Tuesday, April 24, 2012

Perils of Indonesia’s economic policy making and the rise of ‘nationalism’

A new trend in Indonesian economic policy making has emerged recently, but it is not clear if it is part of a broader economic agenda. What is clear is that a lot of it seems to be ad hoc policies designed to accommodate the results of lobbying from political and business groups.

There are three prominent features that characterize current economic policies. First, they are more nationalistic in tone. Second, they tend to be more protectionist. Third, the power of economic policy making is more fragmented.

The recent debacle over the proposed fuel-price increase in the House of Representatives reminded us about the perils of power-sharing in economic policy making.

The perils are exacerbated by the emergence of Constitutional Court, as an arbitration body, that could annul a particular government policy through a judicial review filed by a certain group of people.

There is no doubt that economic policies will sound more nationalistic in the future. The government has decided to impose restrictions on foreign ownership of mining companies operating in Indonesia.

A recently enacted Presidential decree dictates that a foreign mining company has to divest 51 percent of their shares to Indonesian entities, so that within 10 years of commercial production commencing, a foreign company would have a minority holding.

On April 2, Singapore-based DBS offered to buy Danamon Bank from fellow Singaporean company Temasek Holding for US$9.1 billion. If the plan is finalized this year, DBS would ultimately own 80 percent of the shares in Danamon.

The plan drew sharp reactions. Some member of the House’s Finance Commission said they would propose a maximum 20 percent of foreign ownership in national banks.

A foreign bank could currently own up to 99 percent of shares in a national bank. The proposal would be included in the forthcoming revision of the 1999 Banking Law.

A Bank Indonesia (BI) official made a statement that the central bank would seek equal treatment for Indonesian banks operating in Singapore. Although, legally, there is no rule that could bar DBS’ acquisition of Danamon. But BI approval of the takeover would be made conditional on the reciprocity of treatment to Indonesian banks by the Singaporean government.

Given the still deeply rooted nationalist sentiment in the Indonesian psyche, more nationalist economic policies could be expected in the future.

There is nothing wrong with nationalistic economic policies, as long as a fair play of the game is strictly observed. A joint venture should be beneficial to both parties and should not intervene in the pursuit of corporate efficiencies.

In trade, the policies are getting more restrictive and protectionist. A ban on raw rattan exports was imposed in January. The aim is to secure raw rattan supply for the furniture industry. Exports of rattan furniture are encouraged, since they would bring more added value to the industry.

By the end of the year, trade barriers will be expanded if the restriction of imports of consumer goods, as proposed by Trade Minister Gita Wiryawan, is implemented.

The rule will impact several consumer industries like automotive, textiles and electronics. The objective of the import restrictions is to protect domestic industries from competition since, according to Wiryawan, “they have invested billions of dollars in Indonesia”.

The government also plans to impose export taxes on unprocessed mineral ore. The rate has not been fixed, but a government official said that it would be 25 percent initially, to be extended to 50 percent. The objective of the ruling is to protect mineral reserves from being over-exploited prior to the ban of raw mineral export that will take effect in 2014.

Mining companies have to build smelter plants to process raw minerals, because only processed minerals will be allowed to be exported. The argument is that exports of processed mineral would give added value and create more state revenue.

A move into a more regulated economy runs the risk of inefficiencies. A more regulated economy means more discretionary power for the government to grant special treatment to a certain group of

A more regulated trade regime — as our experience has shown in the past — is prone to business lobbying that asks for special treatment and protection. It encourages rent-seeking activities that harm the economy.

The argument of higher added value gained from the export of processed goods has to be made with caution.

It is important to distinguish between added value for a particular industry, and added value for the
national economy.

Added value for a particular industry could be gained at the expense of the national economy. If the loss of jobs and income of thousands of rattan collectors and farmers in Sulawesi and the loss of foreign exchange from the ban of raw rattan exports outweighs the added value gained from furniture exports, then the economy would lose.

The export ban on unprocessed mineral ore would initially reduce foreign-exchange earnings. The added value expected from exports of processed and refined minerals would depend on the ability of the processing and smelting industries to compete in the world market.

It has to be noted that most of the smelters are going to be built in the eastern part of Indonesia, where infrastructure, particularly transportation and electricity, is still lacking.

This situation could pose the risk of creating a high-cost economy that could put smelting industries in a difficult position to compete in the world market.

The theme of the nationalistic and protectionist policies is generally about protecting the interests of domestic producers. The interests of consumers are ignored, as policy makers focus their attention on producers’ interests.

The overall effect of these policies has been to deny consumers freedom to access cheaper and better-quality goods and services. The policies also rob the jobs and income of certain groups of people.

Overall consumer spending could decline. This would not be good for the economy, since consumer spending has been the main driver for our economic growth, and would be the main driver of economic growth in the future. Jakarta Post

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