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Keeping Trade Policy Open: The case of Indonesia

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

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Keeping Trade Policy Open: The case of Indonesia

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  1. M. ChatibBasri 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

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

  7. Structure of tariff Cited from :Rebuilding Indonesia’s Export competitiveness, World Bank (2005)

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

  9. 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

  10. 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

  11. Creeping protectionism? • Raising wages and rigidity in the labour market • High cost economy • Appreciation of rupiah • 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

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

  13. Trend of new export tax? • Case of Coal (has been phased out) • Case of CPO • Case of natural gas

  14. Unilateral, multilateral or FTA? • Unilateral: strong pressure for trade protection • Multilateral: prospect of WTO and DDA ? • FTA: - 2nd best solution for reform? - Rule of origin issues? - Low rate of utilization - Divert the focus from multilateral

  15. 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

  16. Thank you

  17. 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

  18. 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

  19. Logistics Costs in Indonesia LPEM/JBIC 2005.9.12

  20. 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 Source: LPEM, 2006

  21. Appreciation in the RER increase the demand for trade protection Source: Basri and Hill, 2004

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