Rising Economic Nationalism in Indonesia.

AuthorPatunru, Arianto A.

"It would be wrong to see nationalism as either an unmitigated evil or a universal virtue. It can be both, a boon and a curse." Amartya Sen (2008) "Protectionism breeds monopoly, crony capitalism and sloth. It does not achieve a happy and serene egalitarian society." Paul A. Samuelson (2005) 1. Background

The world is gradually recovering from the 2008-09 Global Financial Crisis. In 2017, for example, economic growth climbed back to 3 per cent. During this transition phase, however, the role of trade has been much smaller--thanks to the maturation of global value chains, the shift to robotization and the services economy, fluctuation in commodity prices, as well as rising protectionism around the world.

At the same time, more than 3 billion people still have to struggle to live with US$2.50 or less per day. The richest 10 per cent of the global population owns more than 85 per cent of the global wealth. Even in countries where poverty has gone down, inequality is on the rise--prompting social tensions. These factors are often seen as the main cause of the re-emergence of anti-globalization sentiments and seem to have encouraged world leaders to adopt populist, inward-looking policies. Examples of consequent surprises coming from the voting booths include Duterte, Brexit, and Trump among others. Moreover, often by riding on the back of this disdain for globalization, those in power display increasingly authoritarian inclinations--such as Erdogan in Turkey, Putin in Russia, and Xi in China, to name a few.

Indonesia is no exception. In this country, dissatisfaction with globalization has manifested itself in rising protectionism, rejection of foreign interference, and expressions of distrust of democracy--sometimes with a New Order flavour. The disappointment, nevertheless, is not totally unfounded. As in the case elsewhere, globalization--and nationalism--can bring both good and bad results, "boon and curse", as Amartya Sen put it. Trade creates winners and losers, and in the absence of (1) well-functioning compensation mechanisms and (2) free movement of labour across sectors, the gains may remain concentrated in the hands of a few. And corruption only worsens this situation.

Nationalism in the economic sphere takes the form of protectionism--protecting domestic industries from foreign competition. It usually reveals itself in policies aimed at self-sufficiency in a number of commodities, including those of which Indonesia is a natural net importer. Like several other countries, Indonesia's approach to trade has, in general, been mercantilist, i.e., promoting exports while limiting imports. As most of the protection measures in Indonesia are imposed only on the import side, this paper focuses mainly on import protection.

The article is structured as follows. The next section summarizes the current state of trade and openness in Indonesia. The third section discusses the major tariff and non-tariff measures of protection used by the country's policymakers. The fourth section is a historical take on trade policy in Indonesia--a brief chronology of approaches from the ultra-nationalist era of President Sukarno to the reform era of President Yudhoyono. The subsequent section zooms in on President Joko "Jokowi" Widodo's era, and the final section offers further points for discussion.

  1. Indonesia's Trade and Openness

    The role of trade in the Indonesian economy had been increasing in the lead up to the Asian Financial Crisis (AFC), with the share of merchandise trade in the national income fluctuating around 40 per cent since the late 1970s before reaching more than 80 per cent just before the crisis (Figure 1). The spike in openness between 1997 and 1998 also reflects the collapsing rupiah around the time (the denominator effect, as the measure is percentage of national income). After the Crisis, the figure has been continuously declining and now stands at around 35 per cent.

    Figure 2 compares Indonesia's openness to that of China, India and Vietnam. Indonesia, in the past, was much more open to trade than any of these countries. By the early 1990s, however, Vietnam had taken the lead. (1) Indonesia, on the other hand, has become less open since the early 2000s, overtaken by China. (2)

    Despite the differences in openness, the terms of trade between these countries have actually converged in recent years (Figure 3). During the 1960s, Indonesia was far behind India and China, but then its terms of trade improved dramatically from mid-1975 until mid-1985. This might reflect the effect of the two oil booms in 1973-74 and 1979-80. Since then, the trend of Indonesia's terms of trade has been similar to the other countries.

    During the AFC, the Indonesian currency depreciated dramatically and continued to stay weak for almost three years (Figure 4). As the economy began to recover, along with increasing export revenues, the rupiah too started to strengthen in 2001, and by 2003 it was catching up with regional currencies (Pangestu, Rahardja and Ing 2015). In more recent times, the trend of Indonesia's real exchange rate has been closer to that of India than that of China. It also appears that the rupiah is a bit weaker in Jokowi's era as compared to the figures observed during President Yudhoyono's second term.

