***Given that Indonesia’s manufacturing products are often more expensive than their Chinese counterparts, these criticisms are perhaps justified. But a closer look reveals that such complaints are not entirely rational, as Indonesia has many comparative advantages over China. In particular, Indonesia has significant natural resource endowments and a substantial supply of low-cost labor.
No Pain, No Gain When It Comes to Economic Reform — Just Ask China Xunpeng Shi | May 26, 2012 Complaints about cheap Chinese goods flooding the Indonesian market as a result of the Asean-China Free Trade Area frequently appear in the Indonesian media. Given that Indonesia’s manufacturing products are often more expensive than their Chinese counterparts, these criticisms are perhaps justified. But a closer look reveals that such complaints are not entirely rational, as Indonesia has many comparative advantages over China. In particular, Indonesia has significant natural resource endowments and a substantial supply of low-cost labor. Indonesia has a much younger population than China: the percentage of Indonesia’s population aged 0–14 is almost 10 percent higher than that in the former, while the median age of the Indonesian population is nine years younger than in China. Indonesia’s unemployment rate is also 3.6 percent higher than China’s, and average labor costs in the Indonesian manufacturing industry are less than half of China’s. These comparative advantages will not disappear after policy intervention and will lead to serious trade gains if they are fully realized. Indonesia thus has the potential to develop a strong manufacturing industry and gain from trade liberalization, particularly vis-a-vis China. But Indonesia’s competitive advantages have not been well developed in the past, meaning that many industries are not confident about facing competition from China. Indonesia’s steel industry is a case in point. It is well placed to compete considering the above comparative advantages and Indonesia’s proximity to Australia, which is the major source of coal and iron ore for China’s steel products. Thus Indonesia has the potential to produce cheap steel products. But the steel industry too has joined the chorus, complaining about cheaper Chinese products. These kinds of complaints mask the true potential of Indonesia’s international competitiveness, and if followed blindly will hurt the country’s industrial sector and its national economy in the long run. Developing the manufacturing industry would be a comprehensive way for Indonesia to exert its comparative advantages. A competitive manufacturing industry would help create enough jobs for its growing labor force and would help Indonesia gain from trade liberalization. The success of such an approach was demonstrated by China’s experience acceding to the World Trade Organization in 2001. Before then, and for a couple of years after, the WTO was viewed as a “wolf at the door” because the reforms needed to bring in foreign investment and promote a market economy created huge pressure for domestic industries. Similar to the current situation in Indonesia, many Chinese industries also complained that China’s less competitive industries would suffer if tariffs were reduced and restrictions on foreign rivals lifted. Ten years later, many Western brands have indeed entered the Chinese market, but Chinese products have also flooded the world market. China’s gross domestic product quadrupled and exports almost quintupled in the 10 years following its accession to the WTO. Even industries that were not considered competitive, such as the automotive sector, have finally gained from trade liberalization. But so far Indonesia’s manufacturing industry has not been robust enough to meet the challenges created by the Asean-China Free Trade Area . This is a direct result of insufficient investment in the manufacturing and related sectors, rather than an effect of trade liberalization. For example, the high cost of steel products is a result of high transportation costs, long delivery times, high container rents and high electricity tariffs. So, investment in the manufacturing sector and the establishment of a competitive manufacturing industry would be a key indicator of successful structural reform in Indonesia. There are many hurdles for such investment, including poor infrastructure, high electricity rates, restrictive labor regulations and onerous licensing controls. According to the World Bank’s Doing Business Index, Indonesia is ranked 129 among 183 countries, making its manufacturing sector a risky destination for investors. This also means the banking sector is less inclined to provide loans to the manufacturing sector. But these hurdles are surmountable through well-executed policy intervention. One necessary policy intervention, as evidenced from China’s experience in entry to the WTO, is structural reform. Structural reform must aim to improve institutional frameworks, regulations and policies to minimize behind-the-border barriers and thus improve economic performance and regional economic integration. The opportunities to be had from openness to trade and foreign direct investment may not be realized if behind-the-border policies do not support competition and efficiency. Structural reform in Indonesia would help support trade liberalization by increasing the level and competitiveness of the country’s manufacturing industry. Structural reform in Indonesia must focus on improving regulations, governance, and legal and economic infrastructure. Promoting competition is not an immediate priority, as the country liberalized significantly following the Asian financial crisis of 1997-98. But Indonesia must be prepared for the hard work required to implement structural reform. East Asia Forum Xunpeng Shi is an energy economist at the Economic Research Institute for Asean and East Asia. http://www.thejakartaglobe.com/opinion/ ... ina/520155 [Non-text portions of this message have been removed] ------------------------------------ Post message: prole...@egroups.com Subscribe : proletar-subscr...@egroups.com Unsubscribe : proletar-unsubscr...@egroups.com List owner : proletar-ow...@egroups.com Homepage : http://proletar.8m.com/Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/proletar/ <*> Your email settings: Individual Email | Traditional <*> To change settings online go to: http://groups.yahoo.com/group/proletar/join (Yahoo! ID required) <*> To change settings via email: proletar-dig...@yahoogroups.com proletar-fullfeatu...@yahoogroups.com <*> To unsubscribe from this group, send an email to: proletar-unsubscr...@yahoogroups.com <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
