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The wordeconomy

1.Making trade policy in a newdemocracy aftera deepcrisis:IndonesiaIntroductionHow dodeep crisesaffect trade policy indeveloping countriesTheconventional historicalview is that economiesturn inward,in anattemptto protectfirms andemployment,to restoretrade balances,and inresponseto theperceived negativeconsequences ofglobalisation.As a corollary,it is argued thatgovernments findit easierto reformduring goodtimes,of strongeconomic growthand lowunemployment.However,over thepast twodecades,an alternativeview has arisen,based onthe observedbehaviour ofcountries incrisis.This iswhat Littleetal.Termed thenew liberalisation.That is:the balanceof paymentscrisiscreates theshock environmentin whichviable.The reformersnowhave towin overa constituency,in the parliament,the press and civilsociety,in generallyunfavourable ideologicalcircumstances andwheremoney politicsplays alarger role.Labour policieshave weakenedcompetitivenessin export-oriented sectors,and in the processdiluted theconstituencyin favourof aliberal traderegime.In lightof thesefactors,we nowexamine trade policy outcomessince the crisis.

3.TRADE POLICYAFTER THECRISIS:INTERNATIONALA.An overviewAsIndonesia becameever moredeeply engulfedin theeconomic crisisof1997-98,the governmentsigned aseries ofLetters ofIntent with theInternational Monetary Fund.While mostof theconditions in these LOIspertainedto macroeconomic and financialpolicy,there were a number oftrade-related provisions.Several of the tradeprovisions involvedtheremoval ofspecial privilegesgranted inhighly controversialcircumstancesto membersof the Soeharto family.These includeda clovemonopolyand aso-called nationalcar programme.Monopolies in the cementand forest industries,and in the distributionof severalagriculturalcommodities,were substantiallydismantled.B.Aggregate trendsAlthoughthe governmentformally exitedthe IMFprogrmme inlate2004,it alsoannounced itsintention toproceed withcontinuing tradeliberalisation,te tarifficationof mostremaining NTBs,and acommitment,in principle,to unifytariffs andreduce themto around5per centby

2010.Thus in2005the governmentbegan whatit calleda tariff harmonisationprogramme withthe objective of adoptinga uniformtariff rate.Team Tariff,an inter-ministerial teamhoused in the Ministryof Financewas responsiblefor the programme.It establishedcriteria forsetting tariff rates,theseincluded loweringthe average tariff rate,and reducingthe numberof tariffbands.The programmewas carriedout intwo stages.The firststage coverabout1900tariff lines,mainly affectingagriculture commodities,and wasimplementedin early

2005.The secondphase,covering morethan9000tarifflines,was completedin February

2006.The newtariffharmonisationprogramme specifiesa tariffreductionschedule from2005to

2020.By2010,94per centof alltariff lineswouldhave ratesat orbelow10per cent.The remaining6per centof tariff lineswould havetheir ratesreduced to10per centby

2020.Team Tariffprovidedrecommendations onthe tariffharmonisation changes to theMinister ofFinance,who thenissued adecree implementingchangesto the tariffschedule.In sum,the tariffharmonist ioneffort resulted in thefollowing sixoutcomes.First,a reductionin theweighted averageMFN tariffrate from

8.7per centin2004to projected

7.7per centin

2010.Second,an increasein theactual numberof tariffbands formeight tonine.However,by2010about87per centof alltariff linesare likelyto fallintotwo handsthe5per centand10per centbands.The tariffharmonisationprogramme alsoresulted infewer tariffline subject to azero importduty:the percentageof tarifflines subjectto azero dutyfalls from22percent in2004to

5.5per centin

2010.Third,the dispersionof tariffrateis projectedto increasefrom

2.6in2004to

3.1by2010,indicating thatthe government initialgoal of a smallerdispersion intariff rateswillnot beachieved.Fourth,an exemptionlist ofproducts subjectto importdutyof35per centor moreaccounts for about6per centof alltarifflines.These productswill notbe subjectto reducedrates until

2020.Fifth,the sectorsare treateddifferently.The simpleaverage tariffratefor agriculturegoods remainsrelatively highand withonly asmalldecline from

14.9per centin2006to

14.6per centby

2010.Rice issubjectto a specific tariffof Rp450/kg andsugar toRp750/kg.Rice andsugar aresubjectto importquotas as well.Non—agricultural goodsare subjecttoa loweraverage tariffand biggerdeclines over the scheduleperiod:thesimple averagefalls from

