President Jokowi is likely to travel to the US for his first official visit to Washington in early June. President Obama no doubt wants to hear Indonesia’s President describe his country, his plans for its economic future and how the US fits in. What might Jokowi tell President Obama about today’s Indonesia? He will no doubt discuss plans for achieving 7-8% growth and creating jobs. He may not say so in so many words but Indonesia’s paradigm has become the VAS, Value-Added State.
What are its characteristics?
(Apologies for over simplification of a topic that is actually much more complex than what I set out below.)
1. A VAS welcomes FDI BUT
A VAS welcomes foreign direct investment but wants it to meet priorities established by either its government or legislature. Indonesia does not want foreign investment to create raw materials if there is not the addition of processing or if it believes a local company should be doing it. Indonesia desires to be more than a big market but part of the global supply chain of manufactured goods, producing for other markets, especially within ASEAN.
2. A VAS crafts policies to keep as much currency within the country without going as far as establishing formal currency controls. Indonesia is drafting regulations that will keep insurance premiums within the country. It already has other regulations in place that limit offshore borrowing and prevent Indonesian private equity firms from investing more than 20% of its capital offshore. A VAS finances its debt in local currency when possible.
3. A VAS expands rather than contracts its state-owned sector.
To build the VAS Indonesia’s leaders do not fully trust market forces and rely on a large state sector. SOE’s (state-owned enterprises) were very important in Indonesia’s early years as the private sector was still small. By the late 1990’s many SOE’s become redundant and unprofitable and some lost their monopoly positions. A wave of privatizations occurred but today they are again being given an out-sized role. For example, four small state-owned reinsurance companies are being merged and given a quasi-monopoly position to receive mandated premiums from companies that previously went offshore. Although the regulation is still under review insurers are highly concerned there may be a loss of capacity and risk leverage which could negatively effect future big ticket investments. Similarly, the 2015 budget includes massive increases to many SOE’s who will be tasked with building critical infrastructure.
4. A VAS is paternalist; it desires to be a player not just a referee.
Reform exists and will continue but only as a sidebar to pervasive patronage networks that limit transparency and the rule of law. These networks are stubborn and extend from the private sector to the large bureaucratic state through political parties. Preferences may be given to state-owned firms rather than private companies to import and distribute products. Foreign companies and employees may be singled out for selective prosecution or blamed for holding back the development of local capacity. A non-VAS would see the “other side of the coin”; foreign companies are true partners and are catalysts for the development of local players.
5. A VAS pursues import substitution policies through a combination of import and export bans. A ban on various kinds of beef imports is now employed to boost local cattle production. Raw and semi processed mining products cannot be exported or if so, they have very high duties attached. It has been reported that only cell phones made in Indonesia will be allowed to be sold in the future. The goal is to legislate what the market has not created, more local manufacturing.
6. A VAS intensively credentials foreign workers.
Even though businesses acknowledge a shortage of qualified middle managers, Indonesian officials and some professional associations believe local labor needs protection. Labor certification is reported to be getting more difficult and a new regulation will soon be implemented to require all expatriates employed in the country to pass a basic test of the Indonesian language. Even Indonesian doctors who have earned medical diplomas overseas cannot get these credentials recognized and thus cannot practice if they want to return.
President Obama should ask President Jokowi the following questions: How does the vision of a VAS fit in with regional economic agreements such as APEC, WTO, and the ASEAN Economic Community that lower barriers between the movement of goods, capital, and people? Are there not some internal contradictions?