International competitiveness 2016

Assignment about National Competitiveness
Based on World Economic Forum Report and Doing Business Report

THE INDONESIA CASE

MAIN SOURCES: * World Economic Forum, Global Competitiveness Report 2015-2016 * World Bank, Doing Business Report 2015-2016 * “The Economist” * “The Age” * “CNBC, World Economy” * “Indonesia-Investments”

LORENZO TRABACCHI
4502720

INDONESIA: A CASE OF COMPETITIVENESS

The World Economic Forum approach: Indonesia case
Overview
According to the WEF Global Competitiveness Report 2015-2016, Indonesia has an overall position of 37 out of 140 countries, with a score of 4.52 from 1 to 7 and a positive trend line which shows the evolution in percentile rank since 2007. Even the rank among 2014-2015 economies was 37, while the GCI 2014-2015 rank was 34 out of 144 economies.

The graph here, shows that, the GDP per capita in Indonesia, since 1990 to 2014, had always grown in parallel with but more than the average of other countries in the same regional area (Emerging and Developing Asia). Since 2012-2013, Indonesia has always grown in terms of GCI, moving from the 50th to the 37th position with a score shifted from 4.4 to 4.5.

Overall position of the country in the regional area
Behind Singapore (2nd), the five largest members of the Association of Southeast Asian Nations (ASEAN)—namely Malaysia (18th, up two), Thailand (32nd, down one), Indonesia (37th, down four), the Philippines (47, up five), and Vietnam (56th, up 12)—all rank in the top half of the overall GCI rankings. With the exception of Thailand, all five have improved their showing since 2007.

Overall position of the country with respect to similar countries in terms of stage of development

In terms of “stage of development”, Indonesia is one of the 31 efficiency –driven economies (GDP per capita: 3,534 US$) with: a score of 4.84 and a rank of 49 in basic requirements, a score of 4.34 and a rank of 46 in efficiency enhancers and a score of 4.14 and a rank of 33 in innovation and sophistication factors. After leapfrogging 16 places in the past two years, Indonesia posts a performance almost unchanged from last year (37th, down three) and remaining uneven across the different categories of the Index. Under new leadership, Southeast Asia’s largest economy still faces major challenges in the basic areas of competitiveness, including infrastructure (62th, down six) and institutions (53rd, down two). The data suggest that efforts to tackle corruption—a priority for the previous as well as the current administration—are paying off, with Indonesia improving on almost all measures related to bribery and ethics. Lack of labour market efficiency remains the weakest aspect of the country’s performance (115th, down five), the result of persisting rigidities in wage setting and hiring and firing procedures. The fiscal situation could worsen, though, because depressed energy prices lead to lower proceeds from oil exports. If we take a look to the overall position of Indonesia with respect to similar countries in terms of same stage of development, we can notice that, out of 31 economies in the world, Indonesia ranks at the third position (37th ), just after Thailand (32nd) and Chile (35th); this special rank ends with Paraguay (118th), Guyana (121st) and Swaziland (128th).

Pillars and points of strength and weakness of the country
So let’s start focusing more in detail on the different pillars and on their weight on the Indonesian economic system. In the Basic Requirements group of indicators, these indicators represent 40% over the overall GCI; Indonesia ranks 49 out of 140 countries, with a score of 4.8 from 1 to 7: with reference to the rest of the world, the only real point of strength is represented by the macroeconomic environment, which scores 5.5 (higher than the average of the state) with a rank position of 33; even health and primary education score 5.6 which is higher than the Indonesian average score, but concerning this pillar, Indonesia ranks 80th in the world. Infrastructure and institutions represent two points of weakness, in my opinion, because they are well under the average score of the country and the rank position for Indonesia is not that good (respectively 62nd and 55th). Concerning the group of pillars considered “Efficiency Enhancers”, Indonesia ranks 46th with a score of 4.3 on average, considering that it is an efficiency-driven country, where efficiency enhancers represent 50% of the overall pillars. In this case, there is only one main and actual point of strength, which is represented by the market size, the 10th pillar which allows Indonesia to rank at the 10th position with a score well over the average of the country, 5.7. On the other side labour market efficiency and technological readiness represent the main point of weakness in this section (ranking respectively 115th and 85th with scores of 3.7 and 3.5). The last category of indicators is represented by Innovation and Sophistication factors, which weight 10% over the overall index for Indonesia, ranking the country at the 33rd position with a score of 4.1 from 1 to 7. In this case, the two pillars cannot totally be considered as points of strength or points of weakness, because they are both, either in terms of rank and in terms of score, really close to the country average.