9.2per centin2006to

8.1per centin

2010.Finally,the effective tariffrate is muchlower than the averageMFNtariff rate.For example,customs datasuggest that theaverage,effectivetariffrateisin therange of3-4per cent.This arisesfortwo reasons.One is that mostcommon effectivepreferential tarifflineshave ratesranging between0and5per cent.The otheristhata substantialproportionof importedintermediate goodsare exemptfrom dutyunderIndonesia variousexport facilitationprogrammes.The aboveanalysis refersjust totariff policy.The pictureis lessclearinthe case ofnon-tariff barriers,and thisillustrates theprecariousnature ofIndonesia tradeopenness.During thelast decadeofthe Soeharto era,Indonesian trade policy wasbroadly consistentandunilateralist,both acrosssectors andwith reference to tradepolicyinstruments.In particular,both theaveragetariffand thenumberof NTBsdeclined.However,since2001,tradepolicy has becomeinconsistent.Thisis indicateby the trends invarious tradepolicy measures.Measuring NTBsis inherentlydifficult.By definition,theirproponents havean interestin ensuringthat theyare opaque.In Indonesia,the Ministryof Tradegenerally issuesthree typesof importerlicences.An importer-producer licencemeans thatonly theproducer ofthat commoditycanalso importit.The restrictedimport licenceimporter ofa listedcommodityregister withthe MOT.In principle,this doesnot involveanyrestriction onwho canregister orhow muchthey canimport,apart fromtheinevitable costsofprotectionist instrument.One exampleisthatin2001the MOTestablished animporter-producerlicensing schemefor importsof26categories oftextile fabric,with thestatedobjectiveofpreventing smuggling.The schemeappears appearstohave succeededas officialimport statisticsrecorded adrop infabricimports between2001and

2004.However,these datado notaccount forimportsinto bondedzones,where mostclothing exportersoperate.Exportstatistics frommajor foreignsuppliers offabric reflecthese unrecordedimports.Furthermore,in2003the MOTintroduced importer registration licencesforselected commodities.More than500tarifflinesat thenine-digit levelweresubjecttothis scheme.Again,its statedpurpose wasto clampdownon allegedsmuggling.While theimporterregistrationlicence isgenerallymerely anuisance,and dosenot restrictthe importationofacommodity,there arecases wherethe registrationlicence has been usedin arestrictivemanner.For example,the MOTrefused toregister importersofcloves,effectively creatinga ban on imports.No rigorousassessment oftheeffectiveness offNKIP licences,or whetherthe variousimport licenceschemesare inthe publicinterest,was undertaken.Other non-tariff restrictionsinclude abanonfarmed shrimpimports,imposed in2004following allegationsof thetrans-shipment ofshrimp ofChineseorigin.The banwas extendedinJune

2006.Sugar importwere alsorestricted by an MOTdecree issuedin2002stipulating thatlicensed importers,defined asjust fivestateentities,were permittedto importsugar.This replacethe estimated800private importersin operationbefore thedecree wasissued.Thislicence was accompanied byaspecifictariff perkilogram,of Rp550/kg forcane and Rp700/kg forindustrial gradeand whiterefined sugar.The advaloremtariff equivalentof thesespecific tariffsvaries withtheprevailing internationalprices ofcaneandrefined sugar,but wasestimatedto be30per centand35per cent,respectively.The decreeineffect createda cartelas theimporters withlicences accountedfor over90per centof whitesugar producedon Javeand over60per centin thecountry asawhole.Wheat flourhas alsobeen asubject ofpolicy dispute.In1998,the industrywas deregulatedas partof the IMF programme.The monopolyof thetrade liberalization and otherradical policychanges becomepossible.Laland Myintdeveloped thisargument moregenerally withtheir crisishypothesis,that majorreforms areoften triggeredbyasignificant event:a majoreconomic crisis,a militarydefeat,the cessationof externalsupportoranatural disaster.The politicaleconomy explanationsfor thischanged behaviourarecomplex,and includeboth genericand country-specific factors.The purposeofthis paper is to add toour understandingof thenexus betweentradepolicy andcrises withreferenceto a studyof theIndonesian experiencesincethe late1990s.After threedecades ofmostly rapideconomic growth,accompanied byliberalisation inthe late1960s andmid-1980s,the countryexperienceda deepeconomicand political crisisinl997-

