JAKARTA
- Indonesia's prolonged transition to democracy may have
distracted it from issues tied to its Association of
South East Asia Nations (ASEAN) membership and lessened
its political weight and influence there, but after last
week's ASEAN summit in Laos, the country's sixth
president, Susilo Bambang Yudhoyono, has grabbed the
ASEAN free-trade ball and is running with it.
After the ASEAN pact with China was penned in
the Laotian capital, Vientiane, Yudhoyono said, "We will
move forward with globalization. In the past, we failed
to take full advantage of free trade and to curtail or
minimize the excesses of globalization. We're not going
to make that mistake again."
Indonesia, the
10-member ASEAN's biggest economy, has not only been
left behind in the scramble by its neighbors to cut
separate bilateral trade deals in the past, but now
appears singularly unprepared for the intense
competition likely to be unleashed by the free-trade
zone with new regional powerhouse China that grabbed
world headlines last week.
In a recent study of
60 economies by the World Competitiveness Yearbook,
Indonesia was ranked last of 15 Asia-Pacific countries.
Poor human resources and the associated poor
productivity will leave Indonesia exposed in the
expanded regional markets of the grand alliance, the
study added. Almost 70% of the country's workforce are
only elementary and high-school graduates, or school
dropouts. Greater levels of competition may also lead to
bankruptcy for inefficient companies, both state-owned
and private that have hidden safely behind protectionist
barriers in the past.
Diversity in
unity Indonesia's national motto is "Unity in
Diversity", but it is difficult to imagine a more
diverse lot than its fellow ASEAN members. Democracies
in Indonesia, Malaysia, Thailand and the Philippines; a
military dictatorship in Myanmar; an absolute monarchy
in Brunei, a country whose wealth is solely based on
oil; communist regimes in Laos and Vietnam, and
free-wheeling capitalism in Cambodia. These link
together in the same trade deals as tiny, wealthy
Singapore, the only truly developed country, but too
small to dominate regional trade.
Trade
agreements locking in countries with such vastly
different levels of productivity cannot bring manna from
heaven for all. When the promised growth is not
forthcoming for some weaker nations, protectionism could
lure them back into their safe bolt holes, far from the
madding crowd of free trade.
According to ASEAN
statistics, average per capita gross domestic product
(GDP) among ASEAN's four poorest nations - Cambodia,
Laos, Vietnam and Myanmar - in 2003 was US$356; that of
Brunei, Indonesia, Malaysia, the Philippines, Singapore
and Thailand was $1,626. Singapore's Senior Minister and
former premier Goh Chok Tong pointed out last week that
the Middle East's combined GDP exceeds ASEAN's.
A McKinsey report commissioned by ASEAN
highlighted a lack of integration, non-tariff barriers
and disparate policies that favor competitiveness of
single nations at the expense of the group as just some
of the problems. "Companies would rather pay more than
put up with the red tape and delays that they would
encounter if they applied for preferential treatment
under AFTA [ASEAN Free Trade Area]," Goh, Singapore's
then-prime minister, told regional business leaders in
Bali in October before China was formally signed up. "It
makes ASEAN uncompetitive," he said. "ASEAN must be
disciplined in the implementation of agreements."
The diverse economic circumstances of ASEAN's
member countries highlight another problem. "Even if
China can reach a common understanding with ASEAN as a
whole, the varying interests of its member countries and
the different social and economic developments may
impede ASEAN members to have consensus in most issues,"
warns Professor Zhao Zhongxiu, an international trade
guru at a Beijing University.
All roads lead
to China China entered the World Trade
Organization (WTO) less than three years ago, but now
accounts for a large slice of the global market. Its
growth has been the engine the region needed after Japan
drifted into deflation in the 1990s. In the first eight
months of this year alone total trade volume between
China and ASEAN was $65.60 billion, up 37.5% over the
same period last year. Imports from the grouping
amounted to $39.66 billion, leaving Beijing with a
deficit of $13.72 billion.
China is Indonesia's
fourth-largest export market - after Japan, the United
States and the European Union - and takes oil and gas,
coal, rubber, timber, pulp and paper, palm oil, organic
chemicals, fish, electronics and steel. Trade between
the two steadily increased to $10.2 billion last year,
giving Indonesia a tidy $1.27 billion trade surplus on
the year's trading.
The ASEAN-China pact aims to
bring tariffs below 5% in most of the 11 countries by
2010, but excludes thousands of "sensitive goods", many
of them major items such as cars, steel and sugar.
