Doesn’t always take two to tango: Unilateral trade policies and Indonesia

In the past, many Asian governments were at the forefront of making unilateral changes to their domestic economies.  Singapore and Hong Kong, for example, slashed applied tariffs to zero absent external demands for them do so.  Others opened or liberalized sector after sector to promote inward investment or spur domestic competition.

But much of this unilateral spirit of reform appears to have dissipated.  Governments now prefer to wait to make changes until some foreign partner requests reform.  It may appear to be easier to make politically and economically hard choices with a foreign party to absorb some of the “blame” for any short-term pain. 

One government official said me a few years ago, “Yes, we know that a 2% tariff is really just a nuisance.  It probably costs us more to collect the tariff than the revenue it generates.  It is an administrative hassle for firms.  But if we get rid of it, what will we use as a bargaining chip when we engage in trade negotiations?”

I tried to argue that eliminating nuisance tariffs does not automatically mean that no one will do a free trade “dance” with you in the future.  Singapore did not get more than 20 active FTAs by stripping away 2% tariff levels for preferred partners in an FTA.  There is more to a trade deal than tariff reductions, after all, and win-win outcomes can be achieved in a whole range of sectors and issue areas.

One particularly promising area for unilateral reforms can be found in regulations.  For most companies today, the biggest headaches are not tariff levels or official customs procedures or registering for protection of intellectual property rights.  Instead, the hassle factors that are most pertinent to firms tend to be regulatory in nature.

Such regulations may include rules for licensing of all sorts.  Such rules may mean that you can import this item, but only if you first hold a valid permit for doing so or you may invest in a sector but only after appropriate licenses for operation are in place.   Other regulatory barriers could be rules that require goods be transshipped through only one port or only after inspection of paperwork or goods by specific ministries.

This is not to argue that regulations are not needed or necessary.  Government, as always, retains the right to regulate in the public interest and to safeguard the interests of human, animal and plant life and health. 

However, the thicket of regulations in many markets clearly extends well beyond what is strictly necessary in many countries around the region.

For example, nearly every firm that speaks to us can relate some good stories about nightmare regulations in Indonesia.  These range from the large to the small hassles, time and cost needed to try to comply with the rules.  The forest of regulations ensnares firms in nearly every sector and applies to both big and small companies.

The Indonesian government of Joko Widodo (Jokowi) has recognized some of the problems.  The National Development Planning Minister Sofyan Djalil just highlighted more than 2700 regulations and presidential and ministerial decrees that were “inimical to economic activity.” 

That is surely an impressive number of identified obstacles to trade and economic growth. 

Partly in response, Jokowi has begun rolling out a three-part package of unilateral economic reforms to tackle the problems of excessive regulation.  The first package was revealed with great fanfare last week.

It includes the drafting of 91 new regulations and 89 regulations to be amended. 

It could be argued that the creation of nearly 100 new regulations is not a particularly promising way to start clearing away 2700 existing, identified problematic rules.  But, of course, much depends on which rules are being tackled and whether or not the first set of reforms gets at some of the key obstacles to growth or simply nibble around the edges.

Indonesia has ample room for improvement.  It ranks 114 of 189 on the World Bank’s ease of doing business (well below most other ASEAN members) and has been hit by a sharp decline in the value of the rupiah and reduction in the amount of inward foreign direct investment.  Arianto Patunru and Sjamsu Rahardja highlight some selected non-tariff measures and local content requirement rules imposed in Indonesia since 2009.

Last week’s announced policy changes are largely intended to push up demand and not, as Chris Manning has argued, to increase competitiveness of domestic companies.  Changes include greater collaboration between central and local governments around price controls for products like beef, changes in banking to allow easier foreign currency account creation, and the provision of funds to citizens by raising the tax-free thresholds for the poorest citizens as well as newly expanded cash-for-work schemes.  The reform policies are not completely worked out yet, so it is not entirely clear what will be on the table, nor the level of implementation to be expected.

This package of reforms are meant to be overseen by a new economic policy deregulation center set up at the Office of the Coordinating Economic Minister.  The office will also assist with the roll out of two additional packages of reforms due in the next few months. 

The Jakarta Post responded with an editorial to urge the government to take the new deregulation center seriously.  It could implement reforms urged by the OECD in 2012 to evaluate regulations across ministries and to improve regulatory outcomes.

The consequences of successful reform could be quite substantial.  Indonesia’s large, youthful population and ample natural resources provides a platform for significant rewards.  McKinsey and Company has suggested that the country might become a Group of Seven economy by 2030.

As our conversations with companies have revealed, getting there will require unilateral reforms.   The announced regulatory changes are important, but must go substantially deeper and further for the real payoff to occur.