Trade
challenges and Indonesia’s ideal response
Kiki Verico ; The writer is co-editor of Journal of Economics and
Finance in Indonesia (EFI) published by the Institute for Economic and
Social Research at the University of Indonesia’s School of Economics,
currently living in Canberra
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JAKARTA
POST, 15 Februari 2013
In mid-January this year, the World Bank (WB) released
its Global Economic Prospects that showed that the source of global
economic growth was still largely contributed by developing countries’
economic growth. The WB estimates that economic growth of developing
countries may potentially increase from 5.1 percent in 2012 to 5.7 percent
in 2013 while economic growth of developed countries in 2013 is estimated
to stand still at 1.3 percent as it was in 2012.
An important
engine of developing countries’ economic growth is international trade,
also known as “trade-led growth”, which requires fair trade circumstances.
Yet, the recent global economic turmoil that decreased global market demand
can easily deceive countries to gain trade surplus by imposing
protectionism on the demand-side economy using either tariffs or quotas. If
this happens then the classic mercantilism doctrine is likely to reemerge
worldwide. The doctrine itself was proven to fail hundreds of years ago
because of its inability to predict “retaliation actions” from trade
partners.
International
economic theory has warned that import protection does not come without a
cost. Banning import policy on trade partner products in a country’s
domestic market will encourage similar banning policies from its trade
partners in their respective domestic markets. Protection is myopically
popular for the short-term yet actually generates “deadweight loss” and
costs the economy in the long run. This deadweight loss can be seen from an
increase in domestic prices. It often burdens net buyers and worsens both
urban and rural poverty. Besides, protection induces rent-seeking behavior.
Take for example the recent bribery case on Indonesia’s beef import quotas.
On the other
side of the coin, protection will oppress exporting countries and in the
end, fluctuate the international price. At the global level, when countries
are trapped in this trade retaliation, international trade will naturally
be set back into a “lose-lose situation”.
Trade
protection stimulates a global trade protection as the “dominant strategy”
which resembles a cycle of revenge. This causes international trade to be
caught in a severe recovery path.
In order to
prevent international trade from being held hostage by this retaliation
trap, the WTO has to impose its important role in “dispute and settlement”
issues and resolve any trade quarrels. Its member states must comply with
multilateral agreements in order to maintain both conditions where (1) no
country turns to be “the only country that imposed such trade barriers” and
(2) the international trade system remains on the right track.
An emerging
economy like Indonesia needs to be cautious in formulating its trade
policies because the impact will not only affect its domestic market but
also the global economy. This year Indonesia is appointed to be the host for
the ninth Ministerial Conference, the topmost decision-making body of the
WTO. The world will witness whether Indonesia is in fact on board to
harmonize the pendulum between her domestic interests and the multilateral
economic rationales.
My own calculations
on Indonesia’s trade comparative advantage with the Revealed Comparative
Advantage (RCA) index before the global economic crisis (2006-2008) and
afterward (2009-2011) shows that Indonesia‘s comparative trade advantage
still remains in the primary sector of agricultural and food products,
fuels and mining and the labor intensive sector of textiles and clothing
products.
My other
calculation, using the constant market share analysis (CMSA) method, shows
that after the global economic crisis, Indonesia’s manufacturing exports
have been growing faster than those of global exports. The latter indicates
that recently Indonesia has not only relied on the primary and labor
intensive sector but has in fact gone up into a higher value-added sector
of manufacturing exports. Hence, what about Indonesia’s supply-side
economy?
One of the
useful figures is the Global Competitiveness Report of the World Economic
Forum (WEF) that describes the supply-side economy of countries and frames
them in ranks. In its 2012-2013 report, it shows that Indonesia’s
competitiveness rank has slightly decreased from 44 out of 139 countries
(2010-2011) to 50 out of 144 countries (2012-2013).
Indonesia’s
situation is rather interesting, market size-wise. Indonesia’s rank for
this factor is 16 out of 144 countries which establishes her to become one
of the G-20 member states. In addition, Indonesia has performed great on
the macroeconomic environment at rank 25 and rather good on innovation and
business sophistication factors at rank 40.
However, this
report shows Indonesia still has to work harder in enhancing its
supply-side economy: one, for basic requirements of infrastructure due to
her fairly low rank of 78, institutions (72) and health and primary
education (70). Two, for efficiency enhancers of labor market efficiency
due to her lowest rank of 120, technological readiness (85), higher
education and training (73), financial market development (70) and goods
market efficiency (63).
For
mercantilism doctrines to have net export surplus by simply protecting
demand-side economy through the implementation of import trade barriers,
with no regard to managing production base competitiveness, is simply
counterproductive. To increase economic growth via trade, a country needs
to boost its supply-side economy.
This requires
an immense and comprehensive effort as the main objective is to achieve
both the country’s comparative and competitive advantage. Ideally, each
country including Indonesia should focus on strenghtening its supply-side
economy instead of risking becoming entangled in the demand-side
protectionism and trade retaliation trap. ●
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