New Direction for Investment, Export Policies

HERYUNANTO

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At the end of the first term and ahead the beginning of his second, President Joko “Jokowi” Widodo has continued to remind people of the importance of foreign investment and exports for the economy.

This is expected to be the answer to the current account deficit (goods trade balance, services trade balance, primary income balance and secondary income balance).

With regard to the above challenges, in his section term, which will begin on 20 October 2019, President Jokowi has announced that he will form three new ministries, namely the Investment Ministry, the Digital Economy Ministry, and the Creative Industries Ministry. The Investment Ministry will take on the function of the Investment Coordinating Board. Meanwhile, the Digital Economy Ministry and the Creative Industry Ministry are the development of the Creative Economy Agency.

This step is to be taken by the President because he believes macroeconomic conditions are stable. Based on data from Statistics Indonesia (BPS), economic growth stood at 5.02 percent in 2014, then 4.88 percent (2015), 5.03 percent (2016), 5.07 percent (2017) and 5.15 percent (2018 ). Meanwhile, unemployment in 2014 was 5.94 percent, 6.18 percent (2015), 5.61 percent (2016), 5.5 percent (2017) and 5.34 percent (August 2018). In the 2015-2018 range, 9.38 million new jobs have been created.

Inflation stands at 3 percent, which maintains people\'s purchasing power and gives business space. In 2014, inflation was recorded at 8.36 percent, then dropped to 3.35 percent (2015), 3.02 percent (2016), 3.61 percent (2017) and 2.88 percent (September 2018). For the first time, the poverty rate was at a single-digit level (9.66 percent). The 2014 poverty rate was 10.96 percent, then 11.13 percent (2015), 10.7 percent (2016), and 10.12 percent (2017). The reduction in poverty is followed by a consistent reduction in income inequality; currently the Gini ratio is 0.389.

KOMPAS/PRIYOMBODO

An officer explains the One-Stop Service (OSS) integrated business licensing facility to applicants on Wednesday (11/9/2019) at the office of the Investment Coordinating Board (BKPM) in Jakarta. The government has made a series of regulatory improvements and eased licensing procedures to attract more investment to Indonesia.

Stimulating investment, exports

In short, President Jokowi already has good capital to start his second term and what is needed to stimulate investment and exports, which are expected to be the right formula to overcome the threat of an economic slowdown due to the US-China trade war, and to utilize it for the benefit of the Indonesian economy. Taking into consideration that China is the main supplier of the daily needs of American people, the imposition of import duties on goods from China is an opportunity for industries in Indonesia to replace it.

We need to be watchful because the trade balance in April 2019 was in a deficit of US$2.5 billion, the highest monthly trade to date. Previously, the deepest deficit was recorded at $2.3 billion, which was recorded in July 2013. Indonesia\'s trade balance during January-June 2019 was still in deficit of $1.93 billion/month. BPS also noted, cumulatively, the value of Indonesia\'s exports in the January-June 2019 period reached $80.32 billion, down 8.57 percent compared to the same period in 2018. The writer believes, if the direction is correct, a focus on policies that stimulate investment and exports enable Indonesia to gain profits in the US-China trade war, like that experienced by Thailand and Vietnam.

Many forums have revealed that Indonesia is still struggling with a number of fundamental issues that prevent it from increasing the value of exports, such as exports dominated by extractive products, fragile industrial structures and the lack of processed industries in the medium and small categories, that fact that production technology (especially textiles and steel) is far left behind, high production costs, poor infrastructure, and expensive electricity because they have to provide a large enough backup diesel.

REUTERS/STRINGER

Workers load goods for export onto a crane at a port in Lianyungang, Jiangsu province, China June 7, 2019. Picture taken June 7, 2019.

The program to improve the structure of the industry and multiply types of medium and small processed industries for all primary products of domestic production needs to be closely linked to the campaign to attract foreign investment in the form of foreign direct investment, which should not only be used to secure the current account and trade balance, but it must be effective in developing our own national industry. The benchmark for the success of foreign investment governance is not merely the ability to attract large foreign investment but to what extent it does it have an impact on increasing national capacity in the economy.

Since the Foreign Investment Law was enacted in 1967, Indonesia has continued to attract foreign investment to expand employment, increase economic growth, transfer technology and gain foreign exchange from investment. Since then, foreign investment has entered Indonesia in various fields. Almost all leading industries and national economic drivers in the early New Order Era were supported by foreign investment. During the recovery period of the 1997-1998 economic crisis, foreign investors with large investments were also relied on as sources of foreign exchange and had the opportunity to control many national economic assets, especially in banking.

