Indonesia reflects regional doubts on economic integration – Nikkei Asian Review


donesia President Joko Widodo pictured at the November 21-22 ASEAN and related summits, during which the ASEAN community agreement was signed (Photo: Simon Roughneen)

Indonesia President Joko Widodo pictured at the November 21-22 ASEAN and related summits, during which the ASEAN community agreement was signed (Photo: Simon Roughneen)

JAKARTA — In a small fourth-floor office amid a jumble of buildings that make up Indonesia’s trade ministry, several staff members work on pamphlets and posters to inform Indonesian businesses about the new Economic Community of the Association of Southeast Asian Nations, known as AEC.

“It is mostly smaller businesses we talk to. They need the information about the AEC more than the big companies, who know about it already,” said Firlana Herva Mulia at the AEC Center.

“They ask us about the opportunities, the strategy, the best way to deal with the AEC.”

Many of her AEC Center colleagues are out on the road, part of a last-minute drive to spread the word to businesses in rural Java.

At work inside the Indonesian trade ministry's AEC information center (Photo: Simon Roughneen)

At work inside the Indonesian trade ministry’s AEC information center (Photo: Simon Roughneen)

The 10 ASEAN members gave final official approval to the group’s long-awaited economic community initiative in a ceremony in Kuala Lumpur in late November, with the new common market for trade in goods and services due to launch on Dec. 31.

Malaysian Prime Minister Najib Razak, who hosted the event as the ASEAN chair, told the assembled diplomats and officials that the organization was progressing to a tighter economic union, saying “in practice we have virtually eliminated tariff barriers.”

Another set of goals were laid out for 2025, some of which were meant to have been reached by 2015. Najib summarized the next steps when he said: “We now have to ensure this creates a truly free single market and production” base.

Indonesia is ASEAN’s biggest member state and economy by far. Its population of 250 million is more than double that of the Philippines, the next most populous member, and makes up 40% of the region’s total population. The country’s near-$1 trillion economy is more than twice the size of ASEAN’s next biggest economy, Thailand, and makes up almost a third of the region’s combined economic strength.

Lagging the neighbors

But to some skeptics, Indonesia Inc. is not yet ready to compete with some of the region’s more affluent economies and business powerhouses.

Income per capita in the country lags well behind that in Malaysia, Singapore and Thailand. Former Indonesian Trade Minister Gita Wirjawan told a recent business forum in Kuala Lumpur that despite the country’s size, Indonesia’s overburdened infrastructure, high business costs and low labor productivity mean it is not well placed to thrive under the AEC.

“Absolutely, beyond a shadow of a doubt, Indonesia is going to be exposed,” Wirjawan said.

Former Indonesia Trade Min. Gita Wirjawan speaks at ASEAN investmnet forum in Kuala Lumpur on Nov. 20 (Photo: Simon Roughneen)

Former Indonesia Trade Min. Gita Wirjawan speaks at ASEAN investmnet forum in Kuala Lumpur on Nov. 20 (Photo: Simon Roughneen)

Wirjawan estimated that Indonesia’s workforce only has the capacity to produce $20,000 worth of goods and services per head, at purchasing power parity, compared with $50,000 per person in Malaysia and $120,000 in Singapore. Such numbers are “reflective of where each of the countries are [at],” he added.

Echoing some of Wirjawan’s concerns about labor productivity, Aan Purnama Yoga, a multilingual travel agent and tour guide based in Yogyakarta, the central Java tourist hub, spoke of fears of losing out to better-skilled foreigners in his sector.

“It will be hard for us anyway, due to a human resources problem,” he said.

An hour from Yogyakarta sits Borobudur, a huge 9th century Buddhist temple that is increasingly drawing pilgrims from majority Buddhist countries such as Cambodia, Myanmar and Thailand.

Thai-speaking tour guides are looking at Borobudur as an opportunity for work, in anticipation of a further increase in Thai visitors, Purnama noted, adding: “We have to prepare for competition that way.”

Outside the train station in Yogyakarta (Photo: Simon Roughneen)

Outside the train station in Yogyakarta (Photo: Simon Roughneen)

A 2014 survey of regional businesses by the Boston Consulting Group (BCG) showed that Indonesians were much more likely to see the AEC as a threat than were their counterparts in other ASEAN countries.

