An Efficient Route to Tetrahydronaphthols via Addition of Ortho

Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

The Services Sector as a Driver of Change: Indonesia’s Experience in the ASEAN Context Christopher Findlay & Mari Pangestu To cite this article: Christopher Findlay & Mari Pangestu (2016) The Services Sector as a Driver of Change: Indonesia’s Experience in the ASEAN Context, Bulletin of Indonesian Economic Studies, 52:1, 27-53 To link to this article: http://dx.doi.org/10.1080/00074918.2016.1161499

Published online: 06 Apr 2016.

Submit your article to this journal

View related articles

View Crossmark data

Full Terms & Conditions of access and use can be found at http://www.tandfonline.com/action/journalInformation?journalCode=cbie20 Download by: [RMIT University Library]

Date: 07 April 2016, At: 00:25

Bulletin of Indonesian Economic Studies, Vol. 52, No. 1, 2016: 27–53

Indonesia in Comparative Perspective THE SERVICES SECTOR AS A DRIVER OF CHANGE: INDONESIA’S EXPERIENCE IN THE ASEAN CONTEXT

Downloaded by [RMIT University Library] at 00:25 07 April 2016

Christopher Findlay* University of Adelaide

Mari Pangestu* University of Indonesia

By various performance indicators, the Indonesian services sector ranks below those of its main ASEAN neighbours. This is concerning for Indonesia, given the the increased attention worldwide on the services sector as a likely source of growth, the contribution of the services sector to the competitiveness of other sectors, and the opportunities available for capturing the gains from innovation and change in services. There is scope, we argue, to increase the number of formal jobs in the sector and to dispel its reputation as the employer of last resort. We find that a restrictive policy regime contributes to the sector’s poor performance, leading to an argument for reform. We discuss a potential strategy for such reform, focusing on four factors: increasing transparency and policy information; capturing the opportunities from international commitments; and exploring the potential of, one, new technology, and, two, urbanisation. Keywords: services sector, policy reform, productivity JEL classification: F13, F14, L80

INTRODUCTION Given the slow-growth trajectory since the 2008 global financial crisis, many countries have been looking for new sources of growth and productivity, both in existing sectors and in new sectors. This has drawn attention to the services sector, which is already a large part of all economies and which is expected to become even larger as incomes rise. This interest in services has been reinforced by other factors, too, such as the high value placed on services inputs by trade-exposed manufacturing sectors looking to increase their competitiveness, and the attempts of economies like Indonesia, which enjoyed the recent commodity boom, to diversify their exports. Traditionally, however, having a large services sector has been considered bad for growth. It was thought that productivity growth in services was low (Baumol 1967), because services production appeared to be labour-intensive and not amenable to the application of capital embodying new technology; because many firms * The authors thank Shandre Thangavelu, for his discussion of aspects of this article, and the anonymous referees, for their comments and suggestions. They also thank Astari Adityawati and Novia Xu, for their excellent research assistance. ISSN 0007-4918 print/ISSN 1472-7234 online/16/00027-27 http://dx.doi.org/10.1080/00074918.2016.1161499

© 2016 ANU Indonesia Project

28

Christopher Findlay and Mari Pangestu

FIGURE 1 Share of Services, Industry, and Agriculture in GDP, Indonesia, 1960–2014 (%) 60 50

Industry

40 Services


30 20

Agriculture

10 0 1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

Source: Data from the World Bank’s World Development Indicators. Note: Services includes wholesale and retail trade (including hotels and restaurants); transport; and government, financial, professional, and personal services, such as education, health care, and real estate services.

