1. M. Chatib Basri Institute for Economic and Social Research Faculty of Economics University of Indonesia Keeping Trade Policy Open: The case of Indonesia

2. 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

3. Question to be addressed  How conflict over trade policy takes place in Indonesia?  How to keep trade policy open?

4. Current trade performance

5. Exports performance: mainly driven by commodity prices Constant pricesCurrent price Price effect Growth 90- 96 96- 06 Categories 199019961998199920042006* 90- '9696-06 1990- '96 1996- '06 Oil/Gas13.115.114.414.311.19.32.4-4.78.46.2 6.010.9 Rubber0.91.41.61.51.92.38.45.1 18.79.2 10. 34.0 Coffee & Cocoa0.70.9 1.34.64.1 12.94.2 8.40.1 Minerals2.14.311.25.48.910.1 13.08.8 19.414.0 6.45.2 Copper0.41.92.12.22.02.528.73.0 27.812.0 9.0 Nickel and Tin0.40.50.60.51.01.36.29.1 4.914.3 -1.35.1 5

6. Constant pricesCurrent price Price effect Growth 90- 96 96- 06 Categories 909698990406* 90-'96 96-06 1990-'96 1996- '06 Total non- oil/gas11.133.2101.155.458.368.020.07.4 26.36.8 6.4-0.6 Labor intensive manufactured exports Textiles & footwear2.28.07.811.010.312.123.64.2 23.31.6 -0.3-2.6 Furniture0.20.80.51.41.8 22.48.5 23.55.6 1.0-2.9 Total-labor intensive manuf.2.58.88.312.412.113.923.54.7 23.32.1 -0.2-2.6 6

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

8. Structure of tariff Tariff Weighted tariff* Mean Std. DevMean Std. Dev Sector: agriculture4.143.672.285.20 mining3.832.131.972.44 manufacturing7.2911.333.735.01 Goods: consumer goods10.8416.198.537.33 intermediate goods5.725.613.624.07 capital goods3.485.421.923.68 *Weighted by import value Source: MOIT Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

9. Tariff has declined and dispersion has improved Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

10. 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

11. 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

12. 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

13. Case of Rice: Poverty and rice price Source: Basri and Patunru, 2006; World Bank 2006

14. 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

15. 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

16. 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

17. Thank you

18.  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

19.  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

20. Logistics Costs in Indonesia LPEM/JBIC 2005.9.1220

21. 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

22. Appreciation in the RER increase the demand for trade protection Shock To Respons e In Cumulative IRF up to 1 period4 periods8 periods DLPOILDLAVT 0.76 0.41 0.21 DLRERDLAVT-1.15-0.51-0.82 Source: Basri and Hill, 2004