Doesn’t Always Take Two to Tango: Unilateral Trade Policies and Indonesia

The current obsession with trade negotiations (okay, maybe it’s mostly our obsession) may have obscured the fastest, often easiest way for governments to make their domestic economies more competitive:  governments can act on their own to create more favorable trade environments. 

In the past, many Asian governments were at the forefront of making unilateral changes to their domestic economies.  Singapore and Hong Kong, for example, slashed applied tariffs to zero absent external demands for them do so.  Others opened or liberalized sector after sector to promote inward investment or spur domestic competition.

But much of this unilateral spirit of reform appears to have dissipated.  Governments now prefer to wait to make changes until some foreign partner requests reform.  It may appear to be easier to make politically and economically hard choices with a foreign party to absorb some of the “blame” for any short-term pain. 

One government official said me a few years ago, “Yes, we know that a 2% tariff is really just a nuisance.  It probably costs us more to collect the tariff than the revenue it generates.  It is an administrative hassle for firms.  But if we get rid of it, what will we use as a bargaining chip when we engage in trade negotiations?”

I tried to argue that eliminating nuisance tariffs does not automatically mean that no one will do a free trade “dance” with you in the future.  Singapore did not get more than 20 active FTAs by stripping away 2% tariff levels for preferred partners in an FTA.  There is more to a trade deal than tariff reductions, after all, and win-win outcomes can be achieved in a whole range of sectors and issue areas.

One particularly promising area for unilateral reforms can be found in regulations.  For most companies today, the biggest headaches are not tariff levels or official customs procedures or registering for protection of intellectual property rights.  Instead, the hassle factors that are most pertinent to firms tend to be regulatory in nature.

Such regulations may include rules for licensing of all sorts.  Such rules may mean that you can import this item, but only if you first hold a valid permit for doing so or you may invest in a sector but only after appropriate licenses for operation are in place.   Other regulatory barriers could be rules that require goods be transshipped through only one port or only after inspection of paperwork or goods by specific ministries.

This is not to argue that regulations are not needed or necessary.  Government, as always, retains the right to regulate in the public interest and to safeguard the interests of human, animal and plant life and health. 

However, the thicket of regulations in many markets clearly extends well beyond what is strictly necessary in many countries around the region.

For example, nearly every firm that speaks to us can relate some good stories about nightmare regulations in Indonesia.  These range from the large to the small hassles, time and cost needed to try to comply with the rules.  The forest of regulations ensnares firms in nearly every sector and applies to both big and small companies.

The Indonesian government of Joko Widodo (Jokowi) has recognized some of the problems.  The National Development Planning Minister Sofyan Djalil just highlighted more than 2700 regulations and presidential and ministerial decrees that were “inimical to economic activity.” 

That is surely an impressive number of identified obstacles to trade and economic growth. 

Partly in response, Jokowi has begun rolling out a three-part package of unilateral economic reforms to tackle the problems of excessive regulation.  The first package was revealed with great fanfare last week.

It includes the drafting of 91 new regulations and 89 regulations to be amended. 

It could be argued that the creation of nearly 100 new regulations is not a particularly promising way to start clearing away 2700 existing, identified problematic rules.  But, of course, much depends on which rules are being tackled and whether or not the first set of reforms gets at some of the key obstacles to growth or simply nibble around the edges.

Indonesia has ample room for improvement.  It ranks 114 of 189 on the World Bank’s ease of doing business (well below most other ASEAN members) and has been hit by a sharp decline in the value of the rupiah and reduction in the amount of inward foreign direct investment.  Arianto Patunru and Sjamsu Rahardja highlight some selected non-tariff measures and local content requirement rules imposed in Indonesia since 2009.

Last week’s announced policy changes are largely intended to push up demand and not, as Chris Manning has argued, to increase competitiveness of domestic companies.  Changes include greater collaboration between central and local governments around price controls for products like beef, changes in banking to allow easier foreign currency account creation, and the provision of funds to citizens by raising the tax-free thresholds for the poorest citizens as well as newly expanded cash-for-work schemes.  The reform policies are not completely worked out yet, so it is not entirely clear what will be on the table, nor the level of implementation to be expected.

