Academic journal article Journal of Southeast Asian Economies

The Structure of Protection in Indonesian Manufacturing Sector

Academic journal article Journal of Southeast Asian Economies

The Structure of Protection in Indonesian Manufacturing Sector

Article excerpt

I. Introduction

Trade and industrialization have been the engines of economic growth for East Asian expansion. Following the "flying geese" (FG) formation (1) (Akamatsu 1961, 1962), Japan had high economic growth based on exports in the 1960s and it was followed by the newly industrialized East Asian economies--Hong Kong, Taiwan, Singapore and the Republic of Korea--in the 1970s and 1980s, the ASEAN (Malaysia, Indonesia and Thailand) in the 1980s; and China in the 1990s. To promote exports, the governments of the East Asian countries provided various incentives such as subsidized credit for exports, duty rebates, credit facilities with preferential lending rates, duty-free imports for manufacturing exported products, one-stop services for investment, etc. Later, the governments have implemented more general incentives and instruments including appropriate exchange rates, reforms of trade and investment regimes and macroeconomic policies (World Bank 1998; Aswicahyono and Pangestu 2000).

Indonesia has been implementing various trade and industrial policies since 1970s. Due to the oil boom, trade protection levels were relatively higher from the 1970s up to the mid-1980s (Basri 2002). Since Indonesia had pursued a strategy of import substitution for industrialization, it adopted inward-looking policies. Consequently, many "infant industries" required special treatment from the government such as subsidy and protective barriers for the foreign competition. From the time when the import substitution strategy was in place, the manufacturing sector was highly protected with tariff and non-tariff barriers. This strategy was set aside in the mid-1980s and since then the government has reduced both tariff and import licensing requirement.

Under various industrial and trade policy reforms, trade protection has been reduced significantly since the mid-1980s. Decrease in oil price and the 1997 economic crisis have encouraged the government to implement industrial and trade policies, which are much more "pro-liberalization". As a member of the World Trade Organization (WTO) since 1 January 1995, the government of Indonesia is required to reduce all bound tariffs to 40 per cent or less over a ten-year period, subject to an exclusion list of products for which this commitment did not apply. The largest tariff reductions in Indonesia began in 1995 although the government had reduced tariffs long before that. Tariffs on final goods had fallen from an average of 21 per cent in 1995 to an average of 8 per cent in 2001, with large variations across and within industries (Amiti and Konings 2005).

The shifts in trade regime from a liberal trade regime to a protective one during the period of increase in oil price ("oil boom") and then going back to a liberal trade regime during the decrease in oil price and the economic crisis have been part of the Indonesian trade and industrial development. Hence, Indonesia provides an interesting case study of trade protection, especially in the manufacturing sector. It shows a conventional cycle of trade protection, which states that protectionism is likely to become stronger during the weaker economic position of the country (Frey 1985; Basri 2002). To what level have the effective rate of protection (ERP) been reduced? Which industries are most protected? Compared with other countries, how fast is the Indonesian liberalization in the manufacturing sector? This paper deals with these questions and focuses only on the structure of protections in Indonesian manufacturing sector. The rest of this paper is organized as follows. Section II describes the evolution of industrial and trade policies in Indonesia, and pays more attention to the underlying political economy. Section HI represents trends in the comparative advantage of Indonesian exports. Section IV shows structure of protections in Indonesia and in some other countries. Finally, concluding remarks are presented in section V. …

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