In the next period, the strategy of attracting foreign investment was much emphasized on reducing the negative investment list. Even with this approach, Indonesia is often unable to compete with neighboring countries. Whenever there is foreign investment, we record it as foreign exchange. However, outgoing foreign exchange needs to be provided continuously after the investment begins to generate profit, to pay dividends to foreign investors.

Foreign products marketed to the domestic market are very detrimental. If this type of business continues to grow from year to year, it will drain our foreign exchange.

For Indonesia, the necessity of providing US dollars for dividend payments to foreign investors in recent years has become increasingly burdensome. Financial market participants recorded a pattern in every second quarter of each year, where the value of the rupiah was always under pressure, allegedly because the demand for the US dollar increased as foreign investors exchanged rupiah dividends into US dollars to be deposited to foreign holding companies.

A situation where the trade and payment balance has a deficit will erode foreign exchange reserves that have been raised from the trade and payment surplus. As a result, the value of the rupiah tends to decline.

Foreign products marketed to the domestic market are very detrimental. If this type of business continues to grow from year to year, it will drain our foreign exchange. In this context, it is unfortunate that the majority ownership changes of several national consumer goods products/brands have gone to foreign companies, such as Aqua to Danone from France, Kecap Cap Bango to Unilever from the United Kingdom, SGM Milk to Royal Numico (Netherlands)-Danone , and Ketchup, Sauce, ABC Syrup to Heinz from the United States.

What is more profitable is export-oriented foreign investment with the necessity of placing foreign exchange export earnings in Indonesia, which in recent times has become increasingly difficult to obtain because many countries fight over this type of investors. What is promising are efforts to encourage Indonesia to seize the market share of Chinese textile exports to the US, along with plans to increase cotton imports from the US.

KOMPAS/PRIYOMBODO

Monitors surround a female officer waiting to serve customers of the One-Stop Service (OSS) integrated business licensing facility on Wednesday (11/9/2019) at the office of the Investment Coordinating Board (BKPM) in Jakarta. The BKPM has set an investment target of Rp 792 trillion (US$56.15 billion) for 2019, comprising Rp 483.7 trillion in foreign direct investment and Rp 308.3 trillion in domestic investment – of which Rp 395.6 trillion has been realized in the first half of the year.

Foreign investment in infrastructure projects is also good because it has a concessional system with a limited period. In controlling the negative impact of foreign investment on the monetary system, some countries apply strict rules that require foreign companies to partner with local companies so that dividends do not fully leave the country. There is also a regulation that requires foreign owners to divert to domestic entrepreneurs after a certain period of time.

We really need to be selective in looking for foreign investors, namely  ones which will lead us to the fulfillment of our national interests to develop our own national industry, especially medium and small manufacturing industries for all primary products of domestic production.

New strategy

We need to try a new strategy by finding medium foreign investors to build partnerships with local entrepreneurs to boost a variety of industries throughout the country, rather than targeting large investments that are wholly owned by foreigners.

If this can be realized, Indonesia will have a much more complete business ecosystem that will be able to attract more foreign investors, because in the domestic market there will be enough variations of raw material products and supporting materials that allow for product engineering and continued innovation, which will increase Indonesia\'s ability to produce export goods with high added value.

Kompas

Siswono Yudo Husodo

As a country that does not want to be trapped in conflict between the world\'s great powers, we also need to pay attention to investors’ country of origin by prioritizing countries that do not have political tendencies toward Indonesia, such as Scandinavian countries, European countries, Latin America, in addition to South Asia , ASEAN, South Korea, Japan and Taiwan. This approach will simultaneously open up export opportunities to new and potential markets.

In the future, efforts to encourage exports also need to be pursued by multiplying the number of exporters, encouraging the presence of Indonesian-owned trade offices throughout the world with financial support from national banks, and supporting Indonesian entrepreneurs to invest in developing production overseas, including Indonesian restaurants, as has been done by Japan, Korea and Thailand. Initially, this process will require outgoing foreign exchange, but later on it will result in continuous re-entry of foreign exchange into Indonesia.

Hopefully, synergy among stakeholders of the national economy in implementing new approaches in the field of investment and exports will enable Indonesia to progress faster.

Siswono Yudo Husodo, Chairman, Board of Trustees, Pancasila University