Competitive, yet lagging behind

Friday, 17 September 2010

The Jakarta Post

The 10-rung gain that upgraded Indonesia’s economy to number 44 of 139 countries surveyed by the Geneva-based World Economic Forum for the 2010-2011 Global Competitiveness Report should increase the confidence of the government in accelerating the pace of its reform measures.

The government should not, however, read too deeply into that record, let alone become complacent and allow the achievement to go to its head, because our country still lags behind even most major economies in Southeast Asia.

Without belittling the meaning of the survey, most of the indicators used for the index are related to macroeconomics and political stability, taking into account such factors as fiscal and monetary stability, public debt, education and health. Within the perspective of macroeconomic stability, Indonesia indeed performed quite well, as evidenced by its ability to achieve an economic growth of 4.5 percent last year when most other economies, except China and India, suffered contraction and to significantly cut down public-sector debts.

Within a microeconomic perspective, though, Indonesia lags even further behind. The best and most reliable measure of competitiveness in macroeconomic sectors is the ease of Doing Business Index, which is conducted annually by the International Finance Corporation, the private sector arm of the World Bank.

The Doing Business Index is based on indicators in such areas as the expediency in business permits, tax administration, contract enforcement, investment protection, labor regulations and basic infrastructure. These are factors that weigh heavily as the indicators considered by investors in the process of deciding on where to set up businesses.

Quite unfortunately, Indonesia still scores poorly in the 2010 Doing Business Index, sitting at 122nd out of 183 economies surveyed, even below Vietnam, and only performs better than the Philippines.

One major indicator that features prominently in both the Global Competitiveness Report and the Doing Business index is basic infrastructure. Again, Indonesia performs quite poorly in this most important indicator. The 2010-2011 Global Competitive Report places Indonesia as 82nd in the overall infrastructure score, 96th in seaport quality, 84th in road condition and 97th in electricity availability.

Our poor record in most of the indicators used to measure the ease of doing business is clearly reflected in the eroded competitiveness of our manufacturing industry.

The Central Statistics Agency announced early this month that Indonesia’s trade balance in July suffered the first deficit this year, to the amount of US$130 million, due to a significant increase in consumer goods imports.

Even though consumer goods account for less than 10 percent of total imports, the latest import development rang alarm bells with regard to the steady decline in the competitiveness of our manufacturing sector.

The agency reported that imports from China increased by more than 10 percent to almost $2 billion in July, thereby confirming the great concern among our businesspeople regarding the flood of Chinese manufactured goods into our markets after the coming into force of the ASEAN-China free trade agreement early this year.

Encouraging to know that the chairman of the Investment Coordinating Board (BKPM), Gita Wirjawan, is fully aware of the problems. He cautioned last week that Indonesia still had a lot of work to do, citing three areas –basic infrastructure, investment licensing and redundant laws – that badly need improvement.

The fundamental problem, though, is that these barriers lie beyond Gita’s jurisdiction or capacity to address them.