Indonesia needs liberal trade in services: World Bank

22 March 2017 10:57

Indonesia needs liberal trade in services: World Bank

Jakarta, March 22 2017. While the United States is bulking up trade protectionism under President Donald Trump, the World Bank has urged Indonesia to liberalize its trade in services, arguing the move would boost the country’s competitiveness in many business sectors.

In the March edition of its Indonesia Economic Quarterly, the bank highlights that trade in services is one of the most promising engines for growth for Indonesia because of its vibrant role in other sectors, and that it has more resiliency compared to trade in goods.

The services sector, which accounts for around 45 percent of Indonesia’s gross domestic product (GDP), has seen an annual growth rate of 6.8 percent since 2001, faster than the industrial and agricultural sectors, government and World Bank data show.

More than half of employed Indonesians, or 64.7 million workers, were employed in the services sector by early last year, and more than 2 million jobs were added in the sector in 2015 alone.

The bank’s report shows that services have key inputs of production in many sectors in Indonesia’s economy, including 44 percent of the value of intermediate inputs for the mining sector, as well as 32 percent and 21 percent for the agriculture and manufacturing sectors, respectively.

“Therefore, any policies applied to the services sector would also have substantial implications for the competitiveness of other sectors,” the bank’s report said.

However, Indonesia maintains substantial restrictions on trade in services, leading to lower productivity compared to most middle-income economies, according to a study by the Organization for Economic Cooperation and Development (OECD), citing the country’s highly restrictive barriers as one of the problems.

“If the barriers can be reduced, it will push competitiveness not only in services, but also in other sectors,” the World Bank’s country director for Indonesia, Rodrigo Chaves, said on Wednesday.

One of the barriers is a prohibition on foreign lawyers setting up a commercial presence or practice in the country, something that many other countries allow. The only possibility to tap into overseas legal expertise is by hiring foreign lawyers to provide advice on foreign law to Indonesian advocates.

Additionally, certain management positions in Indonesian corporations are reserved for Indonesian nationals. While this may protect skilled workers, the World Bank argues that it is also likely to reduce the quality and increase the price of providing these services, thus harming downstream industries.

President Joko “Jokowi” Widodo has previously suggested that Indonesia might need to employ foreign workers in the top positions of state-owned enterprises (SOEs) in a bid to promote healthy competition among SOEs, which would eventually benefit the overall economy.

However, the idea has sparked condemnation amid rising negative sentiments toward foreign workers, particularly from mainland China, who some believe take jobs from locals.

Businesspeople have pointed out that the current government is actually open to investment, including foreign investors, but it would need sustainable economic policy reforms that could engage them closely to ensure better implementation on the ground.

“The main issue is that the government has started many deregulation efforts, but at the same time we’re still seeing a lot of contradicting policies. Many foreign investors have concerns about foreign investment protection,” said Shinta Kamdani, vice chairman for international relations at the Indonesian Chamber of Commerce and Industry (Kadin) & ISD Board of Founders.