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“What we want to do is generate the value addition in Indonesia”

Interview - July 1, 2014
Globalization has drastically changed trade and industry during the last decade in Indonesia. Agus Tjahajana Wirakusumah, Director General for International Industrial Cooperation at the Ministry of Industry, speaks about the impact of globalization on Indonesia, the new Industrial Law, developing value-adding industries and the impending ASEAN Economic Community.
What is the role of the Directorate General for international industrial cooperation and how has globalization affected its mandate?

It is important to point out that in terms of world trade; the situation for Indonesia is completely different now compared to 10 years ago. As a result of globalization, the way Indonesia and the industry sector operate has to change as well. We need to take a closer look at the world, observe current trends and predict what the future will bring in the world of trade, especially for industrial products. The Directorate General for International Industrial Cooperation facilitates matters related to international cooperation, specifically multilateral, bilateral and regional issues, all related to trade. I also coordinate all interests connected to industrial production.

After 30 years, the People’s Representative Council finally passed the new Industry Law in December 2013, to address the challenges arising from rapid economic development, globalization and trade liberalization. What are the most important points of the 2013 Industry Law?

The Industry Law is comprised of several chapters and is customized to reflect the present economic situation, since the previous law was outdated. Numerous factors have to be taken into account regarding international trade and the development of industrialization in Indonesia. For instance, there are new chapters focused on green industries, which is a modern concept. This issue is in fact a relatively new phenomenon that presents challenges for the country as it adapts to the paradigm. Additionally, there is democratization to be taken into account and increased decentralization through a law passed to provide greater autonomy to regions. This is a result of new legislation, enacted in 2004, and was not taken into consideration in the previous industry law.

The new Industry Law is directed towards greater protection of domestic industry while at the same time promoting a high level of foreign investment. How do you find the balance between these two goals?

This is related to how we defend ourselves against globalization. If you take a look at the level of openness of the country, which is usually indicated by tariffs, Indonesia is already considered to be very liberal. Our average tariff in Indonesia is only 8.6%, compared to 10% in China and about 16% in Brazil. Even the average tariff in South Korea is higher than in Indonesia, because they are still very protective of their agricultural sector.
Given the nature of this situation we have to be very smart. Tariffs are important factors for new investors coming to the country because their enterprises are in the early stages of establishment and they need protection. Tariffs are beneficial for them, because in the first or second year of their operations everything is new, and depreciation is still very high. The machinery of their business is not running efficiently yet and that is the reason why Indonesia still maintains its tariffs at a very moderate level.
As a member of the World Trade Organization (WTO), Indonesia honors its commitments for setting tariff levels and now the maximum level is 40%. So although Indonesia, according to WTO agreements can set as much as a 40% tariff we only set an average of 8.6%.

In addition to protecting fledgling businesses, the other important factor created by this tariff policy is encouraging competitive practices.

There has been significant policy focus on developing the downstream industries. How important are the legal reforms in order to achieve this goal?

Developing the downstream sector is not only a matter of legislative incentives, but it is an absolute must for our country. Why did the Dutch come to Indonesia? Why did the Portuguese come to Indonesia? Why did the British come to Indonesia? It is because they wanted to have access to our raw materials. Three centuries ago they wanted spices. The value and type of commodities may have changed, but economic demand still remains.

We are the number 2 producer of cocoa in the world, but which country enjoys the biggest added value to this product? The answer is Switzerland, which doesn’t have a single cocoa tree. We are not advocating that we shouldn’t sell cocoa to Switzerland anymore, but there is a need to share the value addition of processing with the farmers. Being able to create this value addition greatly depends on technology, management, sales and marketing, which multinationals are very skilled in.
What we want to do is generate the value addition in Indonesia in order for our people to get access to its benefits. We can share the rewards with multinationals that set up shop here. Of course, we do not expect an equal split. If we can get 20-30% of business, that is more than enough. This should take place not only with cocoa, but with other commodities as well including palm oil and rubber. Value adding is a key element of development that we have to pursue.

Indonesia has all the ingredients for a great future: natural resources, human capital and a strategic location. What are the main challenges the country is facing and what are the key priorities to achieve before the end of this electoral cycle?

In my opinion, the challenge is democratization. Indonesia has been working to maintain and develop its young democracy. You can look at the region and see Thailand, which is still struggling in its democratic development. And Vietnam for instance, which is a socialist country. The Philippines is working very hard on this path as well. Sometimes if we compare the Philippines to Indonesia, we see many parallels. We have seen changes in leadership, while still maintaining a relatively stable situation.
We have gone through the process of democratization after the stepping down of President Suharto. Now the current president has been running the country for 2 terms. I hope that under the next president we will see the continuation of democratic development.

How is the establishment of the Asian Economic Community (AEC), which will be implemented in December 2015, going to benefit Indonesia? What are the main challenges for Indonesia?

We cannot compare the AEC with the European Union (EU), because it has a totally different approach. The EU has a single currency and it is led by commissioners, both of which we do not have. In the AEC we will still be individual countries, but we will be united through a signed agreement. The agreement of the AEC is not as strong as that of the EU. The AEC is related purely to economic and not political ties.
The primary trading partners of ASEAN member states are not ASEAN countries. Internal trade amongst us is only 30-40%. Indonesia exports 30% of its goods and of this 30%, one-third is exported to ASEAN countries. 70% of our goods are being used domestically. We are not reliant on exports, but other ASEAN members such as Singapore and Malaysia for instance depends heavily on them. An interesting fact of ASEAN is that our production is very similar. But cars produced in ASEAN are actually managed by one country, Japan. The multinationals in Indonesia also operate in other ASEAN countries, in the automotive sector, in electronics or even in the food and beverages sector. By doing this, their economics of scale are higher. The Japanese produce cars in every Asian country. But with ASEAN they produce cars for the entire ASEAN market.

Do you think Indonesia can establish itself as an industry based country for US companies looking to enter the AEC market?

Of course Indonesia always welcomes US companies, but most US companies opt for China rather than Indonesia. They are more comfortable with China, because it offers a lot of benefits, which we cannot afford. That is why many companies from Europe also establish factories in China. But we understand that one day those attractive factors will diminish. If labor cost is one of the key factors, then certainly Indonesia can compete with China. At the moment, investment from the US goes mainly into the oil and gas sector. There are many reasons for companies like Chevron and Exxon Mobil to come to Indonesia. The demand is there. Caterpillar is here, because we have a strong demand for their equipment from the mining sector.