1.) Indonesia should embrace an open economy (Either …. Or )
Indonesia has just experienced
considerable turbulence in the financial markets during which some observers
even raised concerns about another financial crisis.
As Indonesia’s currency, bond and equity markets plummeted, a number of economists believed that some policies may have contributed unwittingly to the predicament that Indonesia is currently faced with. This raises an important question for the future — what is the best way for Indonesia to embrace an open economy, yet protect its national interests?
Indonesia has opened its economy over time to the outside world. The capital account has been open for decades, allowing substantial flows of capital portfolio and boosting the development of capital markets. The trade sector has been gradually opened to imports though significant barriers remain. Foreign investors have been allowed to participate in Indonesia’s growth, resulting in a huge influx which has helped build up the country’s manufacturing sector in particular.
The country’s economic boom in the late 1980s and 1990s owed much too foreign investment by multinational companies that used Indonesia as a platform for export production as well as to serve the domestic market. Right after the 1997 economic crisis, foreign investments in the manufacturing, banks and telecommunications industry helped Indonesia to overcome that crisis.
As the economy started to perform well and the number of tourists increased, it created new opportunities for job creation. While it has not always been a good experience, the overall impact of the open economy policy has been good for Indonesia.
As we strive to a higher economic performance, leaving industrial development purely to the vagaries of the free market will not necessarily do the trick. Some state intervention is still needed to encourage the development of local industries that will create opportunities for local entrepreneurs to contribute to Indonesia’s economic growth.
As Indonesia’s currency, bond and equity markets plummeted, a number of economists believed that some policies may have contributed unwittingly to the predicament that Indonesia is currently faced with. This raises an important question for the future — what is the best way for Indonesia to embrace an open economy, yet protect its national interests?
Indonesia has opened its economy over time to the outside world. The capital account has been open for decades, allowing substantial flows of capital portfolio and boosting the development of capital markets. The trade sector has been gradually opened to imports though significant barriers remain. Foreign investors have been allowed to participate in Indonesia’s growth, resulting in a huge influx which has helped build up the country’s manufacturing sector in particular.
The country’s economic boom in the late 1980s and 1990s owed much too foreign investment by multinational companies that used Indonesia as a platform for export production as well as to serve the domestic market. Right after the 1997 economic crisis, foreign investments in the manufacturing, banks and telecommunications industry helped Indonesia to overcome that crisis.
As the economy started to perform well and the number of tourists increased, it created new opportunities for job creation. While it has not always been a good experience, the overall impact of the open economy policy has been good for Indonesia.
As we strive to a higher economic performance, leaving industrial development purely to the vagaries of the free market will not necessarily do the trick. Some state intervention is still needed to encourage the development of local industries that will create opportunities for local entrepreneurs to contribute to Indonesia’s economic growth.
Countries such as Japan, Korea and
China have shown us that well-thought-out policies could enhance local
industries to be more efficient, globally competitive and not perennially
dependent on state subsidies. The question really is how can we structure a
state intervention that is aimed at these local industries be delivered
precisely?
Another great example is that Malaysia has enjoyed successful economic performance in general. In contrast, its automotive industry had a sad story where state intervention went wrong. In the early 1980s, the government chose to focus on developing an indigenous national car, Proton, and introduced a slew of tariffs and other inward-looking policies which allowed Proton to grow rapidly.
Sheltered from either domestic or foreign competition, Proton was able to edge out the other automotive manufacturers. However, by 2011, Proton was saddled with huge loss and its cars could not maintain their share even to the local market, while it had failed to gain any traction in export markets. Proton was not able to become a globally competitive company that could survive without government protection even after a nearly 30 years of government support.
As foreign automotive manufacturers shunned Malaysia in favor of Thailand, the latter emerged as one of the major automotive manufacturing hubs in Asia. It could be said that Malaysia’s nationalistic car project was the “best thing” that ever happened for the Thailand automotive sector.
Korea and Japan, however, took a different tactic. They did offer protection against foreign competition and worked hard to build national automobile manufacturers. But Korea’s policy ensured that they have a healthy competition among them and this has forced Korean companies to improve their competitiveness, cost structure, design capability and innovation capacity, while also pressing their supporting parts manufacturers to do the same.
The result is one of the most impressive automotive sectors in the world today. The lesson is clear — competition is vital to encourage companies to constantly improve their efficiency to a point where they could eventually take on global competitors effectively.
Similarly, Indonesia needs to be careful about how to conduct policies on developing indigenous industries. In some cases, even well-intentioned policies could result in a contradictive impact as it was planned. For instance, the authorities recently reversed their rules on allowing unlimited importation quota of live cattle, abandoning the previous policy on annual import quota system to promote the development of a local industry. Subsequently, the policy has caused the price of domestic beef to escalate significantly and created inflationary pressures.
