INDONESIA - OECD.org

1 OECD Reviews of Regulatory ReformINDONESIAMARKET OPENNESSS eptember 2012 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENTThe OECD is a unique forum where governments wor k to gether to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation pr ovides a setting where govern ments can compare policy experiences, seek answers to common pr oblems, identify good pr actice and work to co-ordinate domestic and international OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

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3 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. Foreword This background report on Market Openness in INDONESIA analyses the institutional set-up and use of policy instruments in INDONESIA . It was peer reviewed by the Working Party of the trade Committee of the OECD on 22 March 2012, with the participation of officials of the government of INDONESIA , and concludes with policy options for consideration by the government of INDONESIA . The OECD Review of Regulatory Reform in INDONESIA is one of a series of country reports carried out under the Regulatory Reform Programme of the OECD, in response to the 1997 mandate by OECD Ministers. Under this programme, the OECD has assessed the regulatory management policies of 24 member countries, as well as Brazil, China and Russia.

4 The reviews aim at assisting governments to improve regulatory quality that is, to reform regulations to foster competition, innovation, economic growth and important social objectives. The review methodology has developed over two decades of peer learning. It draws on and is grounded in a number of OECD instruments including: the 1995 Recommendation of the Council of the OECD on Improving the Quality of Government Regulation; the 2005 Guiding Principles for Regulatory Quality and Performance; the 2009 OECD Recommendation on Competition Assessment; the 2012 OECD Recommendation of the Council on Regulatory Policy and Governance; and the 2012 OECD Recommendation for Public Governance of Public-Private Partnerships. This is the first review in this series to be undertaken under the auspices of the OECD Regulatory Policy Committee, which was formed in 2009.

5 This paper was prepared by Molly Lesher of the OECD trade and Agriculture Directorate, under the supervision of Michael G. Plummer and Raed Safadi. Stephen L. Magiera s contribution as a consultant is gratefully acknowledged. The author is indebted to Clarisse Legendre (statistics) and to Jennifer Griffin and Anita Lari (administration) for invaluable assistance. The author wishes to thank Paul Bartlett and sa Larsson, as well as Rachel Dunstone, Philip Houlding, Elly Lawson, Oke Nurwan, Walter Van Hattum, and colleagues in the OECD Secretariat, especially Gregory Bounds, Nikolai Malyshev and James Sheppard, for very useful comments and suggestions. The author also acknowledges the contributions of participants at the three Working Group Meetings of the INDONESIA Regulatory Reform Task Force (February 2011, October 2011, and February 2012).

6 The report also benefitted from discussions in the OECD Working Party of the trade Committee, which has agreed to make the study more widely available through declassification on its responsibility. All background reports of the OECD Review of Regulatory Reform in INDONESIA are available at OECD 2012. All rights reserved. 3 ABSTRACT This paper focuses on the market openness aspects of regulatory reform in INDONESIA to devise recommendations for improving the country s regulatory processes. These recommendations involve institutionalising independent and objective evaluations of policies from an economy-wide perspective, as well as instituting a process by which broad public consultations are systematically required. Moreover, the findings in this paper suggest that the Indonesian economy would benefit from streamlining the licensing regime.

7 The paper also identifies a need to ensure that new laws and regulations benefit INDONESIA as a whole. Finally, the paper advocates for better co-ordination between the central government and the periphery. The implementation of these recommendations will help INDONESIA achieve its goal of becoming one of the world s ten major economies by 2025. OECD 2012. All rights reserved. 4 TABLE OF CONTENTS Executive Summary .. 6 I. The current trade and economic environment in INDONESIA .. 9 trade has contributed to INDONESIA s impressive growth, but trade and growth remain below potential .. 10 Goods trade is concentrated in energy .. 13 ..amid a marked shift of increased trade with developing countries, primarily in Asia .. 16 trade in services is less developed and concentrated in relatively few 17 FDI has benefited INDONESIA , but it is not widely spread across the archipelago.

8 19 II. Recent developments in trade and investment policy .. 20 Tariffs have fallen sharply in recent years .. 21 Services regulations appear minimal at first .. 26 ..but important barriers to commercial presence (mode 3) remain .. 28 Non-tariff measures touch upon many segments of the economy .. 33 III. The trade and investment policymaking process in INDONESIA .. 38 High-level teams tend to dominate the policymaking .. 40 ..but ministries also play an important role in the policy process .. 43 IV. Integrating INDONESIA s domestic market and linking it to world markets .. 44 Connecting INDONESIA s domestic market more effectively .. 45 Linking INDONESIA to world markets .. 52 V. Conclusion .. 56 Annex .. 63 Tables Table 1. Selected indicators, INDONESIA and Southeast Asia, 2010 .. 10 Table 2. Top 10 products exported at the 6-digit level of the HS classification, 1995 and 2010.

9 14 Table 3. INDONESIA s top 10 trading partners, goods trade .. 17 Table 4. INDONESIA s trade in services, 2008 .. 18 Table 5. INDONESIA s top 10 trading partners, services trade .. 19 Table 6. INDONESIA s MFN 22 Table 7. Nominal and effective rate of protection in INDONESIA , 2005 .. 22 Table 8. Average MFN applied tariffs in ASEAN countries .. 23 Table 9. CEPT rates are substantially lower than INDONESIA s MFN tariffs, 2006 .. 24 Table 10. ASEAN services restrictiveness scores in select sectors, 2009-10 .. 26 Table 11. Comparison of Foreign Equity Ceilings in INDONESIA and the World, 2010 .. 32 Table 12. OECD FDI Regulatory Restrictiveness Index, 2010 .. 33 Table 13. Key licenses and permits for starting a manufacturing business in INDONESIA .. 49 Table Inward stock of FDI as a share of GDP, ASEAN Economies and China .. 62 Table Comparison of Investment Negative Lists and other regulations over time.

10 63 Table INDONESIA s Bilateral Investment Treaties, 1 June 2011 .. 64 OECD 2012. All rights reserved. 5 Figures Figure 1. Evolution of GDP per capita and trade as a share of GDP in INDONESIA .. 11 Figure 2. Share of INDONESIA in world trade , 1994-2009 .. 12 Figure 3. Trends in INDONESIA 's terms of trade .. 12 Figure 4. INDONESIA s trade is dominated by energy, 2010 .. 13 Figure 5. INDONESIA 's export performance: Goods trade , 1996-2010 .. 15 Figure 6. Revealed Comparative Advantage indices for INDONESIA , selected sectors .. 16 Figure 7. Inward stock of FDI as a share of GDP .. 20 Figure 8. INDONESIA s tariff structure .. 21 Figure 9. Hierarchy of INDONESIA s domestic regulation as provided for at the national level .. 39 Figure GDP growth (annual %), INDONESIA .. 63 Boxes Box 1. The policy environment for logistics services in INDONESIA .