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Declining Indonesian Global Competitiveness

What should Indonesian Trade Policy Makers Do?

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Tulus T.H. Tambunan

Indonesian Global Competitiveness

Methodologically, the global competitiveness of a country can be examined with a number of approaches. One method is the so-called country market analysis profile conducted by ITC from UNCTAD. This provides an overview of the export performance of developing countries and economies in transition in terms of the product composition of their exports, the dynamics of international demand, and growth patterns of their leading export products. The national export performance analysis shows: the leading export products of each country and their extent of concentration or diversification, the products for which each country has out/under performed other countries and increased/decreased its international market share, the extent to which the leading export products are positioned in growing or declining markets, and the market segments in which the leading export products are positioned in terms of unit values.

Conceptually, the national export performance is based on trade data for the years 1997 to 2001 reported by 184 countries and territories to the COMTRADE database of the United Nations Statistical Division, which together account for more than 90 percent of world trade.

This analysis yields two types of information. The first information is presented in Figure 1 showing the national export performance of Indonesia vs. international demand from the dynamic perspective. The figure presents the performance of Indonesia’s 20 leading export product groups, including palm oil. It shows the export value of the products under review (size of the bubbles), and it compares the national export change in world market share (horizontal axis) to the growth of international demand (vertical axis). The figure also provides an overview of the concentration of Indonesian exports: the appearance of one or a few comparatively large circles shows that exports are highly concentrated. In addition, the figure indicates the average nominal growth of world imports (horizontal reference line) over the 1997 to 2001 period, which was 4.5% p.a. Moreover, the vertical line (i.e. the line of constant world market share) divides the figure into two parts. Exports of products to the right of this line have grown faster than world imports and thereby increased their share in the world market. Conversely, products to the left of the vertical line have seen erosion of their world market share. The figure also provides an overview of the concentration of exports. The appearance of one or a few comparatively large circles shows that exports are highly concentrated. The vertical and the horizontal reference lines are of particular interest from a trade development perspective, since they divide the chart into four quadrants with different characteristics. The quadrants have been labeled as follows:

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1) “Champions”: winners in growth markets (upper right, first quadrant): these are the export products for which Indonesia has performed very well, such as palm oil and its fractions and natural rubber. These are particularly dynamic products, which are growing faster than world trade in general and for which Indonesia has outperformed world market growth and increased its share in world imports. Indonesia as an exporter of these products has proven its international competitiveness over the late 1990s. Trade promotion efforts for these products are less risky, as there are national success stories, which can serve as reference points.

2) “Underachievers”: losers in growth markets (upper left, second quadrant): these products such as women’s suits, jackets, dresses skirts, etc represent particular challenges for trade promotion efforts in Indonesia. While international demand has been growing at above-average rates, Indonesia has been falling behind. Its exports have either declined or grown less dynamically than world trade. As a result, Indonesia has been losing international market share. In general, the bottleneck is not international demand, but rather on the supply side. For these products, it is essential to identify and remove the specific bottlenecks, which impede a more dynamic expansion of exports.

3) “Declining sectors” (lower left, third quadrant):2the export prospects for these products tend to be gloomy, for example woven fabrics of synthesis. World imports of these products have been stagnating or have actually declined, and the market share of Indonesia has gone down. Trade promotion efforts for product groups in this category face difficulty. Indonesia needs to adopt an integrated approach to take into account bottlenecks both on the supply and on the demand side.

4) “Achievers in adversity”: winners in declining markets (lower right, fourth quadrant): products in this quadrant are characterized by growing shares of exporters in world import markets, which are declining or growing at a below average rate, such as other paper and paperboard in the Indonesian case. From a trade promotion perspective, niche-marketing strategies are required to encourage this positive trade performance despite the overall decline in these markets.