This package of reforms are meant to be overseen by a new economic policy deregulation center set up at the Office of the Coordinating Economic Minister.  The office will also assist with the roll out of two additional packages of reforms due in the next few months. 

The Jakarta Post responded with an editorial to urge the government to take the new deregulation center seriously.  It could implement reforms urged by the OECD in 2012 to evaluate regulations across ministries and to improve regulatory outcomes.

The consequences of successful reform could be quite substantial.  Indonesia’s large, youthful population and ample natural resources provides a platform for significant rewards.  McKinsey and Company has suggested that the country might become a Group of Seven economy by 2030.

As our conversations with companies have revealed, getting there will require unilateral reforms.   The announced regulatory changes are important, but must go substantially deeper and further for the real payoff to occur. 

*** Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The Costs of Inefficient Road Transport

JAKARTA--This blog post almost didn’t get written.  I was stuck in a taxi for three hours trying to get back from an interview at a factory just outside the city.  The total distance was 39 kilometers and there was absolutely no reason for such a relatively short journey to take so long.  Google maps suggested that the route we travelled should take 45 minutes without traffic. 

Anyone who has ever visited Jakarta (or Manila or Bangkok) will smile knowingly at this story.  They may feel the urge to swap their own personal horror moment about sitting for long stretches without going anywhere.  Such anecdotes can be told without references to terrible traffic accidents or road construction.  These are just examples of the normal, daily operation of the roads.

Clearly, a big part of the problem is simply too many vehicles and not enough capacity.  Poor mass transit systems do not help the situation.  Both of these challenges are difficult and expensive to sort out and address properly.

However, poor road design also contributes to traffic woes.  For example, in Jakarta, it is often impossible to turn onto a road at an intersection in the direction you actually want to travel.  This means that you are forced to drive for potentially long distances in the exact opposite direction.  (Or, even more frustratingly, to sit for long stretches of time--not moving--while pointed in the wrong direction.)

The only way to get going in the right direction is to do a U-turn at the next available opportunity. 

Here is where a bad design situation gets much worse.  With heavy traffic, safely executing a U-turn takes time.  There are generally no traffic lights at these road breaks.  In Jakarta, at least for now, there may be some enterprising young man who acts as an informal traffic policeman to stop traffic long enough to get a few cars turned around (for which he accepts a small payment from grateful drivers). 

Given the length of time needed to turn, the traffic quickly backs up even worse as impatient drivers line up to wait until they can head back in the correct direction. 

It really ought to be possible to fix some of these problems by using roundabouts, more U-turn breaks, more traffic lights, or some combination of all three.  The economic incentives alone ought to be driving governments to sort out any potential barriers to the smooth movement of vehicles as quickly as possible. 

Another significant cause of delay is the time needed to pay the road tolls.  The backup for the toll roads can stretch for kilometers.  The toll payment may be as little as 50 cents.  But the economic costs associated with having traffic not move for 15 minutes or more must surely outweigh whatever toll amount is collected. 

At a minimum, more toll booths could be automated or converted to system where drivers do not have to stop completely and hand over a few notes.  If the problem is getting drivers to start using such a system and stop paying cash, perhaps cashless cards could be given a discount or some other incentive to induce drivers to make the switch.  At least all taxis and commercial vehicles should be required to use the automated system.

The situation here is not just frustrating for drivers and passengers.  It imposes huge economic costs on the country, including acting as an informal tax on business operations for every firm trying to operate in the city.  (Being stuck in traffic also increases pollution and contributes to environmental damage.)

What I found very striking in today’s case study interview was a comment that the firm spends 20 hours shipping products between their factories in Jakarta and Central Java.  No one seemed at all surprised by this schedule either. 

