M. Chatib Basri Institute for Economic and Social Research Faculty 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 Constant pricesCurrent price Price effect Growth Categories * 90- ' ' '06 Oil/Gas Rubber Coffee & Cocoa Minerals Copper Nickel and Tin

Constant pricesCurrent price Price effect Growth Categories * 90-' ' '06 Total non- oil/gas Labor intensive manufactured exports Textiles & footwear Furniture Total-labor intensive manuf

Trend of trade protection: Indonesia’s protection is low Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

Structure of tariff Tariff Weighted tariff* Mean Std. DevMean Std. Dev Sector: agriculture mining manufacturing Goods: consumer goods intermediate goods capital goods *Weighted by import value Source: MOIT Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

Tariff has declined and dispersion has improved 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 Raising wages and rigidity in the labour market  High cost economy High cost economy  Appreciation of rupiah Appreciation of rupiah  High commodity price in the international market tend to push government to impose export tax 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 Coal (has been phased out)  Case of CPO Case of CPO  Case of natural gas Case of natural gas

Unilateral, multilateral or FTA?  Unilateral: strong pressure for trade protection  Multilateral: prospect of WTO and DDA ?  FTA: - 2 nd 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 Source: LPEM, 2006

 Cost to handle labor problems has increased from 3.7% to 4.6% of production cost  About 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

Informal Payments to Government Officials  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 21 Source: LPEM, 2006

Appreciation in the RER increase the demand for trade protection Shock To Respons e In Cumulative IRF up to 1 period4 periods8 periods DLPOILDLAVT DLRERDLAVT Source: Basri and Hill, 2004