with Australian Trade Minister Craig Emerson, Indonesian Trade Minister Mari Pangestu explained the inclusion of services in Indonesia’s agenda:

This is a Comprehensive Economic Partnership Agreement which is going beyond trade in goods. It has investment; it has services. It has many other components, especially the economic cooperation component which will ensure that this is a win-win agreement.

The Indonesian government has also shown its good initiative to involve the business communities particularly KADIN (Kamar Dagang dan Industri Indonesia or the Indonesian chamber of commerce and industry) in the preparation for trade negotiations.

In regard to the government’s approach to address the ‘within economy’ challenges, according to Bachrul Chairi, Trade Minister’s expert staff for diplomation (15/5/2011),

“[Services trade liberalisation] does not necessarily mean we [simply] open our economy up. It puts more emphasis on how to make a regulation so that we can gradually and systematically introduce more competition in services sectors”

Mr Chairi explained that as the first step, the government will observe the potentials of differing services sectors across provinces. In a region where a specific services sector has been quite open, for example tourism in the eastern part of Indonesia, the government would welcome the inflows of foreign investors. For services sectors which have not achieved their optimum potentials, the Indonesian government will provide assistance.

Challenges

In addition to low quality of human capital, the lack of infrastructure is again and again said to be a major challenge for Indonesia. It is very critical that according to Senior Economist Thee Kian Wie, if Indonesia can tackle infrastructure issues (and corruption), Indonesia can join the ‘BRIC nations’ ( BRIC refers to Brazil, Russia, India and China highlighting the increasing importance of emerging economies who are experiencing rapid economic growth).

Multilateral forums such the World Economic Forum often provide opportunities for Indonesia to learn from other countries about infrastructure development. Whilst the lack of infrastructure can impede trade in services, trade liberalisation may stimulate the government to opt for domestic reform. An example is through Indonesia’s involvement in the CER-ASEAN forum which serves as a platform for economic engagement amongst ASEAN, Australia and New Zealand. Speaking at the CER-ASEAN Integration Partnership Forum in Kuala Lumpur Malaysia (25/6/2011), Professor Christopher Findlay of University of Adelaide stated:

A key lesson from CER is the value of a wide-ranging commitment to reform, including commitments to unilateral liberalisation, which helped public acceptance of particular integration initiatives since they could be seen as an extension of a domestic reform program.

According to  Messerlin and Zedillo (2004), the effect of service sector reform may positively  impact on the capacity to remove bottlenecks to growth in the infrastructure sector in addition to the reform’s impacts on competition, market scale, diversity, lower prices and higher quality.

Next Steps

Much needs to be done to get a better idea of how to reform the services market ‘gradually and systematically’ , as suggested by Trade Minister’s expert staff Bachrul Chairi, and what the impacts of such a reform on the domestic economy. This requires contribution not only from the government in terms of designing a ‘blue print’ of services industry but also research and business communities to assist the government by providing empirical evidence on the impacts of trade in services on the Indonesian economy and suggesting various options that the government should consider.

The biggest challenge for the government is to design a strategy to ensure socially and economically beneficiary progress in services sectors. Taking lessons from China, an article by Professor Christopher Findlay, Minister Mari Pangestu and Roy Chun Lee concludes that China’s experience to date in services sectors including financial, transport, telecommunication services shows the importance of distinguishing between key elements of the reform process.

China’s reform includes a series of steps. The first step in China has usually been to deregulate the domestic market. Indonesia seems to move to a similar direction, for example with its telecommunication industry.  The industry has improved substantially after being deregulated as service providers are let to compete giving consumers the most benefit from competitive prices and a full-range of products.

The second stage of China’s reform has been to reduce the extent of discrimination against foreigners. Indonesia’s involvement in unilateral, regional and international forums provides solid evidence of its commitment to remove trade barriers against foreign investors and producers. This stage normally involves a schedule of steps, not an immediate movement to full liberalisation.

The term ‘a schedule of steps’ shoud be emphasised. The Indonesian government should clearly set  its gradual targets including timeliness and some observable measures of achievements. Perhaps the government has done this but many of us might not know. Therefore, explaining to the public the exact steps or targets that the Indonesian government aims at is crucial to receive public support. Also, uncertainty normally puts investments on hold.

On the other hand, once information about the government’s approach becomes more and more publicly available, this additional ‘social control’ challenges the government to ensure that they can achieve the targets being set. Failure in achieving targets not only would result in delay to further economic progress and integration with its trading partners but also may send a negative signal to the investment market about the credibility of the Indonesian government.

This article is prepared by Risti Permani.

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Filed under Economic Integration, Indonesia, Infrastructure, Services, Trade

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