in the sector were too small to invest in research and development; and because services were not tradable, so international competition was weak. In Indonesia, the focus of this article, the services sector has been stereotyped as a large and informal ‘employer of last resort for rural “surplus” labour’, or low-productivity workers who could not find other jobs (Manning and Aswicahyono 2012, 11). These propositions can now be challenged, as we will explain. We will also make the point, however, that achieving better performance in the services sector will depend on policy reform, including as part of international commitments such as the ASEAN Framework Agreement on Services (AFAS). Indonesia has one of the most restrictive services regimes in Asia; its regulatory frameworks need to keep up with, for example, developments in information and communications technology (ICT) and the opportunities created by e-commerce. An efficient and innovative services sector in Indonesia would enhance the productivity and competitiveness of other sectors and increase the country’s capacity to participate in global value chains. In this article, we discuss the role of services, services production, and productivity growth in Indonesia and other ASEAN countries; examine the relation between services and the rest of the economy; and, in proposing a potential way forward for Indonesia’s services sector, recommend policies that would benefit the sector’s development. THE ROLE OF SERVICES IN INDONESIA Share of Output and Employment The size of Indonesia’s services sector has increased along with the growth in GDP per capita. Between 1960 and 2014, the services sector’s share of output rose

The Services Sector as a Driver of Change

29

TABLE 1 Annual GDP Growth and Share of GDP, by Services Subsector, Indonesia, 2000–2014 Average annual growth (%)


Services subsector

2000–10 2010–14

Share of GDP (%) 2000

2010

2014

Agriculture, livestock, forestry, & fisheries Mining & quarrying Manufacturing Electricity, gas, & water supply Construction Trade, hotels, & restaurants Transport & communication Finance, real estate, & business services Other services

3.5 1.1 4.5 8.0 7.0 6.0 12.9 6.7 5.3

3.5 1.6 5.4 5.5 6.7 7.3 10.6 6.6 5.9

15.6 12.1 27.7 0.6 5.5 16.2 4.7 8.3 9.3

13.2 8.1 25.8 0.8 6.5 17.3 9.4 9.5 9.4

12.1 6.7 25.5 0.8 6.7 18.0 10.9 9.9 9.4

All services Excluding construction & electricity, gas, & water supply

7.1

7.4

44.6

52.9

55.7

7.1

7.6

38.5

45.7

48.3

5.2

6.0

100.0

100.0

100.0

Gross domestic product Source: Data from Badan Pusat Statistik.

from slightly above 30% to close to 45% (figure 1). Over this same period, the share of the industrial sector increased as that of agriculture declined. Figure 1 suggests that this growth in services occurred in stages: it changed little between 1966 and 1980, surged in the first half of the 1980s, remained relatively stable until 2010 (although with significant declines during the financial crises of 1997–98 and 2008), and increased quickly during 2010–14. The share of the industrial sector grew even more rapidly. The services sector is an aggregate of a range of activities. Table 1 shows growth rates by subsector in Indonesia during 2000–2014. Infrastructure-related sub sectors grew the fastest; transport and communication, for instance, boomed, owing to the relative openness of telecommunications to private and foreign investors and the high demand for ICT connectivity. Figure 2a shows the share of services in GDP in Indonesia and other ASEAN countries. Indonesia’s share is comparatively low. The ASEAN Secretariat and the World Bank point out that although the services sector’s share of GDP generally increases with a country’s level of development, Indonesia’s services sector remains ‘relatively underdeveloped’ (Ahsan et al. 2015, 11). This is evident in figure 2b, which plots the sector’s share of GDP against income for a range of economies in 2013. Also relatively low, compared with the trend line added to the data, are the sector’s shares in Thailand, China, and Malaysia, while those in the Philippines, South Africa, Brazil, and Singapore lie above the trend line. The share of employment in services in Indonesia grew from 32% in 1980 to 43% in 2013 (table 2). However, the share remains below those in other ASEAN countries and has grown more slowly than, for example, those in Thailand, Malaysia,

FIGURE 2a Share of Services in GDP, Indonesia and Other ASEAN Countries, 1960–2014 (%) 60 Other ASEAN countries

50 40

Indonesia


30 20 10 0 1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

Source: Data from the World Bank’s World Development Indicators. Note: Other ASEAN = Average of Brunei, Malaysia, Philippines, Singapore, Thailand, and Vietnam.

FIGURE 2b GDP per Capita ($ ’000) and the Share of Services in GDP (%), BRIICS and Selected Countries, 2013 (%) 100 90 80 South Africa

70 60

Philippines

Russia Malaysia India China Indonesia Thailand

50 40

Singapore

Brazil Korea

30 20 10 0 0.1

1.0

10.0

100.0

200.0

($ ’000) Source: Data from the World Bank’s World Development Indicators. Note: Logarithmic scale on x-axis. BRIICS = Brazil, Russia, India, Indonesia, China, and South Africa.