For the firm, the costs of such delays can undermine their competitiveness on international markets.  Their margins are quite thin, so they do not have a lot of room for additional costs.

Yet just getting from their factory back to the first intersection of any kind took nearly 15 minutes.  I would guess that the distance traveled was less than a kilometer?  To reach the main road, which was about 2 kilometers from the factory gate, took a total of almost 25 minutes.

What was really astonishing about this timeline is that the factory is located in a bonded zone, specifically designed for export firms.  So, in this specially created district full of factories of all sorts, it still took 25 minutes to get to the main road on an apparently ordinary day—no rain, no car accidents, no construction. 

This road is the main means for the factory to get supplies in and final products out.  The firm, like most in Indonesia, does not have the option of using rail transport.  The trains do not, apparently, go where the firm needs them to travel. 

Very bizarrely for a country of 16,000 islands, cargo is not moved much by sea between domestic ports.

Air transport for cargo is expensive.

This leaves road transport as the primary means of moving goods around Java.  But given the state of the roads, firms cannot use large trucks either.  Hence, the company ships goods between its factory facilities in relatively small trucks over small roads since the highway system does not connect together well. 

Without traffic, the company estimates the drive could be done in 13 hours.  But for planning purposes, the firm usually assumes a trek of 20 hours.

This kind of inefficiency adds up.  To get anywhere remotely on time, everyone has to budget in all kinds of extra traffic delays into their schedules.  This results in additional wasted time if the traffic does not, for some reason, materialize as expected. 

Traffic delays are not just irritating.  They are costly and can seriously undermine economic competitiveness.  Firms will think twice about locating facilities in places that suffer from regular gridlock.  

Fixing transportation problems can be extremely expensive.  Not every remedy, however, requires substantial investments of resources.  Wherever possible, officials should move correcting inefficient transport higher up their priority lists. 

In a world increasingly operating along just-in-time systems, it will not do to miss your shipping deadline because you are stuck in a massive jam behind a toll booth collecting 50 cents.

***Talking Trade is a blog by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Trade Bottlenecks: A Review of One Day in the Jakarta Post

I was in Jakarta, Indonesia last weekend and picked up the Jakarta Post from Saturday, March 7.  I was struck by the sheer number of articles highlighting issues around trade—or with strong trade implications.  Nearly all highlighted bottlenecks that impede economic growth and development in Indonesia.

The first page notes, “RI Faces Major Infrastructure Project Delays.”  As any visitor to Jakarta knows, infrastructure in Indonesia has been unable to keep up with the demands of a growing population. 

The Public Works and Housing Minister is supposed to open significant new construction contracts by March.  But because of the number and size of the contracts, the ministry has announced that less than half of the proposed projects will meet the deadlines for tender announcements. 

Over the next five years, the government expects to complete 1,000 km of new toll roads and 2,650 km of main roads.  By comparison, the total length of road in China increased from 3.7 million kilometers in 2008 to an estimated 4.7 million kilometers in 2014. Meanwhile, the total length of highway in China rose from 60,300 kilometers to about 112,200 kilometers.

Admittedly, it may not be fair to compare any other country to China’s streak of roadbuilding.  But the contrast certainly in stark.  At the end of 5 years, Indonesia will have less than 4,000 new kilometers of main and toll roads.

The delays in Jakarta in tendering out projects relates in part to problems with land acquisition and paperwork problems in getting the tender documentation prepared.  Land and paperwork challenges will ring familiar with many businesspeople struggling to operate in Indonesia.

The second page of the paper highlighted how police are being urged to obey the president’s order to stop prosecuting the people who are trying to fight corruption.  Another article notes that Jakarta may be unable to pass a budget, so the city is preparing to use last year’s budget as a guidepost. 

One of most disturbing articles can be found on page 4, where President Jokowi has urged farmers to work harder for food sufficiency.  The government has already announced that it will not import any rice to meet rising demands for this staple crop from consumers.  As a result, the government hopes that farmers will start growing more rice to make the entire country self-sufficient in rice production.

