Impacts of ACFTA (ASEANChina Free Trade Agreements) on the local economy in Indonesia: For better or for worse?

Dean Y.Affandi The Habibie Center

Introduction
In the era of globalization: the interdependence of one country to the others. Indonesia is one of them. In world of trade: Indonesia is not a big player compared to China. International Trade Statistics 2009 (WTO, 2009):, Indonesia (export was just at the 30th / USD for 139.3 billion / 0.9% . (import: was at the 31th /USD 126.2 billion /0.8%. China is a bigger player in world trade. China: (the second/USD 1428.3 billion /8.9%. Imports (the third / USD 1132.5 billion/6.9%. Smaller or larger players in trade is relative to how much amount of products a country can supply (sell, export) to or demand (buy, import) from the world. As a signatory of the ACFTA: Indonesia should recognize the. This presentation covers: the rationale and consequences of entering the regional economic integration, ACFTA and strategy that Indonesia should do.

Indonesia in the Emergence of Economic Integration The Rationale

Regional economic integration: to open or accelerate liberalization, pursue deeper integration. The intense economic cooperation: AFTA, ACFTA (2004), AKFTA (2006), AJFTA (in the process), bilateral FTA (JIEPA - 2007). The impact of the 1997/1998 Asian financial crisis: the regional and global cooperation in many aspects will be more effective and beneficial, specialize its industries - produce competitive products, larger markets (consumers enjoy: differentiated products with competitive prices), the center of production chain within the region and FDI, increasing flow of intra-industry trade. The creation of more globalized partnership should not destruct Indonesian economy and its people. The government should take responsibility (by using its resources) on excessive pressures and difficulties.

ASEAN in the Global Landscape

12 Priority Integration Sectors Towards ASEAN Economic Community Agro-based products

Air travel Automotive E-ASEAN Electronics

Healthcare Rubber-based products Textiles & apparels Tourism Wood-based products Logistics services

Fisheries

Share of Indonesia's Trade with Major Trading Partners, 20032009

There has been a tendency of regionalization in Indonesias trade.

Benefit and Costs of the ACFTA

Benefits - related to the Rationale of entering FTA: specialization-increasing competiveness level, larger markets, FDI, production chain intra-industry trade, variety of products, lower prices Costs: Winners and losers in the economy by industries and or countries (short run). For the winners: expansion, reach the economics of scale. For the losers: shrinking industries, unemployment. There should be a structural adjustment and need adjustment costs.

Indonesias Trade with the World, 1995-2008

12000000
10000000

80000000
60000000 40000000

20000000
0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Export to Import form

Indonesias Trade with China, 1995-2008

1,800.0 1,600.0 1,400.0 1,200.0
$ Juta

Enforce of ACFTA normal track Enforced ofEHP

Impor

1,000.0 800.0 600.0 400.0 200.0 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 2004 2005 2006 2007 2008 2009

Ekspor

Global Crisis

Trade Balance Indonesia-China

20
15 10
US$ Billion

0
1999 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008

Export to China

Import from China

Trade Balance

Growth of Indonesian Trade with China (1995-2008), 2000 = 100

800 700 600 500 400 300 200 100 0 19951996199719981999200020012002200320042005200620072008 Export to Import from

Factor Markets: profits, wages and employment

Firstly, the changes in wages and also employment are depended on the elasticity of the labour market Second, the removal of some protection measures in open trade policies can seriously affect the wage of unskilled labour Finally, the ability and the quickness of the industry to react to open trade can be decisive to the effects on employment and wages

Structural Adjustments: A Difficult Choices

Structural adjustment: an effort to adjust the economy in order to restore sustainable growth in per capita income. The structural adjustment is taken in place due to some shocks Structural adjustment is costly. sluggishness of production inputs such as labor (increase the risk of resource allocation)-costs of training for skilled improvement and adaptation. the limited budget of the government of Indonesia would be another problem of structural adjustments. Spending a budget of around Rp 23 trillion: Rp. 7.2 trillion for Ministry of Transportation, construct and revitalize airport and seaports; Rp 15.8 trillion for Kementrian Pekerjaan, construct and maintain roads and bridges

Structural Adjustments: A Difficult Choices

Other programs (tax subsidy, customs and tax facility, reduction in corporate income tax (around 25%), National Single Window (NSW). Tax incentives and amount of money to stimulate uncompetitive industries (in the short run). In the long run, industrial restructuring policy would be more beneficial and targeted to the more competitive industries. The expansion from primary to secondary industries which produce final goods. Skilled and educated labors and technology, including Research and Development (R&D) have to be in the priority list to be empowered. Clean government, zero cost bureaucracy to attract FDI (limited amount of domestic investment) - create additional employment. Pro-active role of government (including local government.

Expenditure on social security and welfare(% of GDP)

Expenditure on Social Security and Welfare (% GDP)
14 12 10 8 6 4 2 0 Region Sub-Saharan Africa South Asia East Asia and Pacific Latin America and Carribean Middle East and North Africa Eastern and Central Europe North America Western Europe

The Issues
Large variations in local resource availability and resource potentials Indonesia still faces an ongoing governance transition Government effectiveness has been limited by insufficient capacity and accountability of civil servants, both at the national and the local level The legal framework and system must be revised to establish a more investment- friendly environment at every level of government The government has limited capacity to address the poor quality of infrastructure services and inadequate coverage

REALITY BITES
The experience of decentralization shows that most of the local governments are ill-equipped to assume their new and expanded role it can be argued that before there is an adjustment to restructure for the above mentioned factors, ACFTA will bring more setbacks to the district governments and not all of the districts will reap benefits from ACFTA

Conclusion and Policy Recommendation

ACFTA is one of FTA in which Indonesia has involved in. The decision of entering the ACFTA (and other types of free trade agreements) brings the consequences including negative impacts and costs. The renegotiation strategy on most affected products/industries is possible (with the arguments of: high unemployment rate, infant industry, protection human safety and health, BOP crisis). The problems of the structural adjustments related to the immobile factor of production especially labors and capital. Technology (its level) and its development also undermine the capability of Indonesia to make necessary adjustments. The high cost economy deteriorates significantly the competitiveness of products and industries and make larger adjustment costs.

Conclusion and Policy Recommendation

Indonesian government has just started to make preparation on how to deal with the ACFTA (and other FTAs). The allocation of national budget to infrastructures (of road, bridge, sea and airport) is necessary; but it is not a sufficient condition. Others (water, electricity and gas) also need revitalization. Related official procedures on investment and business need serious attention from government to perform clean and good governance (National Single Window). To increase the mobility of labors (factor of production), the government has to share the costs that emerge due to the reallocation of labors to the new production lines or industries (for the losers). Other cost of plants/capital to the new production lines has to be share proportionally (especially to the costs of bureaucracy, cut to zero). Regionally, promoting the mutual fund for inter-country trade-off

Thank You Very Much Terimakasih