31

TABLE 2 Share of Employment in Services, Selected ASEAN Countries, 1980–2013 (%)


Singapore Malaysia Philippines Indonesia Thailand

1980–89

1990–99

2000–2009

2010–13

62.9 44.2 35.9 32.4 22.5

67.1 47.6 41.0 35.4 28.4

74.6 54.8 48.4 38.5 36.5

76.9 59.3 52.5 43.3 39.4

Source: Data from the World Bank’s World Development Indicators.

and the Philippines. In absolute terms, employment in services increased by about 20 million people during 2004–14 (figure 3), to reach 60 million. Figure 4 shows the distribution of employment within the services sector in Indonesia. Two-thirds of employment is still in traditional services, with 42% in trade, hotel, and restaurant services; 12% in construction; and 9% in transport and communication. The majority of these jobs are in the informal labour market (74% in trade, 61% in construction, and 66% in transport and communication) and are held by workers with relatively low levels of education (Manning and Aswicahyono 2012, table 2.3). The more modern services are ‘other’ services (31%), which comprise both government services and private services—those related to social activities, entertainment and recreation, and personal and household activities—and finance, real estate, and business services (5%), of which 75% and 85%, respectively, are in the formal labour market and performed by workers with higher levels of education (Manning and Aswicahyono 2012, table 2.3). The services sector has contributed significantly to reducing poverty in Indonesia.1 Suryahadi, Hadiwidjaja, and Sumarto (2012) found that, between 1984 and 2008, 80% of poverty reduction in rural areas and 86% in cities could be directly attributed to growth in the services sector. In other words, over the past three decades, 8 out of 10 people who escaped poverty in rural areas and 9 out of 10 who escaped poverty in the cities found employment in the services sector. The sector has also become a relatively intensive employer of female labour, in particular. According to the World Bank’s World Development Indicators, the share of women employed in the services sector in Indonesia increased from 35% to 52% between 1986 and 2013. This share is similar to that in Thailand but much lower than those in the Philippines and Malaysia, both of which reached around 70% in 2013. Figure 5 shows the rate at which women were employed in various subsectors in 2013. Benchmarked against manufacturing (40%), the shares are relatively high in trade, education, social services, and hotels and restaurants. The general trend—that the share of services in output and employment rises as income per capita increases, which we observe here for Indonesia—has been attributed to the forces of demand (such as the effects of rising incomes) and supply (such as new technology) (Ahsan et al. 2015, 3). But underlying all these 1. Mechanisms by which growth in the services sector helps to reduce poverty have been discussed by Abrenica, Findlay, and Lim (2009).

FIGURE 3 Employed Workers by Sector, Indonesia, 2004–14 (million) 70 60

Services

50 40

Agriculture


30 20 Manufacturing

10 0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Data from Sakernas, Badan Pusat Statistik’s National Labour Force Survey.

FIGURE 4 Services Employment, by Subsector, Indonesia, 2013 (%) Wholesale & retail trade Construction Other community, social, & personal services Transport, storage, & communication Education Hotels & restaurants Public administration & defence Activities of private households as employers Financial intermediation Real estate, renting, & business activities Health & social work Electricity, gas, & water supply 0

5

10

15

20

Source: Data from Sakernas, Badan Pusat Statistik’s National Labour Force Survey.

25

30

35


33


FIGURE 5 Female Participation in Services, by Subsector, 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, & communication Construction 0

10

20

30

40

50

60

70

Source: Data from Sakernas, Badan Pusat Statistik’s National Labour Force Survey, by way of the International Labour Organization.

