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Jakarta Post

The unbearable cost of protectionism in Indonesia

  • Stephen V. Marks

    The Jakarta Post

Claremont, California   /   Mon, December 14, 2015   /  04:53 pm

Recent steps by the government of Indonesia indicate an intent to strengthen economic engagement with the rest of the world. Among these are the resumption of trade talks with the EU earlier this year, the announcement in the US by President Joko '€œJokowi'€ Widodo  that the government of Indonesia intended to join the Trans Pacific Partnership (TPP) agreement, and the ongoing negotiations on the Regional Comprehensive Economic Partnership (RCFP), an agreement aimed at deepening integration between ASEAN and six of its major trading partners, including China.

Comments by the new Trade Minister Thomas Lembong have also been encouraging. He has acknowledged that in the long-run protectionism does not work. Along these lines, he has astutely observed that, if we are concerned that feedlot mafias in Indonesia might be hoarding beef, the best way to combat the practice is to open the economy to additional beef imports, undercutting the prices of the stocks that are allegedly being hoarded.

These developments signal an intent to ease away from the protectionist policies that have been promulgated in recent years. To illustrate the extent of the problem, the share of tariff lines subject to non-tariff measures (NTMs) on the import side grew from 37 percent in 2009 to 51 percent in 2015. Import tariffs have also been increased on both a temporary and permanent basis. The total number of export NTMs tripled over the same period, and affected 41 percent of the value of exports.

One measure of the distortions caused by trade restrictions is the nominal rate of protection (NRP), the percentage by which the local producer price exceeds the border price. On the import side, over the first six months of 2015, the NRP for milled rice averaged 64 percent '€” compared to the 37 percent that Sjamsu Rahardja of the World Bank and I measured for 2008. The NRP for sugar recently was 55 percent '€” compared to 36 percent in 2008. These developments mean higher prices for rice and sugar consumers, all else equal.

Meat and viscera overall have had an NRP of 37 percent in recent years. Similarly, the NRP for fruits is now 25 percent, and for vegetables 19 percent. Wheat flour has also been subject to a succession of anti-dumping duties, safeguard duties, and an import quota since 2009, and has had an NRP of 22 percent.

The price wedge is not just confined to agricultural items. The NRP for basic iron and steel is 17 percent, due to selective anti-dumping duties and high import tariffs on imports from most countries. A recent international price comparison reveals that smartphones cost 49 percent more in Jakarta than in Singapore, and tablet computers cost 65 percent more.

Procedural measures such as extensive quarantine regulations from the Ministry of Agriculture, overseas pre-shipment inspections on imports ordered by the Ministry of Trade, and the application of Indonesian national standards by the Ministry of Industry have added to the costs of importation of a wide range of products.

Apart from consumers, on the losing end of these policies have been manufacturers of processed and preserved meat, bakery products and noodles. Shipbuilders also face higher costs of steel, as do construction industries.

On the export side, a ban on log exports has long been applied, but a complete ban on exports of rattan was instituted in 2011, costing rattan gatherers in some areas 30 percent of their income from the commodity. The complete ban on exports of rattan is a blunt instrument: Some varieties of rattan previously exported are not even used by Indonesian manufacturers.

It is well known that unprocessed and semi-processed mineral exports have been subject to bans or tight restrictions since 2014 and export taxes since 2012. For metallic ores and concentrates, I estimate that these policies have constituted the equivalent of export taxes of 40 percent on bauxite, 28 percent on copper, 15 percent on nickel, and 14 percent for iron, and that an earlier ban on tin ore exports was equivalent to a 57 percent export tax. The extent to which these policies have fostered the development of downstream processing industries remains an open question.

Along similar lines, export taxes on cocoa beans, crude palm oil, and raw hides transfer income from farmers to processing industries and the government. Perhaps we should not have much sympathy for the large and often foreign-owned oil palm plantations that have contributed to the haze problems in Indonesia and throughout the region, but smallholders grow 40 percent of oil palm and 90 of the cocoa beans in Indonesia. These export taxes directly lower their incomes.

The result of all these recent measures is a high-cost economy weighed down by layer upon layer of distortions, many of which have had a direct impact on Indonesian consumers.

I estimate that all trade-related policies, even taking account of subsidies on petroleum products and LPG, add 7.5 percent to the costs of living in Indonesia.   

If the restrictions on rice imports alone were removed, the effect of policies on the cost of living would fall to 4.8 percent. It is unclear how much of the rice and sugar price increases trickles back to farmers of rice and sugar cane, particularly those with the smallest landholdings, but the impact on low income consumers who do not grow these crops is clear. Indeed, recent data from the Central Statistics Agency (BPS) have shown an uptick in 2015 in the poverty rate, for which food prices are a major determinant.

A variety of factors have been behind the protectionist stance, but weak policy coordination is a major problem. Various ministries and government agencies in recent years have extended their regulatory reach into new areas of the economy, without consideration of the impact of these policies on the economy overall.    

It is against this backdrop that the recent initiatives by the President and the Minister of Trade must be understood.  By signaling an intent to open the trade regime, and indeed, by addressing some of the more burdensome import NTMs through the recent deregulation packages, the government has taken an important step toward reforms that will improve competitiveness, stimulate private sector development, and ultimately create more opportunities for economic growth and job creation.

The writer is Elden Smith Professor of Economics at Pomona College. He recently completed a study of non-tariff trade regulations in Indonesia.

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