Group Blog #9 (Agung C Sumirat, Rudjimin, Rully F Sukarno)
Year 2015 just passed by. As agreed in the ASEAN Summit 2013, ASEAN Economic Community (AEC) took into effect. What actually happened then when the AEC came into being? There appears to be a mistaken expectation that something big would happen at the end of 2015, as if huge door of liberalization would open up at the point in time. This is the general perception of the Indonesian public as well as probably the public in some ASEAN Members States. In fact the process of liberalization in ASEAN has started in 1992 when ASEAN Members States signed the ASEAN Free Trade Agreement (AFTA). The reform process in ASEAN took place gradually. Besides the general misunderstanding on the AEC process, what we can capture from the public sentiment is that there is a certain degree of skepticism that AEC on the part of the public, especially the private sector – the Small and Medium Scale enterprise, that AEC brings benefit that Indonesia can reap. What are the advantages of the AEC for Indonesia? Considering that Indonesia is the most populous country in the region in with sizable number of middle class, logical thought that first naturally come out is that Indonesia only the target market for other ASEAN countries.
The first thing that people will look at in finding whether a Free Trade Agreement could bring some benefit is the level of trade creation that the Free Trade agreement will result in. Statistically speaking what people will measure is the additional market access penetration that the FTA rules will create. Using this parameter, Indonesia experiences trade deficit with ASEAN in the last ten years, around USD 11 billion in 2014. The figure will grow more and more, unless strategic balancing emerges. Then what is the incentive of Indonesia to implement the AEC? Some analysts are of the view that the impact of free trade agreement can reflect on the structural policy change and reform and competitiveness and long-run growth effect. Using the two parameters, how will Indonesia reap the benefit of the AEC? This article will analyze how the AEC can be advantageous for Indonesia and the options that Indonesia shall take to maximize the befit incurred.
Trends
There has been a shifting of global economic gravity toward Asia. China and India are the biggest drivers of this “Asianization” of global economic process. In such an undertaking, ASEAN with its ASEAN Economic Community has strengthened its position and attractiveness as an integrated economy with 620 million population and USD 2.6 trillion of GDP. With this credential, ASEAN would be the seventh-largest economy in the world. Based on the AEC Blueprint, the AEC process will enhance ASEAN economic integration through expanding an ASEAN wide single market and production base. This will allows the free flow of goods, services, investment, and skilled labor as well as the freer flow of capital.
Against this backdrop, Indonesia should reap the benefit of AEC process particularly since Indonesia is the largest economy in the ASEAN with 250 million of population. This means that Indonesia is a huge market which accounts for nearly 42% of the total ASEAN population. However the big size of the Indonesian economy and market is not a guarantee that Indonesia could reap the biggest benefit of the AEC. Instead, Indonesia can only be the target market of the other ASEAN countries economic expansion.
This happens due to Indonesia’s constraints in its competitiveness. Based on the World Economic Forum’s (WEF) Global Competitiveness Index (GCI) in 2015-2016, Indonesia’s rank has been on the 37th, dropping off from its 34th position of the previous year. Indonesia’s logistics cost is very high mainly due to the lack of adequate quality and quantity of infrastructure. More or less 17% of a company’s total expenditure is used for logistics cost, mainly for land and sea transports. While in other regional economies, the average logistics cost is already below 10%.
Options
First, Indonesia should use the AEC as a platform for pushing a structural reform of its economy including through reducing its protectionist measures (such as non-tariff barriers). Recently, President Joko Widodo has adopted 11 deregulation of economic package aiming at improving the country’s competitiveness. The Government has also committed to reduce protectionism as well as cut excessive subsidies which have made Indonesia less competitive.
Second, Indonesia should view that the AEC is not only about gaining an economic benefit. The AEC is part of ASEAN investment in ensuring peace and stability in the South East Asian region. ASEAN ability in managing possible conflicts through peaceful conflict resolution and non-violence has been an ASEAN biggest achievement. Indonesia with its more than 17,000 islands has a strong interest to make the South East Asia region to be conducive for focusing on the domestic agenda in both enhancing people’s welfare and forging a sustainable national stability.
Third, the AEC has in fact promotes the expansion of a Global Value Chain (GVC) which would produce a wider benefit of an economic opportunity to many countries. Currently it is not easy to determine which country benefits the most out of certain products. Through the GVC, generating of a product may involve various production bases in different countries. This will make those chain of economies involved grow in this process.
Conclusion and Recommendation
Indonesia has no other choice but need to use the AEC momentum as a platform to reform its structural policy with the final aim to enhance the Indonesia’s competitiveness. As a matter of fact Indonesia cannot get away from the challenges arising from the economic regionalism. Aside from the AEC, the Trans Pacific Partnership (TPP) has posed another challenge to the Indonesia’s economy. By focusing on the AEC’s benchmark, Indonesia will expectedly enhance its capacity and competitiveness in facing evolving economic regionalism.
AGUNG CAHAYA SUMIRAT 