10 th Sadli Lecture. Services Sector as a Driver of Change: Indonesia s Experience in the ASEAN Contect

Transcription

1 12 April 2016, Jakarta 10 th Sadli Lecture Services Sector as a Driver of Change: Indonesia s Experience in the ASEAN Contect Christopher Findlay, University of Adelaide and Mari Pangestu, Univeristy of Indonesia

2 Outline 1. Services sector facts: role in Indonesian Economy 2. Trade and investment in services 3. Services and productivity 4. Services and the rest of the economy 5. Services policy 6. Conclusions and Reform strategies

3 1. Services sector facts About 45% of GDP and 43% of employment 60m people employed in services, increase of 20m in the last decade Some assessments, however, that this is underdeveloped Services growth is associated with Poverty reduction Growth of female employment

4 Share of GDP (%) Increasing role of services sector in Indonesia: surge in the 1980s and Share of Services, Industry, and Agriculture in GDP, Indonesia, Industry Services 20 Agriculture 10 0 Source: Data from the World Bank s World Development Indicators

5 Services sector grew at a higher rate than national growth and other sectors, doubling of transport and communication sector Source: Data from the Badan Pusat Statistik

6 Share of GDP (%) Despite rapid growth share remains below ASEAN Figure 2a. Share of Services in GDP, Indonesia and Other ASEAN Countries, Other ASEAN Countries Indonesia Source: Data from the World Bank s World Development Indicators. Note: Other ASEAN = Average of Brunei, Malaysia, Philippines, Singapore, Thailand, and Vietnam.

7 Rising Contribution to Employment Employed Workers by Sector, Indonesia, (million) Services Agriculture Manufacturing Source: Data from the Badan Pusat Statistik s National Labour Force Survey (Sakernas)

8 But still below share of most ASEAN countries Source: Data from the World Bank s World Development

9 Still mostly in unskilled and informal sector such as trade in construction, but growing in other more formal sector (this definition includes electricity, construction, water and gas) Figure 4. Services Employment, by Subsector, Indonesia, 2013 (%) Wholesale and retail trade Construction Other community, social and personal service activities Transport, storage and communications Education Hotels and restaurants Public administration and defence Activities of private households as employers Financial intermediation Real estate, renting and business activities Health and social work Electricity, gas and water supply Source: Data from the Badan Pusat Statistik s National Labour Force Survey (Sakernas)

10 High female participation rate in services sector Figure 5. Female Participation in Services, by Activity, Indonesia, 2013 (%) Activities of private households as employers Health & social work Education Hotels & restaurants Wholesale & retail trade Manufacturing Agriculture, hunting, & forestry Other community, social, & personal services Financial intermediation Public administration & defence Real estate, renting, & business activities Electricity, gas, & water supply Fishing Mining & quarrying Transport, storage, & communications Construction Source: Data from the Badan Pusat Statistik s National Labour Force Survey (Sakernas)

11 Services sector grows with income Demand and supply side factors are often identified as drivers of this trend But we argue services growth is fundamentally about the organisation of production In particular, the use of contracting out Drivers of growth then relate to the incentives to contract out Interesting connection to urbanisation Hill: a service transaction occurs when one firm adds value to the products owned by another

12 GDP per Capita ($ 000) and the share of services in GDP (%), 2013 Source: Data from the World Bank s World Development Indicators. Note: Other ASEAN = Average of Brunei, Malaysia, Philippines, Singapore, Thailand, and Vietnam. Source: Data from the World Bank s World Development Indicators. Note: Logarithmic scale on x-axis.

13 2. Trade and investment in services Services require contact But can still involve an international transaction Consumers move Producers (firms) move (FDI) Contact across the internet People move Cross border transaction data is often quoted, but it is only part of the international business in services Technological change is adding to tradeability Significant gains from trade exist

14 Indonesia s trade and investment in services Deficit in services according to the BoP data: around $10b a year Exports mainly travel and transport Business services exports growing rapidly Low share of GDP relative to other ASEAN economies Imports are also travel and transport Business services imports falling FDI in services in Indonesia are mostly transport, storage and communication Remittance income is significant (nearly $7b in 2010).

