S.E.A. View

Ambivalence in Indonesia towards AEC

Some sectors are gearing up for Asean single market next year, but many, including in government, remain wary about its impact on country

In a class at Polytechnic Manufacturing Astra or Polman, students aged 18 and above are busy assembling machine parts while their friends in another class are learning how to develop computer software.

These students are in the forefront as Astra, Indonesia's largest carmaker, gears up for the Asean Economic Community (AEC) next year.

"We hold seminars on AEC and emphasise the idea during lessons, to stress to them why they need to continuously improve themselves," said the polytechnic's director, Mr Tony H. Silalahi.

Last month, Indonesia raised import tariffs on a range of consumer goods from food to clothes to cars in a move intended to support the local manufacturing industry. PHOTO: EUROPEAN PRESSPHOTO AGENCY

Polman, a specialised technical institute, was set up by Astra to develop and grow its pool of skilled workers. It is one of several investments the carmaker has made to raise productivity and boost quality in its attempt to compete ahead of the AEC, which aims to create a single market in the region with freer flow of capital, services, products and skilled workers across borders.

"We launched an R&D facility targeting 1,400 young people by 2019 to be in our pool doing everything from surveying the market and coming up with better designs for cars, to developing better engineering and production methods," said Astra's senior general manager Yulian Warman.

"So we have made preparations for the AEC and anticipate that our exports will increase to more markets, even as we aim to be the components leader in Asean."

Indeed, as the AEC approaches, the government has identified the automotive industry as one of five major drivers of growth. The others are infrastructure development, the maritime sector, agriculture and tourism.

Last month, State Industries Minister Saleh Husin said he would push for an easing of regulations to attract foreign investments into the automotive sector to create more jobs and spur exports.

"Indonesia is able to become the second-largest car production market in Asean after Thailand, and so we must aim to overtake them because our exports have the potential to rise and our domestic market is large," he said.

Indonesia produced nearly 1.3 million units of four-wheel vehicles last year, according to data from the Association of Indonesia Automotive Industries, with over 90 per cent of that destined for the domestic market. Thailand produced 1.9 million, and exports half of that number.

Data from AC Nielsen suggests that potential for growth in Asean's automotive sector is huge - the number of people in the middle-income category is expected to grow from 190 million in 2012 to 400 million by 2020. Indonesia alone is estimated to account for a third of this number.

There is little doubt therefore about the prospects for some sectors in Indonesia ahead of the AEC but still, many here, including in government, remain wary about its overall impact on the country.

Last month, the Finance Ministry raised import tariffs on a range of consumer goods from food to clothes to cars in a move intended to support the local manufacturing industry.

"Cabinet members talk openly about pushing back against the implementation of the AEC reforms and reviewing the usefulness of existing trade agreements," noted the Lowy Institute in its latest report on rising trade protectionism in Indonesia.

Dr Jonathan Pincus, a noted economist and senior adviser to the Jakarta-based Transformasi think-tank, believes the current government has not clearly communicated AEC goals in its policies.

"While Indonesia is very proud of its role in Asean, there has not been a lot of leadership domestically in its own economic issues. The AEC has to be part of a clearly articulated economic programme... to show that they are committed to enforcing the reforms and that it is core to their goals," he told The Straits Times.

To be fair, Indonesia had actively backed the idea of the AEC decades ago. It articulated its support for the idea of an Asean free trade idea in 1992 and promoted the Bogor Declaration in 1994 that called for greater regional economic integration.

But there is growing concern over the level of commitment to the AEC, especially for a relatively new government saddled with rising protectionist and nationalist sentiment. A senior Asian diplomat said bureaucrats who assumed their posts last October in the new administration are only beginning to adjust to the AEC idea.

"The idea of trade liberalisation has still a long way to go," he said.

Indonesia, as South-east Asia's largest economy with a population and GDP of nearly 40 per cent of Asean, is a natural driver of the AEC.

In the European Union, France is the political driver of integration with Germany as the economic equivalent, noted Dr Pincus. In Asean, Indonesia is expected to do both but it is currently "reluctant or unable" to do so, he said.

He cited the Batam Free Trade Zone area, which was launched in 2009 with the hopes of achieving success like that of China's Shenzhen, but is now under review after some large multinational companies like Siemens left because of rising labour disputes, lack of competitiveness and slow infrastructure development.

Said Dr Pincus: "If you cannot make it work there (Batam), can you make it work in the AEC?"

Others say Indonesia has time to catch up and compete in the AEC.

Asian Development Bank's deputy country director, Dr Edimon Ginting, expects the government to rev up infrastructure spending in the later part of the year. "Eventually, Indonesia's trade barrier posture will correct itself as the country becomes more confident," he said.

"It needs this confidence to be active at the AEC."

• S.E.A. View is a weekly column on South-east Asian affairs.

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A version of this article appeared in the print edition of The Straits Times on August 27, 2015, with the headline Ambivalence in Indonesia towards Asean Economic Community. Subscribe