Sjamsu Rahardja

FIFTY YEARS OF TRADE POLICY IN INDONESIA: NEW WORLD TRADE, OLD TREATMENTS

Indonesias trade policy has evolved over the last 50 years. It has been influenced by the countrys level of development and the conflict between openness and protectionism; external developments, such as commodity booms and busts and increased competition; and international commitments, whether multilateral or regional. As a result, trade policy has often been ambivalent and ineffective. Given that Indonesia has undergone various transformations and that the world is a different place from what it was in 1965, the country needs to take a more pragmatic and forward-looking stance. Trade policy needs to be part of a comprehensive strategy to improve competitiveness and diversify exports. If Indonesia is to be part of the new paradigm, where the production of goods and services is based on production networks and global value chains, its policy focus will need to shift from protecting and favouring sectors to promoting trade and industrial policies that encourage the flow of goods, services, and people.

Effective rates of protection revisited for Indonesia

This paper calculates nominal and effective rates of protection for Indonesian tradables sectors in early 2008, and compares these figures with previous calculations for 1987 and 1995. Such a review is overdue. Many non-tariff barriers to imports and exports have been abolished, though new import restraints on rice and sugar are notable exceptions to this trend. Import tariffs have been lowered, particularly through regional preferential trade arrangements. We account for such arrangements in two different ways. Export taxes persist in certain natural resources sectors, but most rates have been reduced. We find that more than half of the effective support provided to tradable products sectors now comes from subsidies on fuels, fertiliser, electricity and liquefied petroleum gas, rather than from trade policies per se. Duty drawbacks and exemptions for exporters boost the effective rate of protection for tradables sectors overall by a small fraction of 1%, and for no input–output sector by more than 3%.

Employee cost-sharing and the welfare effects of flexible spending accounts

Abstract Flexible Spending Accounts (FSAs) subsidize out-of-pocket health expenses not covered by employer-provided health insurance, making health care cheaper ex post , but also reducing the incentive to insure. We use a cross section of firm-level data to show that FSAs are indeed associated with reduced insurance coverage, and to evaluate the welfare consequences of this shift. Correcting for selection effects we find that FSAs are associated with insurance contracts that have coinsurance rates about 7 percentage points higher, relative to a sample average coinsurance rate of 17%. Meanwhile, coinsurance rates net of the subsidy are approximately unchanged, providing evidence that FSAs are only welfare neutral if we ignore distributional considerations and the deadweight loss of the taxes necessary to finance the subsidy. These results also suggest that FSAs may explain a significant fraction of the shift in health care costs to employees that has occurred in recent years.

Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts

In recent years, employees have been shouldering an increasing share of the costs of traditional employer-provided health insurance. At the same time, more and more employers have been allowing employees to pay their out-of-pocket health care costs using pre-tax earnings, through tax-subsidized flexible spending accounts (FSAs). We use a cross-section of firm-level data from 1993 to show empirically that these FSAs can explain a significant fraction of the shift in health care costs to employees, and to evaluate the welfare impact of this shift. Correcting for selection effects, we find that FSAs are associated with insurance contracts with coinsurance rates that are about 7 percentage points higher, relative to a sample average coinsurance rate of 17 percent. Meanwhile, coinsurance rates net of the subsidy are approximately unchanged, providing evidence that FSAs are welfare-neutral.

Agglomeration and Manufacturing Activities in Indonesia

The importance of the agglomeration process in facilitating growth and productivity increases in Indonesias manufacturing sector cannot be ignored. The agglomeration process is associated with improved productivity as firms enjoy external benefits from either urbanization or from the sharing of inputs available in certain locations. Evidence suggests that Java remains the main corridor for manufacturing activities, with large cities attracting manufacturers that are looking for externalities from urbanization. However, there are signs that some firms are shifting to new locations in other cities and forming new agglomerations in areas that these firms find more favorable. With regional autonomy, issues relating to local governance, infrastructure, and uncertainties in local regulations are increasingly important and can undermine the process of agglomeration. Some programs promoting certain locations as special economic zones (SEZs) are experiencing difficulties in attracting manufacturing investors. Understanding these challenges should help policymakers to strengthen the underlying factors that facilitate manufacturing agglomeration.

Big Dragon, Little Dragons: China's Challenge to the Machinery Exports of Southeast Asia

This paper investigates the extent of Chinas export boom in machinery and analyzes trade in components and finished machinery between China and Southeast Asia. China has increased its world market share in machinery exports. The median relative unit value of its finished machinery exports has also risen. Yet the author finds no evidence that Chinas expansion in the world machinery market has squeezed the market shares of Southeast Asian machinery exports. Instead, components made by Southeast Asian countries are increasing in unit value and gaining market share in China.

Managing Globalization in the Asian Century: Essays in Honour of Prema-Chandra Athukorala

than 10,000 Chinese were evacuated to the mainland; in 1998, China stood by passively, expressing its concern for the victims a couple of months later via diplomatic channels, while an unknown number of Chinese Indonesians chose to escape to neighbouring countries. The reasons for Beijing’s passive stance in 1998, according to Suryadinata, is that China wanted to ‘behave like a responsible major power’ and that it would have been against its national interests to confront Indonesia at that time. More specifically, he writes that China’s core national interest was to ‘gain acceptance in ASEAN in general, and in Indonesia in particular, as it still faced diplomatic isolation’ after the crackdown in Tiananmen Square in June 1989. This part of the analysis, in my view, is not as convincing as the rest of the book. One reason is that it is difficult, on the basis of the evidence presented in the chapter, to assess the severity of the threat to Chinese Indonesians. Suryadinata implies that the Chinese were intentionally targeted to deflect attention from other causes of the economic crisis that precipitated the riots. He also acknowledges that the Joint Fact-Finding Team set up after the riots did not find any proof of this. Both sides are probably able to find good arguments for their case. However, assume that the fact-finding team was right. How should Beijing react when overseas Chinese (who are no longer citizens of mainland China) are caught up in conflicts not specifically directed against them? Will it be necessary to explain non-intervention in these cases with reference to ‘higher order national interests’? Or is it simply a reasonable policy choice for any nation in a globalised world? In the other examples of active intervention discussed in the book, it can be argued that the overseas Chinese groups were explicitly targeted by violent actions, or that the overseas Chinese groups included many Chinese citizens (for example, employees of Chinese enterprises in Libya and Yemen). This may have been the direct justification for active intervention.

Why the Manufacturing Sector Still Matters for Growth and Development in Indonesia

Is Indonesias manufacturing sector still relevant for growth and development? As a result of the last boom in global commodity prices between 2003 and 2008, resources in Indonesia shifted towards commodities and resource-based manufacturing as these sectors seemed to promise higher returns on investment. In recent quarters, however, the manufacturing sector has exhibited stronger output growth rates and attracted more investment. This note argues that building on the current momentum of manufacturing growth is critical for Indonesias development (i) to support the creation of higher-productivity jobs, (ii) to sustain higher economic growth and progress in structural change, and (iii) to achieve long-term prosperity. Finally, this note also shows how the Master Plan for the acceleration and expansion of Indonesias economic development (MP3EI) acknowledges the importance of the manufacturing sector for economic growth.