    Several scholars argue that a weak rupiah is a result of the country's current account deficit. This view often results in a mercantilist approach towards trade--increasing exports and limiting imports. Figure 5, however, shows that the relationship between the currency and current account deficit might be more complicated. Although in some periods depreciation seems to follow the changes in the current account deficit, the pattern breaks down elsewhere.

    The mercantilist approach also runs counter to the structure of Indonesia's imports. As shown in Figure 6, the vast majority of Indonesian imports, around 75 per cent, is made up of raw materials, followed by 15 per cent capital goods. Consumer goods constitute only 10 per cent. This suggests that Indonesia does need imports in order to be able to produce. Figure 7 emphasizes that it is exactly the raw materials for industry that Indonesia imports the most.

  2. Measures of Protection

    In general, Indonesia has been "precariously open" since the late 1960s (Hill and Pane 2018). Two influential studies on effective protection in Indonesia (Fane and Condon 1996; Marks and Rahardja 2012) show how the country has been relatively open, despite a handful of episodes of high protectionism.

    As depicted in Figure 8, protection in Indonesia in terms of tariff has decreased over time, consistent with the trend elsewhere. The decline was relatively sharp between the 1980s and 2000s, before it fell to very low rates of 3-4 per cent (weighted mean). Under the Jokowi administration, tariffs have increased slightly.

    Similar to the case in other countries, whenever tariffs have gone down in Indonesia, non-tariff barriers have rapidly increased. Figure 9 compares the number of trade interventions imposed by Indonesia, China, Vietnam and India. The information has been sourced from the Global Trade Alert (GTA) database that tracked the trade interventions among countries since 2009. The database classifies trade measures as colour-coded green, amber, and red to indicate the level of their "harmfulness", with red being the most harmful and green liberalizing. According to the GTA, in most countries, the number of harmful measures exceeds that of liberalizing measures. This might indicate that following the Global Financial Crisis, countries became more protectionist--but the fact that GTA does not have data before 2009 makes it hard to confirm the argument.

    Figure 9 shows that the number of harmful measures in Indonesia fluctuated more than that in China, Vietnam and India--with the highest being in 2015, or a year into Jokowi's presidency. Recently, in 2017, the number is higher in Indonesia than that in China and Vietnam. India, like the United States (not shown) on the other hand, has traditionally shown more protectionist tendencies than other countries. (3) Interestingly, the number of liberalizing measures is also high in Indonesia relative to that in China and Vietnam. Again, it is not very clear in the aggregate whether Indonesia is more protectionist than these other countries. (4)

    Table 1 provides a breakdown of the "harmful" trade interventions implemented in the four countries since 2009. The number of such measures in Indonesia is 173, comparable to that in China, but higher than that in Vietnam. In fact, Indonesia's protectionism in this regard is higher than many other ASEAN countries. (5) This is particularly true for measures like anti-dumping, FDI restrictions, local sourcing, tax relief and incentives, and import tariff.

    Table 2 shows the sectors and goods that are affected most often by the trade measures (both in liberalizing and harmful ways) in Indonesia. Food and meat are among the most protected sectors in Indonesia, whereas machinery is the least protected. This is consistent with the fact that Indonesia has been pushing for food self-sufficiency, and that it has little resources for producing parts and machinery needed for industries.

  3. Protectionism in Indonesia before the Jokowi Presidency

    Under President Sukarno, Indonesia was a newly independent economy, struggling to define itself away from colonial influence. In his nation-building efforts, Sukarno relied more on politics than economics. He nationalized hundreds of Dutch companies such as De Javasche Bank into Bank Indonesia, Koninklijke Paketvaart Maatschappij into Pelayaran Nasional Indonesia (Pelni), and Koninklijk Luchvaart Maatschappij into Garuda Indonesia Airways. More than 250 plantation companies were nationalized into PT Perkebunan Nusantara (PTPN), almost 200 companies in the mining and basic industries into Badan Penguasaan Industri dan Tambang (BAPPIT) and 40 trading companies...

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