Examples of areas of strengthen and areas of weakness for the country
In my opinion, the main areas which represent the strength of the Indonesian economic system are: Market size, Macroeconomic environment and Innovation. The first one has a score of 5.7 and a rank for Indonesia of 10, which is the best rank for Indonesia concerning pillars; this probably depends on the huge and various population which characterizes the Indonesian business environment, granting several opportunities also to foreign multinational companies. But not only: if we look at the raw indicators, we can notice that this amazing rank depends mainly on the domestic market size, the foreign market size and the GDP, while exports are not very diffused in the Indonesian economy. The Macroeconomic environment allows Indonesia to rank 33rd with a score of 5.5; the macroeconomic situation remains satisfactory, thanks to a moderate government budget deficit of around 2 percent of GDP, low debt levels, and a high savings rate. The last point of strength is Innovation, which presents a score of 3.9 (which is pretty low), but which grants Indonesia the 30th position in the overall rank; in particular, this good position depends on the company spending on R&D, the government procurement of advanced technologic products and University-industry collaboration in R&D (capacity of innovation). On the other side, we might define also several points of weakness, in particular: Labour market efficiency, Technological readiness and Health and Primary education. The Labour market inefficiency in Indonesia is represented by problems in wages, in particular in the flexibility in the determination of wages and in the redundancy costs; the main elements influencing the bad rank position (115th) are limited employment opportunity, low quality of labour force, as well as high unemployment rate, but also the ratio to men of women in labour force. Then we have the Technological readiness, ranking Indonesia at the 85th position; in this case, looking at the sub-indexes, this weakness is explained by the fact that the usage of technology is very low, at a individual, business and government level. The last pint of weakness is the Health and Primary education, with the incidence of communicable diseases and the infant mortality rate among the highest outside sub-Saharan Africa; so, the main problem is represented by the impact of communicable diseases on the business.

The World Bank approach: Doing Business in Indonesia
This approach is completely different and could provide different results in rankings, since this approach focuses on the quality and efficiency of regulation. The ease of doing business ranking compares economies with one another; the distance to frontier score benchmarks economies with respect to regulatory best practice, showing the absolute distance to the best performance on each Doing Business indicator. The Region is East Asia & Pacific; Indonesia is characterized by Lower-middle income. The population is 252,812,245; the GNI per capita (US$): 3,650. The rank in 2016 according to the Doing Business report is 109 (distance to frontier score is 58.12), while in 2015 it was 120. Starting a business: Indonesia made starting a business easier by allowing the Ministry of Law and Human Rights to electronically issue the approval letter for the deed of establishment. This reform applies to both Jakarta and Surabaya. Getting electricity: in Indonesia the electricity company in Jakarta made getting electricity easier by eliminating the need for electrical contractors to obtain multiple certificates guaranteeing the safety of internal installations— though it also increased the cost by introducing a security deposit for new connections. Paying taxes: Indonesia made paying taxes less costly for companies by reducing employers’ health insurance contribution rate. This reform applies to both Jakarta and Surabaya. Trading across borders: in Indonesia trading across borders became more difficult because of insufficient infrastructure at the Tanjung Priok Port Jakarta. This change applies to both Jakarta and Surabaya. These are the most important elements that we should consider in analysing the Ease of Doing Business in Indonesia. But, going into details, we can take a look very rapidly to the rank that Indonesia recovers in each of the 10 topics included in the ranking Start a business 173rd, Dealing with construction permits 107th, Getting electricity 46th, Registering property 131st, Getting credit 70th, Protecting minority investors 88th, Paying taxes 148th, Treading across borders 105th, Enforcing contracts 170th, Resolving insolvency 77th out of 189 countries. Clearly, even if during the last year Indonesia has increased its business environment, ranks and scores are not very good, from a competitiveness stand point. The main disadvantages can clearly be identified in Starting a business and Enforcing contracts: the former mainly depends on the huge number of days required in order to start a business (48 vs 0.5 of New Zealand) and by the cost (20% of income per capita, against 0% of Slovenia); the latter mainly depends again on days and cost to enforce contracts (respectively 471 days and 116% of claim vs the top scorer in the ranking which are Singapore with 150 days and Iceland with 9% of claim). The best indicators are instead represented by Getting electricity and Getting credit: the former mainly depends on the fact that number of procedures is 5, which is quite close to the top countries in the world (3 procedures) and on the fact that the reliability of supply and transparency of tariff index(0-8) is 7. The latter depends on the fact that the depth of credit information index (o-8) is 6 and the credit registry coverage (% of adults) is 49%. Again, the most problematic factors for doing business in Indonesia are also represented mainly by corruption (11.7% over the overall percentage of issues in doing business), inefficient government bureaucracy (10.6), inadequate supply of infrastructure (9.6)and policy instability (8.7).

