Infrastructure: A threat to Indonesia´s Integration in the AEC

For our minor International Protocol and Diplomatic Studies we have to write a module assignment that indicates an ASEAN specific country´s challenges to successfully integrate into the ASEAN Economic Community. My – ASEAN specific country – is Indonesia. And even though on the outside they are perceived as an economic newcomer with great potential, they still face certain problems.

Normally I am quick on seeking guilt on a governmental level. If issues are arising in the nation and development is stagnating, it is the government´s duty to take care of it. That´s what they have been elected for. But sometimes the government is financially limited to execute the needed steps. Alternatives need to replace the role of the government to a certain extent. This blog will specifically focus on the current infrastructure of Indonesia and how this problem can be overcome not by monetary actions of the government but rather by investments that come from the outside, the so called Foreign Direct Investments.

ASEAN Economic Community

ASEAN Economic Community

By means of the AEC, the ASEAN tries to create a single market in which the free flow of products, services and investments is guaranteed[1. http://www.adb.org/sites/default/files/pub/2013/aec-work-progress.pdf]. This should elevate the ASEAN member into a developed future in which prosperity is the result. Development gaps are closed and ASEAN becomes a major global player. But to ensure the free flow of goods, an infrastructure that safeguards effective transportation on low cost grounds should be given. Currently, Indonesia is strongly struggling with their physical infrastructure which has two implications for Indonesia. Not only will Indonesia´s bad infrastructure endanger the free flow of goods and thereby harm the AEC members by not full integrating their principles but also, Indonesia itself will not be able to benefit from the opportunities that the AEC is offering. [1. https://crawford.anu.edu.au/acde/ip/pdf/seminars/2011_Ray.pdf]

Indonesia has the potential to achieve economic growth of up to 8%. However, so far economic growth has been sub – optimal due to infrastructure constraints”

Fauzi Ichsan
 

The infrastructural system was evaluated by the World Bank and their Logistics Performance Index has rated them as rank 59 out of 155 countries with a score of 2.59.

  Ability to track and trace consignments Comptence and quality of logistics services Ease of arranging competitively priced shipments Efficiency of customs clearance process Frequency with which shipments reach consignee within schedule or expected time Quality of trade and transport-related infrastructure
Indonesia 3.12 2.85 2.97 2.53 3.61 2.54

Table on Infrastructure Factors[2. http://mecometer.com/infographic/indonesia/logistics-performance-index/]

The above table indicates that the clearance of customs is the currently the weakest point of indonesia concerninig infrastructure. Custom Clearance is the permission that is granted by authorities to import and export goods. Most often it is a document that requires all custom duties to be fulfilled. If not so export or import is not allowed. By restricting goods to be exported or imported or complicating the process, cross border flow of goods will be hindered. This goes against the goals of the AEC, and as indicated, limits the potential economic growth of Indonesia.

Restricting Cross-Border Trade

Restricting Cross-Border Trade

Additionally, the quality of trade and transport-related infrastructure scored only a 2.54 which categorizes it as being concerning. Due to a lack in Quality of Transported-related Infrastructure, trade is become increasingly expensive. This also endangers the free flow of goods since, instead of reducing transportation costs by decreasing tariffs, the costs attached to the action of transport will still be held up, making transportation unprofitable and therefore less attractive. Indonesia will be cut off the single market.

In order to tackle the Customs Clearance Process issue difficulties, the Indonesia´s government has to establish a liberalized approach towards trade. The bureaucratic procedures required for cross-border transportation need to be improved as to their efficiency. From a Hospitality Student´s Perspective, the most logical approach would be to benchmark the efficiency within ASEAN and take the best practice as a guideline to create more efficient procedures. In this case the best practicing country within ASEAN is Singapore with a score of 4.1. Since they are both in the ASEAN, harmonizing the Common Clearance Processes would be the peak of efficiency and integration. It could potentially enhance further bilateral trade.

Problematically so, to tackle the quality of transport, capital is needed. Indonesia is spending three percent of their GDP on the development on developing infrastructure [4. http://ec.europa.eu/transport/media/events/2014-03-27-business-summit/world-bank-presentation.pdf]. This small amount does not in any way reflect the necessity of furthering infrastructural progress. However, and to be fair, it is not the lack of willingness on the governments side, it is simply due to the lack in their financial capacity. Thus, alternative means to generate capital should be considered. Therefore the involvement of the public sector could be a potential solution. Foreign Direct Investments (FDI) would not only bring the required monetary muscle but could also bring technology and best practices to the country in which is being invested[5. http://www.oecd.org/investment/investmentfordevelopment/1959815.pdf].

Foreign Direct Investments

Foreign Direct Investments

On paper this idea is legit but there is a problem attached to this solution. Since investors seek to achieve returns on their investments, the means to attract investors are not always a given. Currently, Indonesia is very protectionist about the free flow of investments with additional restrictions on trade and foreign ownership[6. http://www.thejakartaglobe.com/business/new-indonesia-trade-law-allows-export-limits-to-protect-industry/]. To stipulate more attraction for investors, they should be guaranteed protection and liberalized, less restricted policies, so investments become more profitable. By involving the ACIA and the WTO policies for investments, these standards can be ensured.

To conclude, the infrastructure of Indonesia is posing a great problem. Due to the restrictions in trade and investments, Indonesia is not only endangering their successful integration into the AEC but also their own economic growth. To counter this, they should liberalize their trade and investment policies which would not only generate an automatic increase in prosperity but would also pave the way for foreign investors to invest into the infrastructure of Indonesia. This is a win-win situation since the government does not hold the financial capacity to solve the issue of infrastructure by itself. Additionally, by simplifying the custom clearance process, the ease of arranging competitively priced shipments would increase respectively. The competence and quality of logistic services would be ranked higher in future if the FDI would take place. Therefore, by complying to the mentioned solutions, Indonesia would be able to up their infrastructure to a competitive level, enabling them to exploit upon the AEC integration.

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