explanations is the nature of service transactions. We argue that such transactions are fundamentally consequences of decisions about the organisation of production in firms or households. As Hill (1977) observed, a service occurs when one firm adds value to the products owned by another firm (or provides activities that are valued by households). The alternative to conducting service transactions, in other words, is undertaking those same activities in-house: for example, a manufacturing firm could manage its own trucking fleet rather than contract it out to a logistics firm. Households face similar choices, such as deciding whether to cook at home or eat at a restaurant. The measurement of the services sector captures these activities when they are contracted out: the same activities performed inhouse are not services and are not measured as such. The growth of the sector is therefore associated with a change in the willingness to contract out. The extent of this change will depend on the levels of confidence of the participants (firms and households) in organising relevant contracts, whether formal or informal, as well as on other features of services markets, including the levels of competition. These conditions, we argue, are influenced by policy variables and institutional development. We noted above that the patterns of services-sector growth in Indonesia have changed over time. The complex relation between income and the services sector’s share of output was studied recently by Eichengreen and Gupta (2013), who defined two waves of growth of services activities.2 They found that, at low income levels, the first wave sees demand for traditional services (including transport, storage, and retail and wholesale trade) increase with income. The second wave, at higher income levels, involves modern services, including financial, computer, business, legal, and communication services, as well as what Eichengreen and 2. See the work of Lee and McKibbin (2013) for a more extensive review.


34


Gupta called hybrid services, such as education, health, hotel and restaurant, and personal services, which are consumed mainly by households. Similar waves of services growth have occurred in Indonesia, as we noted earlier, with the first in the 1980s and the second since 2010. Eichengreen and Gupta argued that these waves of services growth have different starting dates in different economies. They identified a number of variables, in addition to income, that determine these dates. For example, the starting date of the second wave can be brought forward by a country’s having a high level of openness to trade, as well as by geographical proximity to a major global financial centre and by a democratic political process.3 They also found that, in recent decades, the starting point of the second wave has occurred at lower income levels. Trade and Investment in Services Services are becoming more tradable, in both foreign and domestic markets, and technology is increasing the scope for international business in services. There is value in connectivity in services, since services production involves adding value to an item belonging to the consumer; it can also involve engaging the consumer directly, allowing production and consumption to occur at the same time. This can be arranged through a firm’s physical presence or, for some transactions, through the Internet. If a foreign firm is involved, the former format requires that firm to have an offshore presence; the latter does not, making a cross-border transaction possible. A pertinent example is the graphic-design services being provided to international clients by village designers (desainer kampung) in rural Indonesia, which have increased income and other social indicators significantly.4 Indonesia’s trade in services has shown a deficit of around $10 billion a year over the last five years. In 2014, Indonesia exported $23.5 billion of services and imported $33.5 billion of services. Its major services export is travel services (business and personal), which was the only subsector to have had a positive trade balance in 2014 (table 3). Travel services’ share of services exports increased from 33% to 44% between 2005 and 2014, while transport services’ share decreased from 21% to 16%. The rising share of other business services, from 21% to 26%, is a major structural change. The growth in trade in business services is a global trend: Nordås (2008) argued that this growth has followed the worldwide pursuit of higher degrees of specialisation in manufacturing and the capability to provide new services in cross-border transactions (see also Jensen 2013). Two subsectors whose exports are still small in share and absolute value but grew at a high rate are maintenance and repair services, and personal, cultural, and recreational services. On the import side, the share of transport services increased from 33% to 36%, owing to an increase in personal transport. Freight transport still dominates this category. The share of travel services also increased, from 16% to 23% of the total import of services. These trends reflect increased purchasing power and are in line with increases in per capita income. The import of other business services declined sharply, from 31% to 21%, while maintenance and repair services, 3. The role of the political process in services growth has been linked to the rule of law and the quality of the regulatory environment (see Repucci 2015). 4.https://99designs.com/designer-blog/2014/11/25/village-designers-desainer-kampung/.

TABLE 3 Exports and Imports of Services, by Subsector, Indonesia, 2005 and 2014 Value ($ million) 2014

Change (%)

2005

2014

574.3 44.0 2,842.0 571.6 1,732.7 537.6 4,521.9 1,356.6 3,165.3 484.1 14.8 367.2 263.3 1,145.6 998.1 147.4 2,875.6 57.0 355.1

425.1 100.5 3,790.9 1,183.4 1,716.6 710.6 10,261.1 3,022.2 6,097.0 711.7 25.7 222.9 59.6 1,139.9 916.7 223.2 6,032.5 149.7 611.4

–26.0 128.3 33.4 107.0 –0.9 32.2 126.9 122.8 92.6 47.0 74.1 –39.3 –77.4 –0.5 –8.2 51.4 109.8 162.5 72.1