But some Indonesian business executives dismiss concerns about the AEC, saying they see it as an opportunity if Indonesia can capitalize on its own advantages.

Devi Adiningrat, who runs a shop in Yogyakarta selling batik, a popular Indonesian fabric, cited her product as an example of how Indonesia can do well under the AEC.

“There are three kinds of batik,” she explained, referring to printed, stamp and hand-crafted batik. While Malaysia is a major producer of printed batik, “in stamp and hand crafted [batik] we are alone, we have something different.”

Indonesia’s lucrative natural resources account for more than half of the country’s exports and are expected to continue buoying the economy under the AEC.

As the world’s fifth biggest coal producer and biggest coal exporter, Indonesian coal miners do not see the AEC as a threat. “In this area there is very limited competition for us. So, we are not worrying about free trade in this area,” said Supriatna Suhala, executive director of the Indonesian Coal Mining Association.

In a remark that highlighted complaints about growing protectionism in the country, Suhala noted: “Until now there has been no export tax imposed by the Indonesian government for coal and there is only a very limited import tax imposed by importing countries. So, actually there has been free trading in coal already for many years.” Earlier in 2014 Indonesia imposed a ban on exports of some minerals and a mining tax and export duties on some ores.

Outside, looking in

Foreign companies might be the biggest winners as they gain access to the vast Indonesian market, dwarfing the benefits for Indonesia from exports to the rest of ASEAN.

“Because Indonesia is Southeast Asia’s biggest market, domestic companies have the most to lose from foreign competition,” noted the BCG report.

That assessment might be tested, however, by conflicting economic signals from the Joko Widodo government in Jakarta.

Over the summer, new rules were introduced making it more difficult for foreigners to work in Indonesia, while the government in July raised tariffs on imports of consumer goods — which will remain in place for imports from outside ASEAN.

Some participants at a recent forum on the AEC in Singapore sponsored by law firm Clifford Chance noted that domestic concerns in Indonesia “may take precedence over regional benefits.” They cited a recently imposed ban on selling alcohol in the country’s minimarts as an example of how local political pressures are driving legislation that undermines foreign investors.

Widodo’s Indonesian Democratic Party of Struggle has long been in favor of nationalist economic policies, while Muslim parties are lobbying for restrictions, such as curbs on the sale of alcohol.

But the government has also tried to cater to foreign investors. It set up a “one stop” approval system for them. It promised to cut the waiting time to process shipping containers in port, which now takes several days longer than elsewhere in the region. It also eliminated massive fuel subsidies, flagging a significant rollback of state intervention in the economy.

Some Indonesian government bodies support investment policies and closer trade ties. Opening the AEC Information Center on Sept. 28, Trade Minister Tom Lembong said ASEAN integration will create a win-win economic environment for regional businesses.

“If Indonesia can synergize and coordinate with other ASEAN countries to face global trends, ASEAN will be stronger than facing it individually as Indonesia, Malaysia, or Singapore,” Lembong said.

The Indonesian government is not only promoting the AEC to the public in an effort to reassure business, but it is also testing the waters on Indonesia’s possible entry to the Trans-Pacific Partnership agreement, the 12-country trade pact led by the U.S.

In a recent speech to local engineers, Widodo said if his plans for a multibillion dollar overhaul of Indonesia’s poor transport and power infrastructure go ahead, it will provide the vast archipelago with the means to capitalize on increased regional economic integration.

Widodo raised the politically controversial prospect of Indonesia joining the TPP, suggesting that his government wants to broaden Indonesia’s trade relations beyond AEC.

“Why should we be afraid?” Widodo said, hinting that despite some pendulum-like policymaking — swinging from protectionism to liberalism in a matter of months – his government ultimately sees more open trade as the way forward.

Train station in Jakarta. Indonesia's government is keen to upgrade the country's transport infrastructure (Photo: Simon Roughneen)

Train station in Jakarta. Indonesia’s government is keen to upgrade the country’s transport infrastructure (Photo: Simon Roughneen)

Follow us on Twitter
, , , ,