The paper reported that Jokowi said, “I asked all farmers to be more confident in producing rice.”  The government is expected to announce a price of unhusked rice that will be “consistent with farmer’s expectations.”  The president has already said he wants the country to be self-sufficient in rice, sugar and corn within five years. 

To achieve the targets, the Indonesian Military (TNI) has been ordered to assist.  The Army signed a Memorandum of Understanding with the Agriculture Ministry for cooperation.  The Army agreed to deploy 50,000 people plus 50,000 non-commissioned officers to serve as agricultural field advisors.

Where to begin on unpacking this story?  I think a future post will go into some of the issues around food self-sufficiency in greater detail.  For now, just note that this is likely to be a poor idea with a fairly miserable track record of success wherever it has been tried.

Banning the importation of rice, sugar and corn (which is what the government seems to believe is necessary to ensure sufficient local production), only distorts the market even more.  It will likely lead to ruinous costs for the government as price supports will likely be needed, as well as all sorts of subsidies and assistance to farmers for things like fertilizers.

The Indonesian distaste for imports is deeply problematic.  In general, a great deal of time and effort has been spent complaining about the trade balance and decrying imports.  Imports are not automatically bad.  Many exports, for instance, require a certain level of imported content.  Again, I could go on, but will move along.

It is unclear to me how bringing the Army into the field will improve the capacity of farmers or the ability of the Army to do its job. 

The business section opened with an article on how the ministry is building roads to connect up seaports and airports.  The government has already announced plans to develop 24 seaports across the next five years, along with 5 new airports.  But none of these projects will work if the road infrastructure is not also in place.

As a result, the article notes, the Public Works and Housing Ministry has pledged to build 1,000 km of roads to connect these facilities (to what, exactly, is not clear from the article).  The ministry is also tasked with creating 1,350 km of roads to support 15 national strategic tourism areas. 

What is not obvious at all is whether the roads announced in the business section are the same roads announced on the first page of the paper.  If they are, then most of the new road construction will be aimed at getting goods and people out of seaports and airports and getting people to tourist destinations.  While necessary, such construction will not solve many of the road and trade bottlenecks that are causing companies major headaches when trying to operate in Indonesia.

Sixty percent of the budget will go to road building in the eastern part of the country.  The government is hoping that public-private partnerships will boost infrastructure and accelerate growth. 

Another great story on the business front page related to e-commerce.  The government has asked for the development of an “e-commerce roadmap” in the next 3-6 months.  Right now, there is a ban on foreign investment in e-commerce.  (I’m not sure exactly how this works frankly.) 

The government is to discuss whether online merchants should have to register with the government or not and become a licensed provider of e-commerce products.  Surely one of the biggest benefits of e-commerce is that it allows anyone—from one person operating in their own home to some of the biggest firms in the world—to buy and sell goods and services.  If every merchant has to be licensed, much of the benefit is likely to be lost, particularly for smaller firms.

In any case, the government has promised to list all the “lingering” issues in the industry to sort out the most pressing.  Hopefully, businesses from around the world will let Coordinating Economic Minister Sofyan Djalil know all about those lingering issues that impede the growth of what ought to be the most dynamic sector of the economy.

The last two articles on the front page are also of relevance to a trade audience.  One announces the launch of a banking road map in May.  The roadmap is supposed to include options for consolidation including the integration of IT systems for state-owned sharia and commercial lenders.  Finally, the government announced the preparation of regulations for the water industry.  One issue is whether or not the government ought to seize control over the bottled water industry.

Thus, this random day in the Jakarta Post highlights so many of the issues for businesses trying to operate in Indonesia: struggles with infrastructure, land and paperwork issues, fear of imports, desire for self-sufficiency in food production, desire to regulate business and create greater opportunities for corruption, and the possible seizure of assets by the government for all sorts of reasons.  It's a challenging place to work.

*******Talking Trade blog is written by Deborah Elms, Executive Director, Asian Trade Centre*****