98.in1998,theeconomy contractedby over13per cent,thegovernmentsigned onto a highlycontroversial InternationalMonetaryFundprogramme,and the32-year ruleofPresident Soehartocame toan abruptend.Authoritarian politicalstructuresgave waytoaweakened state,a newand fragiledemocracy andmajorchanges inpolitical andinstitutional structures.Our mainconclusion isthat,perhaps unexpectedly,the Indonesianeconomyremained largelyopen overthis period.However,in someinstances,holding theline on trade reformhas hadmore todo withthe personalitiesinvolvedin tradepolicy ratherthantheinstitutional processesforformulating thatpolicy.Thus,openness isprecarious,and notdeeply embeddedin eithersupportiveinstitutionalised policy-making structuresor widespreadpopular opinion.Moreover,barriers todomestic tradehave risensignificantly andnow posea substantial threatto the country economicintegration.This latterissuehas receivedrelatively littleattention inthe literature ontradepolicyand criseswhere central government authorityis greatlyweakened.We areunaware ofasubstantialliteratureonthis subjectfor otherdevelopingcountries,addressing bothinternational anddomestic tradepolicy.But weconjecture that the Indonerienexperience haswide generalapplicability.This istherefore anissue thatother developingcountriesand internationaldevelopment agencieswill needto addressin post-crisisenvironments.The restof thepaperisorganised asfollows.Section2provides somecontexton Indonesia,including briefreviews of the evolutionof tradepolicy,the severeeconomic crisisof1997-98,and thenew post-crisispolicy-making framework.Section3examines internationaltrade policysincethe crisis,while Section4investigates thechanging domestictradepolicy regime.Section5provides ananalysis of the bureaucracyill-fatedattempt todevelop anew tradepolicy lawin thisnew politicaleconomyenvironment.Section6sums upour argumentsand discussessome broaderimplication.

2.THE INDONESIANCONTEXTA.Trade Policyunder SoehartoItis sometimesobserved thatIndonesia wasmade byGod forfree trade.This isa referenceto itsstatus asthe worldlargest archipelagicnation,its porousinternational borders,13000islands,sometimes rampantsmuggling,and proximityto free-trade Singaporeand themajorinternational sealanes of the MalaccaStraits.However,the officialtradepolicy pendulumhas swungover itssix decadesasanation statefromvirtually completecommercial isolationto veryopen regimes.There have been majorchanges inIndonesia tradepolicy regimesincethe1960s.By1965,the countryhad disengagedfrom globaltrade andinvestment,and withdrawnfrom theUnited Nation,theIMFand theWorldBank.The politicalturbulence of1965-66then usheredinaradical shifttowardseconomic orthodoxy,including promptand effectivemacroeconomicstabilisation,and anopen commercialpolicy.This periodof liberalismwasshort-lived,however.By the early1970s,there wasa nationalistresurgence.Tariffs wereincreased,but,more importantly,the governmentembarkedonanambitious programmeof heavyindustrialisation underpinnedbyincreased resortto non-tariff barriers.It wasonly intheearly1980s,and moredecisively inthe mid-1980sas oilprice continuedto fall,that keyeconomic policy-makers theso-called technocratswere able to arrestthetrend,and thenembark onaseries ofmajor tradereforms.The secondhalf of the1980s constitutedthehigh pointofthe reforms.This wasahighlysuccessful case of lawpolitics,in Soesastro.The technocraticreformers largelyeschewed highpolitics,inthesense ofengaging ingrand ideologicaldebates.Rather,they developeda strategicreform programme and,partly withthe assistanceoflow-pro advisors,persuaded thepresident that,in viewofthefallinginternational oilprices,thecountryfaced aMexico scenarioof debtcrisisand IMFintervention ifthe liberalisationswere noteffected.OnceSoeharto wasconvinced,reform wasswift andeffective.There waslimitedpublic debate.The mostcomplete setof estimatesofthetradepolicyregime inthelate Soeharto regime arethose computedby Faneand Condon.Employing aconsistentestimation methodologyand database,they concludedthat theweightedaverage rateof effectiveprotection formanufacturing declinedfrom59per centto16per centovertheperiod1987-97,while thedispersionfell from102to

39.The coverageofNTBsfell evenfaster:the percentagesofnon-oil manufacturingvalue addedaffected byNTBs declinedfrom77percent to17per cent.Thus,atthetime ofthe crisis,Indonesia wasa broadlyopen economy,and mostsectors receivedquite lowprotection.By internationalstandards,Indonesia reformssince1980havebeenincremental ratherthan bigbang.Rajapatirana accuratelycharaterises thecountryasa mildreformer sincethe1980s.According to the Sachs-Warner methodology,Indonesia wasopenfor afew yearsfrom thelate1960sandfor mostoftheperiod sincethelate1890s.Moreover,importantly,and borrowingJagdish Bhagwatiterminology,thereformswereacaseofgenuine unilateralliberalisation.They werenot partof anWorld Bankprogramme,though theseactors playedaperipheral role.Nor werethey conditionalupon reciprocity,althoughshortly afterwardsIndonesia wasto enterinto severalregional tradeagreements,principally involvingthe AssociationSoutheast AsianNations.B.The EconomicCrisis of1997-98Indonesia experienceda deepeconomic crisisin1997-