The second information presented in Figure 2 showing the national export performance of Indonesia vs. international demand from the structural perspective. This figure is to some extent similar to Figure 1. The size of the bubble for example is also proportional to the country’s export turnover. The key difference is in the horizontal axis, specified here as the country’s world market share for the corresponding product group. The vertical axis is also different, since we plot here the average growth of world imports in real terms (i.e. volume terms) over 1999-2003. The structural figure is closer to the original Boston Matrix model, also known as the growth-share model. This figure is “structural” in nature because market shares do not vary much over time and

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It should be noted that the criterion for distinguishing growing and declining products is the average nominal growth rate of total world imports from 1999 to 2003, which was at around 4% to 4.5% annually.

world imports expressed in volume terms are, unlike those expressed in nominal (i.e. value terms), not affected by fluctuations in prices and exchange rates.

As in Figure 1, Figure 2 is also divided into four quadrants with different characteristics. The quadrants have been labeled as follows:

1) Stars (upper right quadrant): specialisation in high growth sectors: Products located in this quadrant are those that are growing faster than world trade in real terms. They are also products in which Indonesia is specialised and have captured relatively high world market shares, such as such as palm oil and its fractions, footwear, women’s suits and many others. Indonesia as an exporter of these products has proven their international competitiveness over recent years.

2) Emerging products (upper left quadrant): low market share in high growth sectors. These products, such television camera, as present particular challenges for Indonesia’s trade promotion efforts. While international demand has been growing at above average rates, Indonesia is a relatively minor player with a relatively low market share. This may be because Indonesia has only recently started developing exports in these products or it may be because Indonesia is specialised in niches within the product group in question. For these products, Indonesia needs to identify strategies to increase its market share in these.

3) High growth sectors, by analyzing first supply-side bottlenecks faced by the country and its opportunities for horizontal diversification.

4) Snails (lower left quadrant): low market share in low growth sectors. Export prospects for these products, in which no products are included from Indonesia, tend to be bleak as world imports have been stagnating or declining and the country has a low market share in these products. Trade promotion efforts for these products face an up-hill battle. Trade strategies for these products need to take into consideration bottlenecks on both the supply (production) and demand side.

5) Traditional Products (lower right quadrant): specialisation in low growth sectors: Products in this quadrant, such as parts and accessories of video, are those in which Indonesia has a high market share (i.e. highly specialised) but where world demand is declining or growing at below the world average rate. Trade promotion efforts need to focus on niche marketing strategies in order to identify and increase Indonesia’s specialisation in the best performing products within an overall declining product group.

Figure 1: National Export Performance vs. International Demand from the Dynamic Perspective: Indonesia: 1999-2003

Figure 2: National Export Performance vs. International Demand from the Structural Perspective: Indonesia: 1999-2003

Source: ITC(UNCTAD/WTO)

The second method to analyse the global competitiveness of a country for a particular products (or group of products) is the so-called Revealed Comparative Advantage (RCA) Index according to the Balassa formula.

The index compares the share of a given product in Indonesian exports with the share of this product in world exports. Values above 1 indicate that Indonesia is specialized in the product under review, or Indonesia’s global competitiveness for that product is higher than the world average. Values below 1 indicate that Indonesia is not specialized in the product review, or its global competitiveness is lower than the world average.

As an illustration, based on data from the Ministry of Industry (Deprindag), Figure 3 presents RCAs of Indonesia and Malaysia, which indicates that Malaysia is indeed the heaviest competitor for Indonesia in palm oil trade, as in most years the RCA of Malaysia is higher than that of Indonesia.

Figure 3: RCAs of Malaysia and Indonesia for Palm Oil, 1996-2002

18.64

28.56 17.7

23.33 23.68 22.03

29.39

31.64 28.47

38.38 29.74

23.36 26.61 26.09

0 10 20 30 40 5

1996 1997 1998 1999 2000 2001 2002

0

Indonesia Malaysia

Source: Deprindag database

Another way of assessing the global competitiveness of a country is what the World Economic Forum (WEF) annually does in over 100 countries in the world for its The Global Competitiveness Report. The global competitiveness of a country according to the WEF is determined by three groups of factors as presented in Figure 4. The focus of this study is on the competitiveness of a nation, not a particular product (not like RCA, for instance). However, no doubt, the competitiveness of country will affect the country’s capability to compete in the global markets.

