Better Late Than Never
Commentary by Wayne Forrest
In September President Jokowi had an eventful meeting with Rodrigo Chaves, the World Bank’s Country Director in Indonesia, who told him that out of 33 multinationals relocating production out of China due to its trade/tariff war with the US, 23 went to Vietnam, the rest to India, Thailand, Cambodia and none to Indonesia. He went on to describe Indonesia’s vulnerability to global economic shocks and recommended job creating foreign investment as the primary means to balance its current account. That message seems to be getting through. Since then, the President has not only stepped up his rhetoric for economic reform, he has also backed plans by his Cabinet to overhaul tax laws, turn the negative investment list into a positive one, eliminate permits, streamline the bureaucracy, reduce trade deficits, and reverse some of the features of the labor law that negatively impacted manufacturing. On November 18th in NY, AICC helped organize a business forum initiated by the Consulate General of Indonesia in NY and several Indonesian banks, that featured presentations by two new Vice Ministers (Mahendra Siregar (foreign affairs) and Jerry Sambuaga(trade) Filled with optimistic statements (“US-Indonesia trade can be doubled in 5 years”, “our goal is to rank 50th in the World Bank’s ease of doing business ratings in 3 years”) the presentations confirmed Indonesia’s agenda to implement more reforms to support manufacturing, and maintain and grow the US economic relationship, something that from Indonesia’s perspective cannot be easy, given our own government’s concerns over trade deficits. Let’s examine these two imperatives, reforms and trade deficits, linked as they are by relocating investment from China.
Vice Minister Siregar made the point that of all the countries that have a large trade deficit with US and currently undergoing scrutiny to maintain or lose trade benefits (GSP), Indonesia is the only one actively reducing theirs. I don’t know about you, but I have never understood the huge fuss over trade deficits. If I buy 1,000 shirts from Indonesia, I get the shirts and my supplier gets dollars. The transaction is balanced. A goods deficit (I buy a lot more from you than you do from me.) is what gets talked about. Its not necessarily a bad thing as consumers get products that are not grown locally, such as coffee, spices, herbal remedies, or purchase them at a lower price because US wages are too high (garments, electronics, furniture). Indonesia could buy more goods and services from the US if it eliminated some barriers on agricultural products, open its services sector more to foreign investment, better handled intellectual property rights, reduced permitting for components and lowered tariffs on luxury goods (including health care equipment). However, changes to Indonesia’s domestic policies and legal system, which are crucially important, would only nominally alter the congenital deficit: Indonesia sells twice as much to the US as it buys primarily because it is a tropical country and the US is not. Outside of Hawaii we can’t grow rubber, coffee, tea, spices, palm oil (major contributors to the deficit) which we buy in very large quantities. Indonesia can grow the acacia pine, the same one used as feedstock by North American paper companies, only in the tropics it takes 5 years to grow it and here 20. Indonesia’s market for US products and services is growing along with its middle class but it will take time for Indonesia’s spending power to catch up and for US consumer goods companies to make a concerted effort to understand and tap the market. Of course, many have already done so and we learn of new ones all the time. One Indonesian speaker at the November event, Fify Manon, CEO of PT Rifyo, described how after years of exporting office furniture to the US, she has now successfully opened a showroom in Jakarta for the iconic US office furniture brand Herman Miller.
On December 5th AICC will host an event in NY with the Indonesian Investment Promotion Center and Ernst & Young that will examine new investment and tax policies. Some of these have been foreshadowed by statements from President Jokowi and senior ministers. Within the first few months of 2020 we expect some significant changes to the list of sectors open to foreign investment, centralized business licensing will finally be handled by BKPM, an easier process to obtain/maintain expatriate work permits, and lower corporate taxes rates as well as many other reforms. Many of these were discussed 5 years ago when President Jokowi first took office but never came to fruition. Had they Indonesia may have been in the list of 33 “relocators” from China mentioned by the World Bank’s country director. Better late than never.
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)