Restrictive non-tariff barriers are excluded from the
deal. The four poorest ASEAN members have been given an
extra five years to come on line.
By lowering
tariff rates, ASEAN expects to force industries into
boosting their trade competitiveness and lure foreign
investment back into the region. Proponents of the giant
free-trade area (FTA) claim it will mitigate China's
competitive impact on the nations of ASEAN, as
collectively they stand a better chance of competing
against the might of China than if they try to compete
individually.
The free flow of production goods
among ASEAN countries is attractive to companies wanting
to set up a global production base, they argue. China,
the world's seventh-largest economy, is attracting
billions of dollars in investment that could have gone
further south, in theory, but perhaps not to Indonesia.
Strong commitment by
Indonesia Yudhoyono, speaking at the ASEAN
summit, declared, "A country where property rights are
absent, trade policies are highly restrictive and
corruption is rampant, is unlikely to enjoy rapid
economic growth." Could he possibly have been describing
Indonesia? "Governments, and I am speaking for my own
country as well, need to increase the efficiency of all
economic transactions in the region," he went on,
delivering a strong message about Indonesia's commitment
to free trade and open investment.
To make good
on this grand commitment he will have to alter
Indonesia's domestic business climate, so businesses can
operate efficiently, by remedying many of the failings
that have slowed economic recovery and discouraged
investment: corruption, legal uncertainties, inflexible
wage policies and worker-friendly labor laws that cause
conflict and rising labor militancy, all wrapped up in a
poor economic infrastructure.
Numerous levies
imposed by regional governments and the widespread
practices of extortion by local officials have greatly
increased since the implementation of the autonomy law
three years ago, and high interest rates demanded by
local banks, even those few who agree to lend, are
further obstacles to manufacturers. Lending rates in
Indonesia are around 16%, while rates in Malaysia,
Thailand and Vietnam average 6%.
APEC and the
WTO The Asia-Pacific Economic Conference (APEC)
was formed in 1989 to advance cooperation among
Asia-Pacific economies as fears grew that protectionism
would increase when the old General Agreement on Tariffs
and Trade was phased out in favor of the WTO.
Home to the 1994 Bogor Conference and the lofty
goals set by APEC 10 years ago to fully open trade by
2020, Indonesia has been actively lobbying for better
access for the developing world in WTO talks.
Major developed nations have frequently invoked
the "injury clause" permitted under WTO rulings that
effectively permits protectionism when industries and
jobs are threatened by the scale of specific imports.
Indonesia plans to increase its use of the mechanism to
protect its industries and workers
The 21 APEC
economies, including Indonesia, already account for
around 60% of global trade, but once prospects for
reviving the Doha round faded after the meeting in
Cancun, Mexico, last year, APEC members boosted trade
prospects through a series of bilateral and regional
free-trade deals. Indonesia did not follow suit.
Last year's Singapore-US trade pact acted as a
catalyst for other ASEAN members to seek similar
agreements with the US and other countries outside
ASEAN, such as Japan, Australia and India. Thailand is
in the process of setting up its own FTA with the US,
while Malaysia has decided to proceed with initial
negotiations for a US-Malaysia FTA. Indonesia is not
even on the starting grid yet.
Most of the other
ASEAN countries, unlike Singapore, have major
agriculture sectors, which they need to do their best to
protect. The agriculture sector stalls free-trade
negotiations because the US is the world's largest
exporter of agricultural products and protects its
farmers by preventing farm products from Indonesia and
other ASEAN countries from expanding their presence in
the US market. Broader market access for other
manufactured products from Indonesia will only be
granted if Indonesia concedes more market access to US
agricultural products.
US trade representative
Robert B Zoellick, when inking an FTA with Bahrain in
September, said "a contest for the soul of Islam" is
raging, and "we can help" by striking trade deals that
generate jobs and reduce poverty. Indonesia is still
waiting. The US has so far showed little interest in
Indonesia's importance as the largest economy in the
region, preferring instead to sign the trade pact with
Singapore and another one with Australia.
Nonetheless, the US is still Indonesia's
second-largest trading partner, after Japan, with a
healthy bilateral annual trade of around $12 billion.
Japan invests in Indonesia Indonesia
is the biggest recipient of Japanese aid after China. In
his first meeting with Yudhoyono, Prime Minister
Junichiro Koizumi pledged more investment and economic
support to provide "full cooperation in developing the
country's economy under the new president". The two
agreed to set up a new business and government forum to
help improve Indonesia's investment climate.