98.Its economiccontractionin1998,of over13per cent,was thesharpest amongall fourcrisisaffected East Asian economies.Triggered initiallyby therun on,and subsequentcollapse of,the Thaibaht,Indonesia beganto experiencelarge-scale capitalflight inthe thirdquarter of1997,resulting inasharp depreciationoftherupiah andfinancial distress.At thepeak ofthecrisis,the dollarexchange ratehad fallenfrom Rp2500to Rpl7500,and creditinthe modern financialsector hadeffectively driedup.In thefirsthalf of1998,there wasa lossof macroeconomiccontrol,and inflationonan annualisedbasis exceeded100per cent.The economiccrisis alsoprecipitated apolitical crisis,culminatingin May1998attheend of32-year authoritarianSoehartoregime.This createdapolitical andinstitutional vacuum,heightened socialand ethnictension,andfora periodthreatened thecountry territorialintegrity.Investment,both domesticand foreign,also collapsed.In thesix yearsprior tothecrisis,net annualforeign directinvestment inflowsaveraged$

2.7billion,whereas therewere netannual outflowsof$

1.4billion forthe fiveyearsafter thecrisis.Since2004,modest positivenet FDIinflows havebeenrecorded.Reflecting itstwin crises,both economicandpolitical,Indonesia alsorecoveredmore slowlytan itsEast Asianneighbours.Growth wasnegligibleinl999,but recoveredto nearly5per centin

2000.For theperiod2000-6,growth averaged

4.7per cent,in contrasttothe

7.3per centrecordedin thepre-crisis period1990-

96.In theimmediate post-crisis period,exports respondedsignificantly tothe exchangerate depreciation,with alag.However,in spiteof buoyantcommodity pricesintheearly yearsofthe twenty-first century,export growthsince1998has beensluggish,compared toboth neighbouringEastAsianeconomies andthe countrypre-crisis record.C.Post-Crisis Institutionsand PolicyMakingAs aresult ofthecrisisand regimecollapse,Indonesia politicalenvironmenthas changedradically.There hasbeen ashift from a hand,authoritarian,corrupt butgrowth-oriented statedelivering broad-based,rapidly improvingliving standards,toamessy,weakened,democratic,corrupt state,withthepolitical leadershipnot yetabletoprovide aclearand unambiguouscommitment togrowth.The economicpolicy-makingenvironment haschanged,in somecases profoundly,in atleast eightkeyrespects.As weshall seebelow,these changeshave majorimplications forhowtradepolicyis formulatedand implement.The firstisaweakened presidency,a deliberateoutcome oftheanti-authoritarian sentimentinthewake ofthe Soehartoregime.Second,there issignificantly weakercabinet unity.Third,theparliamenthas beentransformedfromamoribund rubberstamp intoa powerful,assertive,legitimate butunpredictable politicalforce.The proliferationof policyplatforms,and lowlevels ofeconomic literacyhave allresultedina stronginclinationtowards populistpolitics,reflecting ageneral communityreluctanceto embraceliberal economicpolicies.Fourth,and asacorollary,the newlyliberated politicalparties facetheimperative ofcampaign funding.Inevitable,asweshow inthe nextsection,this hasspilled overto economicpolicies asvotes arepurchasedin exchangefortheallocation ofrents,including intradepolicy.Fifth,the longsuppressed civilsociety hassuddenly becomenoisy andinfluential.Almost invariably,these protestsare populistin nature.Sixth,there hasbeen amarked shiftin labourmarket policiesandoutcomes from theSoehartoera oflow regulation,trade unionsuppression,but highproductivity andwage growthto oneof freelabour association,but inother respectsan unfriendlyemployment environment.In consequence,employment inthemodernsector hasdeclined,while informalsectoremployment,typically lowerpain andless secure,hasbeenrising.Finally,in aneffort topreserve thenation territorialintegrity,a bigbang decentralisationreform washastily passedby theparliament inMay1999,and introducedin January

2001.This involveda significantdevolutionof powerand resourcesfromthecentralgovernmenttothesecondtier ofregional governments.These changeshave far-reaching implicationsfor tradepolicy.Thenational governmentis weakened,and thereare manymore policyactors.Theframework formaking economicpolicyhaschanged significantly.Inparticular,the lowpolitics strategyoftheSoehartoera,that is,one whichinvolvesa unifiesteam ofeconomists witha sharedpolicy outlookdevisinga reformprogrammeandconvincing thepresident ofthecasefor reform,aidedby adverseexternal circumstancesand low-pro advisoryinputs,is nolonger。