Growing protectionism hurting Indonesia: Study

Report says that new restrictions on foreign investment and trade are damaging economy

Indonesia president Joko Widodo gives a keynote speech at the Singapore-Indonesia Business Dialogue on July 28, 2015.
Indonesia president Joko Widodo gives a keynote speech at the Singapore-Indonesia Business Dialogue on July 28, 2015. ST PHOTO: CHEW SENG KIM

A report by two leading Indonesian researchers argues that growing protectionism by President Joko Widodo's government is damaging an economy already growing at its slowest pace for the past five years.

The study, sponsored by the respected Lowy Institute in Australia, says new restrictions on foreign investment and trade will "drive up prices for Indonesian consumers at a time when their purchasing power is declining, and undermine the competitiveness and productivity of Indonesian firms".

Dr Sjamsu Rahardja and Dr Arianto Patunru, based at the World Bank and Australian National University respectively, say that former Indonesian finance minister Muhamad Chatib Basri's old adage that "the good times make for bad policy and the bad times make for good policy" has been turned on its head by Mr Joko's government.

In this case, "the bad times make for bad policy", they wrote.

The report comes two days after Mr Joko's trip to Singapore where he wooed foreign investors, saying that Indonesia needs foreign investment and that the best time to invest is now. But economists are less impressed, pointing out that what is said to investors often clashes with what is practised.

The report, which tracked Indonesia's major economic policies from the 1960s until now, noted that while the country had entered into free-trade agreements with Asean nations and other major trading partners, it had also unveiled a raft of protectionist measures over the years.

This year, Indonesia's Manpower Ministry imposed restrictions on the use of foreign professionals and Cabinet ministers talk openly about resisting the implementation of Asean Economic Community (AEC) reforms, with months to go before the AEC takes effect early next year, it noted.

Among the measures are requirements for a higher percentage of local content in exports and the raising of import tariffs on a raft of products earlier this month.

The use of non-tariff measures has also increased, the researchers said, citing the international Global Trade Alert report that ranked Indonesia among the worst offenders for increasing protection since the global financial crisis.

It said Indonesia has introduced 37 "amber" measures and 158 "red" measures since 2009, leading to 756 tariff lines across 45 sectors and affecting 181 trading partners. "Red" refers to harmful measures.

"A more restrictive import regime could add to already rising market concerns over economic nationalism, while protectionism will only likely worsen the deterioration in competitiveness in key industries, including manufacturing, and introduce more distortions and inefficiencies," read an excerpt of a Nomura report released this week.

Mr Joko told The Straits Times in an interview on Sunday that he was aware of these accusations of Indonesia looking inwards, but he said raising tariffs does not conflict with seeking foreign investments.

"I do not think the two are contradictory. We must work to balance the two... and I am sure foreign investment can and must strengthen local industry as well," he said.

Economists are unconvinced.

"Rather than pursuing interventionist policies, the Indonesian government needs to return to the basics: infrastructure, logistics and consistency of rules and regulations. Unfortunately, for the immediate future that seems very unlikely," the authors of the Lowy Institute report noted

A version of this article appeared in the print edition of The Straits Times on July 31, 2015, with the headline 'Growing protectionism hurting Indonesia: Study'. Print Edition | Subscribe