Spurred by rivalry with China, Japan's campaign
to sign free-trade pacts with its Asian neighbors
gathered momentum in Vientiane. It already has a pact
with Singapore, which excludes agricultural products,
and is negotiating agreements with Malaysia, Thailand
and South Korea, though not yet with Indonesia.
Japan and the Philippines also are on the verge
of a major accord, which will be Japan's first FTA with
an Asian country to address the politically sensitive
matter of farm tariffs. According to Japanese media, the
two sides have already agreed that Tokyo will slash its
tariffs on bananas from the Philippines and reduce its
barriers to tuna and poultry from the country. The issue
of Japanese tariffs on sugar, which protect farmers in
southern Japan, was set aside for discussion in four
years' time.
Japan and ASEAN plan to negotiate
architecture for a comprehensive economic partnership by
2005. It would cover free trade in goods and services,
investment facilitation, labor movement, human-resource
development and overall development cooperation.
Officials from ASEAN and Tokyo said tariff-cutting talks
on their Japan-ASEAN trade zone would start in April and
be wrapped up in two years.
Strong support
for free trade Trade Minister Maria Pangestu, an
Australian-educated Chinese-Indonesian economist, and
Minister of National Development Planning Sri Mulyani
Indrawati are both strong free market supporters.
Pangestu thinks any regional agreement should be seen as
a stepping-stone toward the "multilateral trading
system".
"Facing the FTA is not a matter of
whether we are ready or not. The question is, when will
we be ready?" Pangestu commented on her return from
Laos. She wants Indonesia to "fit into China's
fragmented production processes" rather than compete
with it head on and is keen on setting up Chinese-style
free-trade zones in existing industrial centers.
Chief Economics Minister Aburizal Bakrie, former
head of the prestigious Indonesian Chamber of Commerce
and part owner of the family's conglomerate, the Bakrie
Group, also supports free markets. He says that at the
end of the day, the benefits of free trade still
outweigh the risks and argues that the 1997 Asian
financial crisis would have happened all the same, with
or without Indonesia first moving toward trade
liberalization in the 1990s.
Opposition to free
trade stems from smaller businesses and labor groups.
Dita Indah Sari, leader of the Indonesian Workers
National Struggle Front, paints a doomsday ASEAN plus
China scenario, warning that if Chinese products flood
the market, most small and medium enterprises will face
collapse and hundreds of thousands of workers thrown on
the scrap heap.
Clothing the
world China excels in manufacturing cheap
garments and textiles, once the major export revenue
earning enterprise in Indonesia. When international
textile and apparel quotas expire on January 1, China's
textile industry may flood world markets with cheap
goods. Some WTO countries are expected to continue
imposing protectionist measures, further damaging
recovery prospects for Indonesia's textile producers.
When the quota phase-out was first agreed to in
1995, during the Uruguay Round of trade talks, China did
not figure in the equation. Now, warns Neil Kearney,
general secretary of the International Textile, Garment
and Leather Workers' Federation, "China has the capacity
to clothe virtually the whole world at the present time.
Its textile industry is like a tap that is about to be
turned on to full strength."
No pain, no
gain Export wise, Indonesia is doing surprisingly
well at the moment. Exports account for a fifth of its
$208 billion economy and could hit a record $65 billion
this year. Third-quarter exports rose 19.9% from the
same period a year ago, and 12.3% from the previous
quarter, amid soaring oil prices and sales of palm oil,
nickel and coal to Japan and China.
Yudhoyono
has no doubts about the need for ASEAN to deepen its
integration into a single market. "Why?" he asked. "Two
words: India and China." If his administration can boost
exports even further and increase market share in the
ASEAN single market and the ASEAN-China mammoth, it may
eventually deliver greater wealth for Indonesians. But
in the short term, the shocks could be very sharp and
painful.
As Goh pointed out to a US-ASEAN
Business Council seminar in Singapore last week,
integration and change are not just economic
requirements for ASEAN. They are necessary for survival,
he said. And not to change means being thrown out of the
economic arena by powerful centrifugal forces generated
by China's and India's growth.
Bill
Guerin, a weekly Jakarta correspondent for Asia
Times Online since 2000, has worked in Indonesia for 19
years in journalism and editorial positions. He has been
published by the BBC on East Timor and specializes in
business/economic and political analysis in
Indonesia.
(Copyright 2004 Asia Times Online
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