15 Indonesia: services export Source: Data from the International Trade Centre s Trade Map

16 Indonesia: Services Imports Source: Data from the International Trade Centre s Trade Map

17 Growth of services sector exports : doubling of travel and tripling of other business services Exports of Services, Top 5 Subsector, Indonesia, 2005 and 2014 ($ million) TOTAL SERVICES EXPORTS Travel Other business services Transport Telecommunications, computer, and information services Construction Source: Data from the International Trade Centre s Trade Map

18 Balance of services trade 2014: deficit except for travel (tourism) and while still deficit of other business services (declined significantly). Largest deficit transport (freight) Exports, Imports and Net Surplus/Deficit, selected subsector, Indonesia, 2014 ($ million) Transport Travel Telecommunications, computer, & information Other business services Government goods and services n.i.e. Financial services Maintenance and repair services Exports Imports Nett Surplus/Deficit Source: Data from the International Trade Centre s Trade Map

19 But Indonesia has low level of trade in services compared to other ASEAN countries Singapore Thailand Malaysia ASEAN Vietnam Philippines Figure 6. Trade in Services, Selected ASEAN Countries, 2014 (% of GDP) Indonesia Imports as % of GDP Exports as % of GDP Source: Data from the International Trade Centre s Trade Map (

20 FDI is growing and mainly in infrastructure related services Figure 7. Foreign Investment Realisation in Services, Indonesia, 2014 ($ billion) Transport, storage, & communication Construction Electricity, gas, & water Supply Real estate, industrial, & business activities Trade & repairs Hotels & restaurants Other services 0 0,5 1 1,5 2 2,5 3 3,5 Source: CEIC Indonesia Premium Database

21 3. Services and productivity Concern was that services productivity growth would lag manufacturing Some evidence of this in Indonesia But this need not be the case Contracting out is a productivity driver Application of ICT more extensive than imagined Other drivers are infrastructure and human capital Plus policy to be discussed below. Consequently the services sector need not be seen as the employer of last resort

22 Average Growth in Labour Productivity, Selected Sectors and Countries, (% per year) Major sectors India Malaysia Thailand Indonesia Philippines Agriculture, hunting, forestry, & fisheries Manufacturing Services Wholesale and retail trade, and restaurants Transport, storage, and communications Finance, real estate, and business services Community and government services Others Mining and quarrying Electricity, gas and water Construction Aggregate Economy Source: Data from Lee and McKibbin (2014)

23 Indonesia has low services value added in manufacturing goods exports (20%) compared to other emerging economies (31-38%) 40% 35% 3% 1% 5% 1% 6% Community, social and personal services 30% 25% 20% 15% 2% 3% 2% 11% 5% 5% 4% 9% 4% 6% 7% 1% 7% 5% 6% 6% 4% 8% Real estate, renting and business activities Finance & insurance Transport & telecoms 10% 5% 4% 10% 13% 17% 15% 12% 12% Wholesale, retail & hotels Construction 0% 0% 1% 1% 1% 0% 1% Indonesia Brazil Russia India China South Africa

24 4. Services and the rest of the economy By their nature services are connected to the rest of the economy, manufacturing and agriculture Also the services sector itself is a big user of services Services support the development of global value chains Indonesia however appears to be relatively less engaged in global value chains And the services share of the value of exports is also relatively low

25 Pre-manufacturing Design Procurement Services in manufactured goods Manufacturing Engineering QA Post-Manufacturing Packaging Transport Back-office Accounting Legal After-sales Repair UNIVERSITY OF ADELAIDE 25

26 and in food The Director General of Domestic Trade and the Regent of Brebes Launch the Export of Brebes Shallots to Thailand in October 2014.