This year, The Global Competitiveness Report 2007-2008 from WEF shows that the position of Indonesia is in the 54th place from 131 countries covered in the survey, compared to the 50th from 125 countries from last year (2006-2007) (Table 1).

During the survey, the respondents in each country have been asked about their main business constraints. For Indonesia, based on percentage of respondent, it turned out that three business obstacles ranked at the highest position is inadequate supply of infrastructure, followed by inefficient government bureaucracy and difficulties in access to financing. With respect to bureaucracy, many respondents believed that it is the most inefficient practice to delay the growth of business in Indonesia. Inefficient bureaucracy increase business costs,

either in real form that is the amount of cost to be spent by businessman, or in term of alternative cost that is the time wasted in managing business permit which means loosing the chance to gain profit.

Figure 4: Three Groups of Determinant Factors of Nation’s Competitiveness version M. Porter

Sumber: WEF (2007)

Table 1: Ranking of Indonesia in the Global Competitiveness Index (GCI)

No 2007-2008 2006-2007 2005-2006

1 2 3 4 5 6 7 8 9 10 USA Switzerland Denmark Sweden Germany Finland Singapore Japan UK Netherlands Indonesia (54) Switzerland Finland Sweden Denmark Singapore USA Japan Germany Netherlands UK Indonesia (50) USA Finland Denmark Switzerland Singapore Germany Sweden Taiwan, China UK Japan Indonesia (69)

Figures 6 and 7 may give some clue about, respectively, main current factors to the low Indonesian competitiveness low, and business environment facing Indonesian entrepreneurs.

Figure 5 : Factors to Hamper Business Growth in Indonesia in The Global Competitiveness Report 2007-2008.

20.5 16.1

10.8 10.7 8.5 8 5.6 5.5 4.2 3.7 2.2 2 1.8 0.5

15 20 25

Restrictive labor regulations Tax regulations Inadequately educated workforce Inflation Corruption Foreign currency regulations Government instability/coups Tax rates Poor work ethic in national labor force Crime and theft

0 5 10

Inadequate supply of infrastructure Inefficient government bureaucracy Access to financing Policy instability

Source: WEF (2007)

What Should the Trade Policy Makers Do?

The answer to this question is simple, namely: they should know two things. First, what is really happen with the Indonesian competitiveness and Indonesian position in both export and import markets. Second, what are the main determinant factors of the Indonesian current competitiveness. When they know that, then they will come to realize that many factors that hamper the growth of Indonesian competitiveness is in fact beyond their own responsibility. This means that a good coordination among different ministries in efforts to improve Indonesian competitiveness and hence its trade performance is a must. In other words, the trade policy makers or the Ministry of Trade cannot act alone.

Figure 6: Main Factors to the Low Indonesia Competitiveness

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Low Indonesian competitiveness Limited Infrastructure Unsupportive

government policy

Low level of entrepreneurship/

innovation

Increased production cost

Low productivity

More government collections

Increase UMR

Many regional regulations

Limited Production

Capacity Low Labor quality

Poor Technology

Lack of Government

support

Limited Bank Loans

Not fully recovered National Banks

Lack of private/university

support

Regional Autonomy Low Investment

Uncertainty to do business in

Indonesia

10

Figure 7: Business in Direct and Broader Environment

Broader Environment

Direct Environment

Market Consumer Labor

Production materials Skill &

technology Network

Capital Information Location Infrastructure

Business

Regulation & bureaucracy

Public Resource Intervention

External Influence Social & Culture

Climate & Environment Macro Economic Government & politic Government Services

One important current constraint facing Indonesian business world is the slow growth in investment. According to a report of the World Bank in 2005, in order to create more favorable investment climate the government must deal with 3 issues; cost, risk and limitation in competition. As pointed out in Table 2, the report clearly explained the aspects of costs, risks and limitation of competition in which government hold a powerful influence. If government influence through its policy and attitude toward that aspect turned negative, for instance business cost becomes expensive, then those policies have dismissed the opportunity to increase new investment or business, or to expand the production capacity of existing businesses, meaning eliminating the possibility to improve investment.