4.2 0.3 21.0 4.2 12.8 4.0 33.4 10.0 23.4 3.6 0.1 2.7 1.9 8.5 7.4 1.1 21.2 0.4 2.6

1.8 0.4 16.1 0.0 0.0 0.0 43.6 0.0 0.0 3.0 0.1 1.0 0.3 4.8 3.9 1.0 25.6 0.6 2.6

13,544.8

23,531.0

73.7

100.0

100.0

547.7 148.0 7,450.8 1,156.4 6,063.5 230.9 3,584.3 1,075.8 2,508.5 725.5 338.3 539.1 960.9 1,055.5 584.7 546.5 7,016.5 165.7 212.4

— 476.5 11,974.6 2,605.5 9,034.5 899.1 7,682.0 2,254.3 5,420.6 660.0 964.1 620.2 1,861.9 1,620.5 892.0 728.5 6,972.1 244.1 464.2

— 222.0 60.7 125.3 49.0 289.3 114.3 109.6 116.1 –9.0 185.0 15.0 93.8 53.5 52.6 33.3 –0.6 47.3 118.6

2.4 0.7 32.8 5.1 26.7 1.0 15.8 4.7 11.0 3.2 1.5 2.4 4.2 4.6 0.0 0.0 30.9 0.7 0.9

— 1.4 35.7 0.0 0.0 0.0 22.9 0.0 0.0 2.0 2.9 1.9 5.6 4.8 2.7 2.2 20.8 0.7 1.4

Total services imports

22,744.5

33,540.1

47.5

100.0

100.0

Net exports

–9,199.7 –10,009.2

2005


Share (%)

Exports Manufacturing services on physical inputs Maintenance & repair services Transport Passengera Freighta Othera Travel Businessa Personala Construction Insurance & pension services Financial services Charges for the use of intellectual property Telecommunications, computers, & information Telecommunications servicesb Computer servicesb Other business services Personal, cultural, & recreational services Government goods & services Total services exports Imports Manufacturing services on physical inputs Maintenance & repair services Transport Passengera Freighta Othera Travel Businessa Personala Construction Insurance & pension services Financial services Charges for the use of intellectual property Telecommunications, computers, & information Telecommunications servicesb Computer servicesb Other business services Personal, cultural, & recreational services Government goods & services

Source: Data from the International Trade Centre’s Trade Map (http://www.trademap.org). a Data from 2005 and 2013, with the share adjusted to 2005 and 2013. b

Data from 2010 and 2014, with the share adjusted to 2010 and 2014.

36


FIGURE 6 Trade in Services, Selected ASEAN Countries, 2014 (% of GDP) Singapore Thailand Malaysia ASEAN


Vietnam Philippines

Imports Exports

Indonesia 0

5

10

15

20

25

30

35

40

45

50

Source: Data from the International Trade Centre’s Trade Map (http://www.trademap.org).

although still small in absolute value, experienced high growth; their share doubled, from 0.7% to 1.4%. Indonesia’s services exports composed 12% of total exports, which is a similar proportion to that in China (9%) but much smaller than in developed economies like the European Union (24%) and Japan (18%), as well as in the world as a whole (20%). It is also much smaller than the proportions in developing countries that have prioritised services exports, such as India (32%).5 The ASEAN Secretariat and the World Bank (Ahsan et al. 2015) point to the generally low share of services exports in GDP in ASEAN. Figure 6 compares Indonesia’s exports and imports of services with those of selected ASEAN countries and ASEAN as a whole. Indonesia accounts for only 8% of ASEAN’s export of services, with Singapore being by far the largest contributor, accounting for 47%, and Thailand contributing twice that of Indonesia. International business in services is undertaken in a variety of ways, of which making cross-border transactions is only one. Another is the establishment by service providers in the home economy of the consumer in order to facilitate services transactions that require proximity. The nature of services transactions and the simultaneity of production and consumption requires a high degree of contact—if not proximity—of the parties involved. Figure 7 shows the distribution of foreign direct investment in services in Indonesia. Most investments of this type are in transport, storage, and communication, which is relatively more open to private and foreign investment than other services subsectors. The movement of people is another form of international transaction. Manning and Aswicahyono (2012) reported that remittances from Indonesians working offshore were about $6.7 billion in 2010 (from a stock of 4.3 million overseas workers),

5. Data on services exports for Indonesia come from Bank Indonesia, the central bank, while comparative data come from the WTO (2015).


