Indonesia Needs to Join TPP
Widodo's reforms thus far have been piecemeal.
When Indonesian President Joko Widodo meets Barack Obama in Washington Monday, they'll have plenty to discuss. Their agenda includes defense, climate policy, maritime cooperation and much else. Trade is there too -- and should go right to the top, because that's where both countries have most to gain.
Widodo's first year in office has been something of a disappointment, partly because expectations ran too high. (Obama may sympathize.) The new president hasn't been idle, but he's sent no clear message about the kind of economy Indonesia needs to become. Trade policy is the best way to deliver that message, and the U.S. is in prime position to help.
Indonesia isn't a member of the Trans-Pacific Partnership trade pact, recently concluded by the U.S. and 11 other partners. It ought to be. Seeking membership in TPP is a worthy goal in its own right and would announce, in the clearest possible terms, that Indonesia is open for business.
This will require a radical change in thinking. Indonesia's official attitude to trade has long been fearful and nationalistic. Onerous local-content requirements, as well as outright import restrictions, distort the economy and fuel inflation. To compete effectively with India, Vietnam and others, Indonesia needs a clear break from its traditional protectionist mindset.
While Widodo himself has been cagey, aides have declared that Indonesia hopes to join TPP within the next few years. Widodo himself should endorse that as a top priority. Membership would expose domestic producers to much-needed competition, and provide fresh opportunities in export markets. It would help Indonesia integrate its producers into complex global supply chains -- the sine qua non of industrial modernization.
Messaging aside, Widodo has taken tentative steps in the right direction. After Indonesia's growth slowed to 4.7 percent in the second quarter, and stocks and the rupiah plunged over the summer, he thoroughly reshuffled his economic team. Ever since, ministers have been pruning regulations and announcing new measures to make it easier to trade and invest.
The government has pledged to review its so-called negative list, which sets limits on foreign ownership. Widodo has talked about opening sectors such as e-commerce, which he claims could grow to as much as $130 billion in 2020, from $13 billion today.
These changes have been valuable, but piecemeal. They don't add up to a coherent program or a believable promise of more to come. And there's indecision -- for instance, over energy policy, where the government has just reversed an initial effort to liberalize prices.
Resistance to the cultural transformation that Indonesia needs is strong. Widodo has a narrow parliamentary base. He'll have a tough time challenging the vested interests that profit from trade barriers.
Hardest of all will be cutting the thicket of rules that make Indonesia's huge labor market one of the world's most rigid. The high cost of hiring and especially firing has stunted growth and raised unemployment. Allowing in more foreign managers and technical advisers -- rather than demanding that companies hire 10 Indonesians for every foreigner -- would help with training and encourage transfer of technology.
None of this will be easy -- but a clear commitment to TPP would help. It would signal Widodo's wider ambitions for the economy. It would apply extra pressure on forces resistant to change. And it would deliver tangible gains, in the form of better access to overseas markets, to the country's exporters.
A good headline to read after the presidents' meeting: "Indonesia declares its ambition to join TPP."
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