As can be observed, government policies and attitude that could directly or indirectly affected the investment costs ranging from corruption, unfavorable tariff and taxation system, public services, trading policy regarding import duties, bureaucracy in settling permits, monetary policy influencing interest and inflation rate, until government spending to developing or improving infrastructure. That last matter has become crucial issue in the past few years to be discussed in Indonesia that is poor domestic infrastructure condition. A study by World Bank (World Bank, 2004) related to a number of serious problems including high cost in conducting business in many countries in the world stated that in developing countries such as Indonesia, to get a telephone line, loading goods from custom-house, and registering new business, required far more time with greater costs compared to developed industrial countries.

Table 2. Government Policy and Attitude Influencing Investment Decision

Factors creating opportunity and incentive to make investment Three significant factors

affecting investment decision

Strong government influence Weak government influence

Cost Corruption

Tax tariff and system Import duties & export tariff Subsidy

Regulation & bureaucracy burden Infrastructure

Public services,

Finance sector performance Interest rate

Regulation of labor

Price of materials set by market, Distance over input & output market

Related scale & scope of economy related to certain technology

Risk Anticipated policy direction & its credibility,

Macro economic stability, Property rights ,

Enforcing obedient over contract/ agreement,

Reaction of consumer & competitor External surprises,

Natural Disasters Supplier skill ,

To revoke property rights for public interest

Limitation for competition Limitation regulation to enter & exit,

Competition law & policy,

Functioning financial sector market, Infrastructure

Market scale & distance to input & output market,

Economy scale certain activities

Source: from Table 1.1 in World Bank (2005a) with slight modification

Referentes

Tambunan, Tulus (2004), Globalisasi dan Perdagangan Internasional, Jakarta: Ghalia Indonesia. WEF (2005), The Global Competitiveness Report 2005-2006, Geneva: World Economic Forum WEF (2006), The Global Competitiveness Report 2006-2007, Geneva: World Economic Forum WEF (2007), The Global Competitiveness Report 2007-2008, Geneva: World Economic Forum World Bank (2004), Doing Business in 2005: Removing Obstacles to Growth, Washington, D.C.

World Bank (2005a), Iklim Investasi yang Lebih Baik bagi Setiap Orang, Laporan Pembangunan Dunia 2005, The World Bank, Jakarta: Penerbit Salemba Empat.

either in real form that is the amount of cost to be spent by businessman, or in term of alternative cost that is the time wasted in managing business permit which means loosing the chance to gain profit.

Figure 4: Three Groups of Determinant Factors of Nation’s Competitiveness version M. Porter

Sumber: WEF (2007)

Table 1: Ranking of Indonesia in the Global Competitiveness Index (GCI)

No 2007-2008 2006-2007 2005-2006

1 2 3 4 5 6 7 8 9 10

USA Switzerland Denmark Sweden Germany Finland Singapore Japan UK Netherlands

Indonesia (54)

Switzerland Finland Sweden Denmark Singapore USA Japan Germany Netherlands UK

Indonesia (50)

USA Finland Denmark Switzerland Singapore Germany Sweden Taiwan, China UK

Japan

Indonesia (69)

Figures 6 and 7 may give some clue about, respectively, main current factors to the low Indonesian competitiveness low, and business environment facing Indonesian entrepreneurs.

Figure 5 : Factors to Hamper Business Growth in Indonesia in The Global Competitiveness Report

2007-2008.

20.5 16.1

10.8 10.7 8.5 8 5.6 5.5 4.2 3.7 2.2 2 1.8 0.5

15 20 25

Restrictive labor regulations Tax regulations Inadequately educated workforce Inflation Corruption Foreign currency regulations Government instability/coups Tax rates Poor work ethic in national labor force Crime and theft

0 5 10

Inadequate supply of infrastructure Inefficient government bureaucracy Access to financing Policy instability

Source: WEF (2007)

What Should the Trade Policy Makers Do?