27 Services in other services tourism Air transport Hotel services Financial services Guided tours Restaurants Etc. UNIVERSITY OF ADELAIDE 27

28 Services support participation in GVCs Jones and Kierzkowski (1990) and Kimura (2015). UNIVERSITY OF ADELAIDE 28

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30 Backward and Forward Linkages in Services, Indonesia, 2005 Subsector BACKWARD LINKAGE FORWARD LINKAGE Total output multiplier Total input multiplier Electricity, gas and water Construction Wholesale & Retail Restaurant and hotel Rail transportation Road transportation Water transportation Air transportation Services allied to transport Communication Financial Intermediation Real estate and Business Services Government and defense Education and Health (also, other social services) Other Services (Recreation, Culture, and Sporting Services, and Personal Services) Source: Data from AIPEG (2014)

31 5. Services Policy and Regulation Services sector tends to be regulated because of Simultaneity of consumption and production: provider regulated for appropriate provision Regulating first mover advantage and market power: regulate competition Sensitive: limit role of competition and foreign investment and movement of natural persons (dominant role of SOE, protection of local professionals or national interest) Outcome is lack of competition and inefficient and high cost of provision of services, leading to less incentive to contract out and low share of services in exports Indonesia according to OECD and World Bank data (Services Trade Restrictiveness Index, STRI) has a relatively restrictive policy regime in services especially for restrictions on foreign entry and movement of people

32 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 Figure 8. OECD Services Trade Restrictiveness Index, Indonesia, 2015 Restrictions on foreign entry Restrictions to movement of people Regulatory transparency Barriers to competition Other discriminatory measures BRICS's Average Note: The services trade restrictiveness index ranges from 0 to 1, where 0 is completely open and 1 is completely closed. Services categories are as follows: (1) Motion pictures; (2) Legal services; (3) Air transport; (4) Telecommunications; (5) Freight forwarding; (6) Commercial banking; (7) Insurance; (8) Cargo handling; (9) Broadcasting; (10) Courier services; (11) Maritime transport; (12) Accounting; (13) Distribution; (14) Rail freight transport; (15) Sound recording; (16) Road freight transport; (17) Construction; (18) Engineering; (19) Computer services; (20) Customs brokerage; (21) Architecture; (22) Storage & warehousing. Source: The OECD Stat database

33 Restrictiveness correlated negatively to services export content: outlier India (above) and Indonesia (below trend) Figure 9. The OECD Services Trade Restrictiveness Index and Services Content in the Gross Value of Exports, BRIICS Countries, 2013 Source: Adapted from He and Findlay (2013)

34 Explaining low share in services in exports Correlation of restrictive regime with the share of services in exports and low participation in GVC, but also other factors contribute: Also the composition of exports (dominance of commodities) The costs of contracting out Not just correlation but econometric results (STRI, composition of exports (share of fuels and minerals/exports) and the costs of contracting, and control variables such as GDP/capita: STRI values explain more of the variation in the services share in exports compared to other variables. IMPORTANCE of POLICY REFORMS Export composition was the next most significant variable followed by costs of contracting out (both significant). Importance of institutions (rule of law) for contracting out.

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36 Case study: health services Indonesia is a significant net importer (350,000 and $500 million to 600,000 and $1.4 billion outbound) Evidence of significant restrictions, little change in commitments in international agreements, gaps between actual policy and commitments Other ASEAN economies (Singapore, Malaysia and Thailand) have built this sector through cooperation with providers, relaxation of private and foreign providers, access to medical staff and adoption of international standards for hospitals and staff An open policy regime has driven exports! Possible Response: International standards for hospitals and staff, including management issue? Relaxation of cooperation with providers (private, foreign) and medical staff from overseas? If too difficult nationall: a special economic zone for [health] services?

37 6. Reform strategies We propose a 4 part approach Increase transparency and generate better policy information Explore the potential of new technology to drive change Capture the benefits of the interaction with urbanisation Make more use of international commitments, ASEAN integration and APEC capacity building

38 Reforms in the ASEAN Context ASEAN Framework Agreement on Services (AFAS, 1995 part of AFTA): adopted WTO GATS plus approach for making offers and requests, and MRA (Mutual Recognition Agreement) for flows of professionals with little progress AEC Blueprint (2006) free flow of goods, services, investment and skilled labor, and appears to be bold and visionary compared to GATS approach: Targets and timelines across four modes of services delivery (import and export of services, commercial presence and movement of natural persons) and MRAs Target: remove restrictions on mode 1 and 2, ASEAN Equity participation to 70% by 2010 for priority sectors (air transport, e-asean, health care and tourism) and 100% by 2015 for all sectors

