Wednesday, June 9, 2010

Enter the Asean-China FTA Dragon: How Indonesia Fared the First Round

From the viewpoint of economic spectators, economic growth for the first quarter of 2010 paints an intriguing picture of Indonesian achievement. It doesn’t merely prove the sturdiness of domestic demand in supporting the country’s economy amid a global downturn, but it also offers an opportunity to view the country’s position vis-a-vis China through the mildest type of economic integration, the free-trade agreement between China and the Association of Southeast Asian Nations.

Almost without a sound, the agreement, also known as the ACFTA, came into force at the beginning of the year. It was marked by removing tariffs on 7,306 categories of products out of a total 8,738. By 2015, there will be no tariffs at all on products exchanged under the agreement. Another FTA will begin in 2016 with another gigantic economy: India. Is this country ready?

After one quarter under the ACFTA, it would appear that the fears of domestic businesses and workers were unfounded, at least for the most part. Annual growth in the year through March was 5.7 percent, while quarter-on-quarter growth was 1.9 percent.

Employment numbers are also positive. There has been an increase to 107.4 million workers in February from 104.9 million workers in August and 104.5 million workers in February 2009. Based on these figures, the Indonesian economy is still expanding.

Domestic business actors seem to be familiar with the characteristics of Chinese products. They are, in general, viewed as low-end alternatives.

Being such, they are intended for consumers with less regard for quality, which means they have a cozy home in Indonesia and most other Asean countries.

If domestic consumers continue to warmly welcome Chinese products, it is possible Chinese producers could open new factories or even relocate certain types of industry here, since production costs can be reduced by moving the producing unit closer to the market — which in the case of Indonesia also provides opportunities for its raw materials and human resources.

However, Chinese businesses are often seen around the world as muscling in on domestic markets. Along with growing capitalization, China has an interest in securing supplies of raw materials for the sake of production sustainability.

The most promising way to do this through production on the spot, which leaves domestic industries open to being overpowered.

In the end, impressive economic statistics will be meaningless. In the context of “who gets what,” domestic producers will turn into spectators.

To prepare for this reality, domestic producers have to step up to compete with the Chinese. Many Indonesian businesses are already confident in their ability to compete with Chinese products.

In their view, competing head-to-head with China is familiar territory, especially in the form of illegal and semi-illegal products penetrating Indonesia.

With the ACFTA, what is happening is the shifting of product path from underground to fully regulated. From the viewpoint of government and domestic producers, this shift brings nothing but advantage.

To get optimal benefit from this disclosure effect, the government has to be more serious in obstructing every possible way of smuggling. If not, the big punches on domestic industry would come from two directions: legal and illegal products.

Learning From Namibia

The economic integration of South Africa and neighboring Namibia provides a good reference to see how integration in two significantly different economies affect both the larger and the smaller actors.

After their economies were integrated in the form of a customs union, Namibia became more isolated from international economic interaction, except with South Africa.

This was because all domestic demand in Namibia could be met by domestic and South African production. But then the following adverse situation took hold: Namibia became dependent on South Africa’s economy.

Namibia’s economy was distorted as a result of the control on price and supply by what was essentially an oligopoly. Conversely, the impact of economic integration for South Africa came down to one thing: market expansion.

The more uneven the economic scale of countries involved, the worse off the smaller country will be by economic integration. For this reason, smaller countries need to stick together in order to face integration with significantly bigger economies.

One effective way to address this issue is by forming a regional bloc. In the context of Indonesia, it is necessary to upgrade our regional economic integration in Asean.

It could be through a customs union, common market or even economic union, such as that currently exists in Europe.

The resulting synergy from closer economic ties among Asean countries, which have similar economic characteristics, would be an advantage to avoid the shock of integration with significantly bigger economies such as China and India.

A Closer View of the Quarter

Since the ACFTA came into effect in January, the first quarter of 2010 has been colored by its impact. Positive figures over this period hopefully proved Indonesia’s economic sovereignty.

Exports were up to Rp 361 trillion ($38.99 billion) in the first quarter of 2010 compared with Rp 308 trillion in the same period last year. Without allowing for inflation, growth was 19.6 percent.

This is a clear indication the economy has recovered from the global downturn, but it could also show Indonesia’s market expansion in the initial stages of the ACFTA.

It will take further analysis and future data to see whether this improvement is related to better penetration of Indonesian products, thanks to the ACFTA, or if it was a result of the economic recovery.

Calculated at a constant price from 2000, imports also increased year-on-year by as much as 22.6 percent in the first quarter of 2009. That was the highest increase in the value of imports since the second quarter of 2005.

The composition of countries of origin has to be examined further in order to reveal the true impact of the ACFTA. If the increase of imports related to the ACFTA goes along with a proportionate increase in exports, then the goal of implementing the agreement has been reached.

First quarter figures also show the dynamics of domestic investment, represented by gross fixed capital formation at 7.9 percent — although that was not a significant rise compared to previous GFCF increases in the period before the global economic crisis.

Nevertheless, the figure was still higher than the figures from all quarters in 2009, as the tail end of the recent crisis has now passed.

It is also important to note that the increase was also an indication of positive business expectation about the economic condition as a result of the ACFTA, which helped intensify the investment.

Ready or not, a borderless global economy, free from tariffs on the exchange of goods and services, has come into view. Indonesia is still at the crossroads between seeing it as a good opportunity or as a disaster.

Hadi Susanto is a national accountant at the Central Statistics Agency.

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