Another example is the 2009 Mining Law, which stipulated a ban on mining firms exporting unprocessed ore from 2014 and requires the firms to build local smelters or to cooperate with smelting companies to process the ore. Mining companies have observed that the lack of power and other infrastructure makes it quite difficult to develop smelters. But this policy, though expected to move in Indonesia up on the value-added ladder, has created uncertainty among investors since 2009.
The lessons from others experiences are clear. Policy should be geared toward first ensuring that the environment will help the development of globally competitive local industries. Creating the right business climate means building the right physical infrastructure so that manufacturers’ costs of transportation are lessened.
A huge focus on skills development is necessary to create a cadre of technically skilled workers who can fill such positions as production supervisors and technical foremen. More controversially, perhaps, Indonesia needs a policy where it judiciously embraces multinational companies that can create a base of competitive components suppliers out of whom bigger national companies can grow.
Once this is in place, Indonesia could pursue policies to prod the development of local companies, even employing protectionist and other policies judiciously as Korea did so successfully. However, in prodding development through state intervention, policy makers should ensure that protectionist measures and subsidies are time-limited and they should ensure that there is still intense competition domestically so that local companies are always on their toes to keep improving themselves and remain globally competitive.
The writer is vice chairman of the Indonesian Chamber of Commerce and Industry (Kadin Indonesia) and president commissioner of PT Panasonic Gobel Indonesia. These are his personal views.
Another great example is that Malaysia has enjoyed successful economic performance in general. In contrast, its automotive industry had a sad story where state intervention went wrong. In the early 1980s, the government chose to focus on developing an indigenous national car, Proton, and introduced a slew of tariffs and other inward-looking policies which allowed Proton to grow rapidly.
Sheltered from either domestic or foreign competition, Proton was able to edge out the other automotive manufacturers. However, by 2011, Proton was saddled with huge loss and its cars could not maintain their share even to the local market, while it had failed to gain any traction in export markets. Proton was not able to become a globally competitive company that could survive without government protection even after a nearly 30 years of government support.
As foreign automotive manufacturers shunned Malaysia in favor of Thailand, the latter emerged as one of the major automotive manufacturing hubs in Asia. It could be said that Malaysia’s nationalistic car project was the “best thing” that ever happened for the Thailand automotive sector.
Korea and Japan, however, took a different tactic. They did offer protection against foreign competition and worked hard to build national automobile manufacturers. But Korea’s policy ensured that they have a healthy competition among them and this has forced Korean companies to improve their competitiveness, cost structure, design capability and innovation capacity, while also pressing their supporting parts manufacturers to do the same.
The result is one of the most impressive automotive sectors in the world today. The lesson is clear — competition is vital to encourage companies to constantly improve their efficiency to a point where they could eventually take on global competitors effectively.
Similarly, Indonesia needs to be careful about how to conduct policies on developing indigenous industries. In some cases, even well-intentioned policies could result in a contradictive impact as it was planned. For instance, the authorities recently reversed their rules on allowing unlimited importation quota of live cattle, abandoning the previous policy on annual import quota system to promote the development of a local industry. Subsequently, the policy has caused the price of domestic beef to escalate significantly and created inflationary pressures.
Another example is the 2009 Mining Law, which stipulated a ban on mining firms exporting unprocessed ore from 2014 and requires the firms to build local smelters or to cooperate with smelting companies to process the ore. Mining companies have observed that the lack of power and other infrastructure makes it quite difficult to develop smelters. But this policy, though expected to move in Indonesia up on the value-added ladder, has created uncertainty among investors since 2009.
The lessons from others experiences are clear. Policy should be geared toward first ensuring that the environment will help the development of globally competitive local industries. Creating the right business climate means building the right physical infrastructure so that manufacturers’ costs of transportation are lessened.
A huge focus on skills development is necessary to create a cadre of technically skilled workers who can fill such positions as production supervisors and technical foremen. More controversially, perhaps, Indonesia needs a policy where it judiciously embraces multinational companies that can create a base of competitive components suppliers out of whom bigger national companies can grow.
Once this is in place, Indonesia could pursue policies to prod the development of local companies, even employing protectionist and other policies judiciously as Korea did so successfully. However, in prodding development through state intervention, policy makers should ensure that protectionist measures and subsidies are time-limited and they should ensure that there is still intense competition domestically so that local companies are always on their toes to keep improving themselves and remain globally competitive.
The writer is vice chairman of the Indonesian Chamber of Commerce and Industry (Kadin Indonesia) and president commissioner of PT Panasonic Gobel Indonesia. These are his personal views.
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