39 But outcome modest and not bold enough Main outcomes: Dee (2015)Increase in no of sectors but not much deepening of opening up within sectors Services commitments which bind under AEC lag actual policy (demand for policy space, no certainty against reversals) for Indonesia especially in health and maritime, use of geographical limitations on tourism Ahsan (2015) progress in air transport development of MRAs (engineering, nursing, architectural, medical and dental, accountancy and hospitality) positive, but yet to be tested Domestic regulations still restrictive and piecemeal opening up (not as group of related services), Indonesian example: international logistics open but domestic and distribution not open; domestic regulations related to license to operate; domestic requirements related to language or local knowledge; and strong preference for limiting foreign ownership in strategic sectors (negative investment list, sectoral laws which have foreign investment restrictions

40 But outcome modest and not bold enough Domestic regulations still restrictive and piecemeal opening up (not as group of related services), Indonesian example: international logistics open but domestic and distribution not open; domestic regulations related to license to operate; domestic requirements related to language or local knowledge; and strong preference for limiting foreign ownership in strategic sectors (negative investment list, sectoral laws which have foreign investment restrictions

41 Future of Reforms for Indonesia AFAS and AEC did not provide the push for services liberalization for Indonesia or the other ASEAN countries. Unilateral reforms have been more important as is the case of Malaysia Since 2013 APEC better understanding of services and benefits,

42 Observations on reform in Indonesia Lack of appreciation of the benefits of reform and how it affects competitiveness of other sectors and the economy as a whole, and participation in GVC Coordination and Political will is an issue (e.g. Investment Law 25/2007 and use of negative list to regulate foreign ownership vs sectoral laws, and sectoral viewpoints) Policy is complex and difficult to assess Resistance due to the consequences of adjustment by incumbents Complex coordination required across agencies Health and Education: protect domestic institutions and professionals, foregin ownership limit in higher education law and limitations on movement of professionals (special economic zones?) Opening up sectors dominated by SOEs resistance transport, banking, infrastructure related services, and fixed line telecommunications

43 A sign of hope in Recent Deregulation Packages Hopeful signs of high level political commitment to enhance Indonesia s competitiveness, diversifying its economy and developing new sources of forex earnings, creating high quality jobs. Recent announcements on Indonesia s intention to join TPP, resumption of CEPA with EU, push towards AEC and consolidation of ASEAN + 1 FTAs under RCEP Some recent relaxation of restrictions in the negative list: tourism, creative economy especially film and e-commerce, and health care,

44 Conclusions Development of Indonesian services sector: story of lost opportunities compared to ASEAN neighbors, Indonesia is a low or middle ranking performer: Low level of competitiveness Small share of services in exports Low productivity compared with manufacturing and in services compared with other emerging economies Analysis shows that the main reason is: Restrictive policy regime, followed by composition of exports and costs of contracting out Lack of a comprehensive overview of the links between services and competitiveness in other sectors and the economy, and lack of political commitment

45 Conclusions It is crucial to develop modern services sector To diversify the economy and take advantage of technological developments To provide source of foreign exchange To enhance human capital (education and health) To provide high-wage, formal sector jobs and not as employer of last resort. Therefore reforms is the key not easy, but several recommendations Understanding the importance and adopting a comprehensive approach Understand the negative effects of restrictiveness and monitor a process of opening up so policies fall in line with desired outcome. Information is now available to provide policy makers more scope for coordination and sequencing and mapping out of reforms that is reinforced by commitments in AFAS, and other trade agreements, and can avail to capacity building through APEC efficient services needed for competitive services and other sectors, development of human capital

46 Conclusions Indonesia and its leadership in othe fora so as to shape services reform AFAs and AEC, RCEP, APEC framework on services (wide support and Indonesia started it as chair of APEC in 2013) process not negotaions Disruptive role of technologies enbale SME, and creative and productive workers greater scope for competition Services sector and urbanization: commitment of local governments, emergence of services hubs and creative hubs