Will Indonesia be competitive in an integrated ASEAN?

JAKARTA, Indonesia – Amid fears and skepticism over Indonesia’s readiness for the ASEAN Economic Community (AEC) in 2015, as well as talk of increased protectionism, analysts and businesspeople say the country has no choice but to pick up its pace of preparations. 

“The AEC is a reality. We have to accelerate our preparations to create a level playing field, otherwise it would be hard for us to compete,” Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), said in a recent interview.

‘We are ready’

ASEAN leaders adopted the AEC Blueprint at the 13th ASEAN Summit in Singapore in November 2007, in which all member states agreed to abide by and implement the AEC by 2015. The goal is ideal: a more equitable development throughout the region by facilitating the free flow of goods and services, skilled labor, and capital, as well as by bringing down the costs of doing business.

By its own account as of March 2013, the bloc has implemented around 78 percent of the measures laid out in the blueprint. As a single and integrated market, ASEAN expects its member states would be able to negotiate better economic agreements with potential partners.

Recently appointed Indonesian Coordinating Economics Minister Chairul Tanjung told Rappler in a recent interview that he estimates that Indonesia is 77% prepared for an integrated ASEAN, compared to what he said was an average of 72% among neighboring countries.

But not everyone shares his confidence, and there’s a lot of worry over how domestic businesses and workers in Indonesia – the largest economy in the region – will fare in an integrated market. There’s so much worry, in fact, that presidential candidate Joko “Jokowi” Widodo talked of increased protectionist measures during a presidential debate on Sunday, June 15, including making it a bit more difficult for foreign investors to obtain permits.

Concerning issues

Where is the worry coming from? Enny Sri Hartati, director of economic think tank Institute for Development of Economics and Finance (INDEF), says the high cost of trade logistics in the vast archipelago is a major problem.

“It is one of the worst and costliest in the region. This would affect efficiency and market penetration, especially in the eastern part of the country,” Hartati said in a recent interview.

Jokowi, a former furniture exporter, also pointed out on Sunday that transporting goods to Indonesia’s easternmost province of Papua costs more than sending them to Europe.

Indonesia ranks 53rd out of 166 countries according to the World Bank’s Logistics Performance Index 2014, scoring 3.08 on a scale of 1 to 5, with 5 being the best performer. It lags behind fellow ASEAN member states Singapore, Malaysia, Thailand and Vietnam, but fares better compared to the Philippines, Cambodia, Laos and Myanmar.

Titik Anas, managing director of Presisi Indonesia Research, an economic research and consulting house, said small and medium-sized enterprises (SMEs) also need better preparation ahead of a single regional market.

Anas said that although the Indonesian government has adjusted some of its regulations to comply with the AEC blueprint, which describes the steps and schedules member states have to take to transform the bloc into an integrated market, it doesn’t mean that small local businesses are ready.

“SMEs are far from ready, so there’s a gap,” she said. “They need to be informed of the benefits and potential gains. Their competitiveness should be strengthened and they should be trained on how to take advantage of this expanded market.”

No choice

Indonesia has no choice but to expedite preparations, though. “Ready or not, it’s already here. We are already in it and we have been implementing it gradually,” Anas said, adding that “nothing drastic” is going to happen in Indonesia or in other ASEAN member states in 2015 when the regional bloc is scheduled to fully implement the AEC.

Indonesian Deputy Trade Minister Bayu Krisnamurthi said the country has effectively been open over the past few years, as Indonesia – along with other ASEAN countries – has reduced 99 percent of its tariff and non-tariff barriers to either zero or a maximum of 5 percent for intra-regional trade.

“Yet our economy still grows. This is a reflection of the competitiveness of Indonesian products and the situation will not be much different from what will happen in December 2015,” Krisnamurthi said.

However, Indonesia’s economic growth has been slowing over the past few years. From a peak of 6.5 percent in 2011, GDP growth slowed to 5.21 percent in the first quarter of 2014.

Indef’s Hartati said the problem with Indonesia’s economic growth is that it relies a lot on unsustainable resources and that it remains to be seen whether the real sector is up for the challenge of a single regional market, despite the country’s compliance with the blueprint.

“In addition, Indonesia’s competitiveness is still low, which could mean we are not ready to compete in the ASEAN Economic Community,” Anas said.

According to the World Economic Forum’s Global Competitiveness Index (CGI) 2013-2014 – which assesses competitiveness among 148 economies – Indonesia’s ranking rose 12 places to 38th from last year’s 50th, thanks to significant improvements in its infrastructure. Indonesia ranks the 5th highest among its regional peers after Singapore, Malaysia, Brunei and Thailand. The Philippines comes next in the region, ranking at 59th, followed by Vietnam, Laos, Cambodia and Myanmar.

How to take advantage

Krisnamurthi said the key is to continue increasing the country’s competitiveness because trade competition is not static. Indonesian businessmen, he said, should not focus on just defending their existing domestic market as the AEC offers them a chance to invade markets in other ASEAN countries.

“They will also be open wide for Indonesian businesses, including SMEs, while at the same time we continue to improve our quality, human resources, services and infrastructure,” the deputy trade minister said.

But Hartati warned that unless as Indonesia fixes its high-cost economy, there is a bigger possibility that the country – the largest market in the region with a population of about 250 million – would remain a target instead of a strong player that would maximize the benefits of an open ASEAN market. – Rappler.com