Global Services Supply Chain in Indonesia: The Case ofTelecommunications Services.

• Author: Anas, Titik

1. Introduction

   The services sector has been gaining importance in many countries in recent years. Responsible for more than 70 per cent of employment in OECD countries, the sector has continued to show steady growth in terms of share of total employment around the world. A similar trend is also observed in Indonesia. Although not as dramatic as manufacturing, the share of services in the national GDP has been steadily rising. However, the latest statistics show that services account for a higher share of employment than of GDP, indicating that labour productivity observed in services is lower than in other sectors.

   This paper examines services sector liberalization for Indonesia in terms of global value chain (GVC) activities, primarily focusing on the telecommunications sector. Using Input Output Tables and sectoral-level data, the value chain for the telecommunications services is mapped out to show the sector's economic contributions. The study also discusses the relevant regulatory constraints impeding the services sector and the steps that can be taken to enhance its growth.

   A number of studies suggest that increasing the services sector's competitiveness could prove to be of great significance to Indonesia's overall economic progress. For example, research conducted by Duggan, Rahardja and Varela (2013) on Indonesia, Arnold, Mattoo and Narciso (2008) on African countries, and Fernandes and Paunov (2008) on Chile revealed how an increase in the degree of competition in the domestic services sector can also increase the productivity of the respective economies' manufacturing sector. Similarly, Deardoff (2001) argued that liberalization of trade in services can generate benefits beyond the services sector, by reducing real barriers to trade in other sectors. Using simple theoretical models, he further showed that the gains yielded will be even higher for formerly restrictive economies like Indonesia. Mattoo and Stern (2008), (1) in fact, have suggested that the gains from liberalizing services may be substantially greater than those from opening up trade in goods because of the potential spillover effect of the required movement of capital and labour within and between economies. In the same context, Robinson et al. (2002) showed that welfare gains from a 50 per cent cut in services sector protection will be five times higher than the gains from non-services sector trade liberalization.

   In terms of the regulatory framework, Dee (2012) emphasized the need for "regulation reformation" to expedite the attainment of liberalization goals. Also, regulatory constraints can largely depend on industrial characteristics, as proposed by Deardoff (2001). With regard to the labour market, growth in employment in services is also linked to export of manufacturing products; consequently, the regulations that affect labour migration can play a crucial role in creating greater yields for an economy (Manning and Aswicahyono 2012).

   Given this background, this study presents a case study of the telecommunication services sector in Indonesia. The paper is organized as follows. The next section provides an overview of Indonesia's services sector. The third section focuses on the country's participation in global value chains. The subsequent section highlights the case study of the telecommunications sector, and the final section concludes.

2. Indonesia's Services Sector at a Glance

   The services sector in Indonesia has been steadily growing over the past few decades, progressively accounting for larger shares of GDP and employment. However, the sector accounts for a minor portion of export and import figures. The share of services trade in total Indonesian exports has been relatively steady over the last decade at around 10 per cent, while its share in total imports has fallen from 31 per cent in 2003 to around 16 per cent in 2013 (Figure 1). As a result, its proportion to total trade displayed a somewhat declining trend from around 18 per cent in 2003 to only around 14 per cent in 2013. This is in contrast with the proportion of trade in goods, which has remained strong at above 80 per cent throughout the 2003-13 period, except in 2004.

   During the 2004-14 period, me travel sector dominated Indonesia's services exports, followed by other business services (Figure 2). (2) Despite fluctuations, the travel sector maintained its lead over other services in terms of exports, far exceeding financial, insurance and pension services. Similar features are observed in Indonesia's services imports (Figure 3). Here, transportation, travel and other business services formed the bulk of the country's import of services, closely followed by telecommunications, and computer and information services.

   Despite the relatively small share in overall trade, the growing importance of Indonesia's services cannot be overlooked. Based on the 2005 and 2010 Input Output (I-O) Tables, the services sector accounted for about 34.3 per cent and 33 per cent, respectively, of the total intermediate input, with trade and transport providing the largest services input to the manufacturing sector. The 2010 Indonesia's I-O Table also highlighted the contribution of the telecommunications services in manufacturing. As a matter of fact, the data reported that about 0.5 per cent of manufacturing intermediate input came exclusively from telecommunications.

   Here, the "restrictiveness stance" of services is worth noting. As international trade in services is often impeded by international trade and investment barriers as well as domestic regulations, the OECD has developed the Services Trade Restrictiveness Index (STRI) to help identify policies that limit trade. Indonesia's scores on the STRI in select sectors available at the OECD STRI dataset are shown in Figure 4. Based on the OECD calculations, Indonesia has a higher STRI score than the sample average in all twenty-two services. This reflects the restrictions that emerge due to the presence of at least one major state-owned enterprise (SOE) in all key services such as air transport, banking, broadcasting, construction, courier services, distribution, insurance, maritime, logistics and telecommunication services (OECD 2015). While logistics customs brokerage, architecture and engineering services were the three sectors with the lowest STRI scores (most open), they were still higher than the sample average. Meanwhile, legal services, motion pictures and air transport (covers establishment only) scored the highest, making them the most restrictive services in the country.

   The high restrictiveness in Indonesia's services sector is generally supported by another index that focuses on measuring the regulatory barriers on foreign direct investment (FDI). The evolution of the OECD FDI Regulatory Restrictiveness Index from 1997 to 2014 (Figure 5) shows that, while Indonesia is becoming more open to foreign investment, obstacles remain. It can be seen that hotels and restaurants have become the most progressive sector in terms of FDI openness. The communications and distribution sectors grew more restrictive in 2014 compared to 2006, but real estate investment remained completely closed throughout the observed period. Overall, the easing of regulations has induced greater FDI inflows to Indonesia. Although the services sector has been leading the direct investment projects in the country, in terms of monetary value of the projects, manufacturing has enjoyed the lead since 2012...