Opinion

Indonesia and global competitiveness

No one doubts the strategic importance of a country’s competitiveness in today’s globalized and liberalized international trade. Political stability, legal certainty and sound macroeconomic policies remain the necessary elements for a nation to sustain economic growth.

In the face of growing global competition, however, competitiveness has now become a determinant of “successful” nations. The question now is, what constitutes national competitiveness?

Mr. Harsha V. Singh, deputy director general of the World Trade Organization (WTO), pointed out in the International Conference in Yogyakarta on Oct. 3, 2011, that the domestic economic environment matters very much in ensuring a more productive and competitive economy. Among the areas in which countries need to improve are, the quality of institutions; infrastructure; macroeconomic environment; health and primary education; higher education and training; goods market efficiency; labor market efficiency; financial market development; technological readiness; market size; business sophistication; and innovation.

I will sum up my own take on this issue by highlighting the following:

First, there seems to be a growing consensus that domestic productivity is a key factor in determining national competitiveness.

Improved domestic productivity will ensure that a country becomes competitive. When there are more and more countries compelled to also become more competitive, this will induce an overall spiral of competition and competitiveness throughout the world. When this situation happens, the whole playing field will no longer be skewed to the advantage of just a few advanced countries but to all; hence, resulting in a more competitive world trade environment.

This contemporary global economy is driven by knowledge and technological innovations. Abundant natural resources are no longer seen as a primary factor for countries to reap sustainable economic benefits from international trade. It is now human resources that make a difference to domestic productivity. Those countries who have skilled human resources with knowledge and technological input will advance innovation, make new high value products, add value to goods and services, and win against the competition in the international market.

The second factor that shapes domestic productivity is infrastructure. This is a common challenge for many developing countries, including Indonesia. Lack of infrastructure raises the cost of producing goods and services and, therefore, reduces their competitiveness against goods and services produced by countries with adequate infrastructure.

Indonesia ranked 44th in the World Economic Forum’s Global Competitiveness Report 2010. While its overall index has improved over the past two years, the country’s infrastructure index remains very low: 76th for physical infrastructure; 103rd in terms of ports quality; and 98th in terms of electricity supply. An official with Indonesia’s Chamber of Commerce revealed that transportation costs for shipping a container from Singapore, China and Hong Kong is around US$300 cheaper than the cost to transport a similar container from Java to Sumatra, Kalimantan or Sulawesi.

Infrastructure development is a major challenge that Indonesia has to address immediately. The country needs to invest heavily in order to enhance the quality of its road and electricity networks, ports and harbors, as well as information and communications technology.

In order to promote sustainable, large-scale, value-added operations, Indonesia needs to invest more in its power supply and power generation capabilities. Investment in sustainable energy and other green, technologically driven capabilities is also a must.

More investment in information and communications technology infrastructure is also required in order to expand the breadth of coverage (outreach capability), and the depth of data intensity (bandwidth capability). An improved infrastructure would increase the country’s regional and global connectivity and reduce the overall costs of trading. It may even alter the way trade is conducted for the better.

The third key factor to support competitiveness is good governance and effective law enforcement. Government regulations and policies should give incentives as well as offer a favorable environment to those in the private sector to invest and enhance their productivity. The absence of sound government regulations and policies will only create more impediments and a high-cost economy, reducing the ability for companies to compete in both domestic and international markets.

Government regulations and policies include, inter alia, an overall development strategy, industrial policy, monetary policy and competition policy that need to be put in place and enforced in a coherent manner.

As far as Indonesia is concerned, the government has to eliminate unnecessary impediments, particularly in the regions, and find innovative ways to lower interest rates to support domestic production. Monetary policy alone is insufficient. We must employ some sort of balance of payment mechanism. Moreover, Indonesia must improve its productivity rate by linking it to higher investment in the quality and quantity of training all over the country, and not just on the island of Java.

Regarding law enforcement, obviously Indonesia needs to improve its state apparatus. Indonesia must beef up its legal institutions and monitoring mechanisms, coupled with its law enforcement capacity, to ensure the primacy of the “rule of law”. Some commentators point to a lack of a clear dispute resolution mechanism as one of the causes of an uncompetitive and high-cost economy.

Indonesia must also improve its bureaucratic efficiency. In this regard, the priority for such an undertaking is to ultimately eradicate corruption, including red tape and bribery.

This point is of the utmost importance because an improved state apparatus enables countries to boost efficiency, so that they can become full-fledged members of the global community of nations, on a par with one another in conducting global trade.

Another important thing within government regulations, I suggest, is a competition policy. It is a body of law, administrative rules and case law to deter restrictive business practices so as to maintain fair competition. It also includes regulations governing mergers and acquisitions. Its central role is to ensure a “level playing field” for firms — big and small — to compete fairly, optimizing efficiency in producing their goods and services.

A study by the United Nations Conference on Trade and Development (UNCTAD) found links between a competitive environment and economic development. Mark Dutz and Aydin Hayri of the World Bank found that over a 10-year period, using data from over 100 countries, there was a strong, positive correlation between the intensity of domestic competition, (excluding the effects resulting from trade liberalization), and economic growth. Their study suggested that the effective implementation and enforcement of an antitrust policy is positively related to long-term growth.

Finally, competitiveness also relates to a country’s external trade policy. The right kind of policy choices that a country has made, and is making, in its international trade negotiations greatly help
to determine the level of its competitiveness.

In this kind of scenario, countries need a favorable international environment in which they can exchange goods and services more freely. Hence, there is a need for fair global rules of the game, which would allow countries to optimize their domestic productivity and generate more employment and income. This is where a stable, strong and predictable multilateral trading system is required and comes into play.

We need a new multilateral trading system that is fairer, development-oriented, and able to sustain an enabling trade environment, where each WTO member is on the same level of the playing field in
enhancing productivity and competitiveness.

The writer is the executive director of the ASEAN Foundation. The opinions expressed are his own.

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