Export Performance and Fiscal Incentives

KOMPAS/AGUS SUSANTO

Ari Kuncoro

For Indonesia, the trade deficit is a combination of the problems of terms of trade (TOT) and productivity. Since November 2018, Indonesia’s TOT has declined because of the slowdown of global economic growth caused by the United States-China trade war.

In January, Indonesia suffered a trade deficit of US$1.16 billion. The deficit occurred because the decline in exports was greater than the decline in imports. The average export price has fallen since June 2017, while export volumes have not changed much. This is a phenomenon for countries that rely on the export of primary commodities.

Imports fell across the board, such as consumer goods, raw/auxiliary materials and capital goods. The biggest decline occurred in the consumer goods. Import controls to improve the trade balance have limitations. Exports - especially manufactured goods - requires imports of supporting goods, both raw/auxiliary materials and capital goods. The development of import substitution industries cannot be done overnight. The alternative is to boost exports, especially manufactured goods.

The effort to boost exports of manufactured goods is clearly not as easy as turning the palm of the hand. Exports should be supported by hundreds, even thousands, of companies that should come out of their comfort zones and focus on export markets.

Exports should be backed by the company\'s productivity, nonproduction activities such as marketing, a network of buyers and suppliers, as well as the company\'s external environment, such as roads, ports and business climate. Profits should be calculated and compared to all risks and costs before deciding to export.

Data from the survey on middle and large industries conducted by Statistics Indonesia (BPS) shows that for manufacturing companies, exports are not an easy job. The number of export-oriented manufacturing companies has fluctuated.

In 1991, exporting was done by 15 percent of companies in the manufacturing sector. In 1996, the figure rose to 19 percent, the highest level recorded in the 1991-2015 period. The monetary crisis in 1998 caused the number to fall again to 16.5 percent until 2000. The commodity bonanza in 2004 to 2012 created an explosion in the exports of the food and beverage subsector, which includes palm oil.

The appreciation of the rupiah in that period also reduced exports of other manufacturing subsectors. As a result, in 2010 the number of companies that exported accounted for only 13.2 percent of companies. This phenomenon is known as the Dutch disease, which refers to the discovery of gas fields in the North Sea in 1959, which made the Dutch nonoil and gas sector shrink due to guild appreciation.

The same situation was seen in Indonesia in the 1970s and early 1980s, when oil prices on the international market increased sharply.

An export recovery began in 2013 and 2014, during which the figure rose to 14.1 and 17.3 percent respectively. However, because of the slowdown in world trade caused by the United States and China trade wars, the figure fell back to about 15 percent in the following years. The fluctuation shows the dynamics of companies entering and leaving the export market. It depends much on external situations that affect the level of profits and risks faced by companies.

From a survey on the medium industry conducted by Statistics Indonesia, corporate profits in the manufacturing sector was not too large, averaging only 20 percent. In the labor intensive industry, it is even below 15 percent. Margins may not be sufficient to absorb costs and risks in the penetration of export markets.

The question is that can fiscal incentives increase interest in exports? Simulations with a simple probability model show that if the corporate income tax rate is reduced from 25 percent to 20 percent, the proportion of companies exporting will increase from 15.6 percent to 17.7 percent (and can approach 20 percent if calculating the standard deviation).

With the assumption that the number of manufacturing companies is 28,917 — as stated in the 2015 Industrial Survey — the number of manufacturing companies that may switch to export markets is quite significant, reaching 1,276 companies.

Of course this simulation does not take into account the fiscal costs that must be carefully calculated. To alleviate fiscal costs and increase the number of new exporters, it is also necessary to improve the business environment, such as reducing logistics costs and streamlining licensing procedures.

The improvement of the quality of infrastructure facilities as reflected in the improvement of the Ease of Doing Business Index and the Logistics Performance Index are also expected to encourage more companies to enter the export market in the coming years in line with the prospect of the end of the US-China trade war. (Ari Kuncoro, Professor and Dean, Economics and Business School, University of Indonesia)