The answer to this question is simple, namely: they should know two things. First, what is really happen with the Indonesian competitiveness and Indonesian position in both export and import markets. Second, what are the main determinant factors of the Indonesian current competitiveness. When they know that, then they will come to realize that many factors that hamper the growth of Indonesian competitiveness is in fact beyond their own responsibility. This means that a good coordination among different ministries in efforts to improve Indonesian competitiveness and hence its trade performance is a must. In other words, the trade policy makers or the Ministry of Trade cannot act alone.

Figure 6: Main Factors to the Low Indonesia Competitiveness

Low Indonesian competitiveness Limited Infrastructure Unsupportive

government policy

Low level of entrepreneurship/

innovation

Increased production cost

Low productivity

More government collections

Increase UMR

Many regional regulations

Limited Production

Capacity Low Labor quality

Poor Technology

Lack of Government

support

Limited Bank Loans

Lack of private/university

support

Regional Autonomy Low Investment

Uncertainty to do business in

Indonesia

Figure 7: Business in Direct and Broader Environment

Broader Environment

Direct Environment

Market Consumer Labor

Production materials Skill &

technology Network

Capital Information Location Infrastructure

Business Regulation &

bureaucracy

Public Resource Intervention

External Influence Social &

Culture

Climate & Environment Macro Economic Government & politic Government Services

One important current constraint facing Indonesian business world is the slow growth in investment. According to a report of the World Bank in 2005, in order to create more favorable investment climate the government must deal with 3 issues; cost, risk and limitation in competition. As pointed out in Table 2, the report clearly explained the aspects of costs, risks and limitation of competition in which government hold a powerful influence. If government influence through its policy and attitude toward that aspect turned negative, for instance business cost becomes expensive, then those policies have dismissed the opportunity to increase new investment or business, or to expand the production capacity of existing businesses, meaning eliminating the possibility to improve investment.

As can be observed, government policies and attitude that could directly or indirectly affected the investment costs ranging from corruption, unfavorable tariff and taxation system, public services, trading policy regarding import duties, bureaucracy in settling permits, monetary policy influencing interest and inflation rate, until government spending to developing or improving infrastructure. That last matter has become crucial issue in the past few years to be discussed in Indonesia that is poor domestic infrastructure condition. A study by World Bank (World Bank, 2004) related to a number of serious problems including high cost in conducting business in many countries in the world stated that in developing countries such as Indonesia, to get a telephone line, loading goods from custom-house, and registering new business, required far more time with greater costs compared to developed industrial countries.

Table 2. Government Policy and Attitude Influencing Investment Decision

Factors creating opportunity and incentive to make investment Three significant factors

affecting investment decision

Strong government influence Weak government influence

Cost Corruption

Tax tariff and system Import duties & export tariff Subsidy

Regulation & bureaucracy burden Infrastructure

Public services,

Finance sector performance Interest rate

Regulation of labor

Price of materials set by market, Distance over input & output market

Related scale & scope of economy related to certain technology

Risk Anticipated policy direction & its credibility,

Macro economic stability, Property rights ,

Reaction of consumer & competitor External surprises,

Natural Disasters Supplier skill ,

To revoke property rights for public interest

Limitation for competition Limitation regulation to enter & exit,

Competition law & policy,

Functioning financial sector market, Infrastructure

Market scale & distance to input & output market,

Economy scale certain activities

Source: from Table 1.1 in World Bank (2005a) with slight modification

Referentes

Tambunan, Tulus (2004), Globalisasi dan Perdagangan Internasional, Jakarta: Ghalia Indonesia. WEF (2005), The Global Competitiveness Report 2005-2006, Geneva: World Economic Forum WEF (2006), The Global Competitiveness Report 2006-2007, Geneva: World Economic Forum WEF (2007), The Global Competitiveness Report 2007-2008, Geneva: World Economic Forum World Bank (2004), Doing Business in 2005: Removing Obstacles to Growth, Washington, D.C.

World Bank (2005a), Iklim Investasi yang Lebih Baik bagi Setiap Orang, Laporan Pembangunan Dunia 2005, The World Bank, Jakarta: Penerbit Salemba Empat.