Conclusion: policies and reforms implemented in order to enforce the competitive advantage or to face the competitive disadvantage
In order to conclude it is quite clear that poor infrastructure and labor inefficiency have dragged down Indonesia’s competitiveness on the global scale, according to the Global Competitiveness Index (GCI) report published by the World Economic Forum. Through the analysis of both WEF Report and WB Doing Business Report, we can notice that the main competitive advantage for Indonesia is represented, first of all, by its market size: Indonesian market is very large and mostly are not yet tapped; It means the market is still very big. The workforce is literate, motivated and amenable to hierarchical organization, as attested to by foreign corporations currently doing business in Indonesia. In this respect, the country is wealthier than many people initially suspect (roughly comparable to many countries in South America and Eastern Europe), and Indonesia could comprise an attractive consumer market. So, in general, the macroeconomic business environment in Indonesia plays a very important role in defining the competitive advantage of the country in specific fields. But, clearly there are also certain competitive disadvantages concerning the Indonesian economic system; surely, the Indonesian labour market inefficiency is one of the most crucial disadvantages in terms of competitiveness for Indonesia; Indonesia has some of Asia's most stringent labor regulations, ranking 115 out of 140 on labor-market efficiency in the WEF's Global Competitiveness report . In general, we can consider that, the low position in the Doing Business report (109th), for sure does not help Indonesia attract FDI: it’s not easy at all starting a business in Indonesia; one of the difficulties regularly cited by foreign companies in setting up operations is the length of time and the number of agencies that they have to deal with to obtain the necessary business permits and licenses.
In response to the ailing global economy, Indonesian President Joko Widodo has unveiled a new economic policy package that aims to boost economic growth of Indonesia amid a highly uncertain global context. The first phase of this package encompasses three policies. The first one is to boost Indonesia’s industrial competitiveness through deregulation, curtailing red tape (bureaucracy), and by enhancing law enforcement as well as business certainty. The second policy of the package involves the acceleration of strategic projects of national interest through the elimination of all obstacles in order to accomplish realization of these projects. Over the past couple of years, quite a few infrastructure projects in Indonesia have been delayed or cancelled altogether as there were serious bureaucratic bottlenecks and land acquisition problems. The new package aims to smoothen the process to obtain necessary permits and land acquisition for such projects as well as to speed up procedures for the procurement of land, goods and government services. Widodo stated that the regional governments will have a bigger role to play in order to secure the smooth realization of infrastructure projects that are of national strategic importance. The third policy involves (raising) investment in Indonesia’s property sector. The central government will push for special housing for the low income households, while widening investment opportunities in the nation’s property sector. It’s clear that the aim of this economic policy package is to improve the ease of doing business in Indonesia, trying to fix the issues in the labour market (which make it inefficient) and to favor the infrastructures. Again, the Law No 31/1999 on Eradication of Criminal Acts of Corruption criminalizes major acts of corruption - including active and passive bribery, abuse of office and extortion - and Indonesia's Criminal Code forbids embezzlement and gifts to public officials. The anti-corruption legal framework is deficient and does not address facilitation payments. One way Widodo has tried to fight corruption is by removing opportunities. However, the Corruption Eradication Commission (KPK) is struggling; weeding out corruption will be a hard battle for Indonesia. So, in general, it’s clear that, despite many opportunities that Indonesia offers, especially in terms of natural resources, nowadays this country has many thing to do and many reforms and policies to implement, in order to defeat corruption and improve its level of competitiveness and the ease of doing business. In fact, from a competitiveness stand point (37th position) Indonesia is already in a good but improvable position, while the 109th position in the ease of doing business ranking makes things difficult for Indonesia to attract FDI.