37

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

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Source: CEIC Indonesia Premium Database.

a figure only slightly smaller than export income from tourism at that time, and equivalent to about one-third of all services exports. Manning and Aswicahyono also reported that around 75% of outbound workers at the turn of the decade were female. They observed that the flow of workers into the formal sector tended to exceed that into the informal sector, although the limited language capabilities of outbound workers and the lack of recognition of workers’ educational attainments impeded this trend. SERVICES INNOVATION AND PRODUCTIVITY The traditional view that services are not associated with high rates of productivity growth ignores the likely gains from specialisation and competition. If the services sector is highly competitive, firms have more incentive to contract out their services, making it more likely that services transactions will take place. Contracting out increases the size of the services sector and attracts specialist firms that are likely to be more productive than diversified firms. Likewise, businesses (and households) consuming services also specialise more narrowly when the sector is highly competitive, which is likely to increase their own productivity. In addition, as the services sector increases in size, competition among services firms increases. Tradability and the entry of international providers adds to this competition and to the scope for productivity growth from ‘churn’, or the entry of new providers and the exit of others (see, for example, Ito and Kato 2016). Lee and McKibbin (2014) examined changes in the structure of Asian economies and the implications for productivity growth (see also ADB 2012). They found that labour productivity tends to converge across sectors but that significant gaps remain, and that those gaps vary by economy. They also found that, in some economies, labour productivity is higher in services than in manufacturing—in Hong Kong, India, and Taiwan, for example. But, otherwise, the ratio of productivity in services relative to manufacturing is less than one. By labour productivity in


38


services, Indonesia lies below India and Malaysia but above Thailand and the Philippines (table 4). Lee and McKibbin observe that the growth of the services sector is not necessarily an obstacle to overall productivity growth. They also note that some parts of the services sector show higher-than-average productivity growth.6 Indonesia, however, is an exception; its productivity growth in transport, storage, and communication, for example, is relatively low. The authors find that the contribution of productivity growth within subsectors contributes more to overall productivity growth than the effects of structural change, which can also be positive. In their data, both are true for Indonesia. A number of studies have looked for the determinants of labour productivity growth in services, at the sector and subsector levels. Thangavelu, Ing, and Urata (2015) concentrate on the impact of exports in all subsectors on productivity in services. They find a significant positive relation between the two, along with a link between the stock of human capital and services productivity. They also find that, other things being equal, membership of AFAS leads to higher services productivity growth. Park and Shin (2013) examine the link to trade, too, but, in their case, to trade in services, which is positively related to services-sector productivity. They infer that this link is due to the effect of trade in services on competition in services markets. They find that a higher share of urban population drives up services productivity, whereas a higher share of the old-age population drives it down. More human capital increases productivity, especially the stock of capital from secondary rather than primary education. A lower starting level of GDP per capita of an economy increases the rate of services productivity growth over the sample period. Park and Shin (2013) conclude that there is scope for greater productivity growth in services in all Asian economies. Productivity growth has its origins in innovation, which in manufacturing and agriculture leads to new technologies embodied in purchased inputs, including capital, or in developing and applying new production methods, as is the case in services. The nature of services means that innovation in that sector is more likely to be associated with new processes or services, the design of which often involves the consumers themselves. The logistics subsector is an example of this sort of innovation (WTO 2010). Another is the ‘servicification’ of manufacturing—that is, the efforts of manufacturing firms to buy in services but also to offer services themselves that complement their products (Kommerskollegium 2012). Changes like these in services are facilitated by the use of ICT. To the extent that services firms buy ICT equipment, they too will benefit from technological change in the sector. But services firms have demonstrated considerable innovation in applying new technology, particularly when the workforce has the skills to develop those applications of ICT. Studies such as that by Australia’s Productivity Commission (2004) have found associations between ICT use and productivity growth in finance and insurance; in wholesale and retail trade; and in transport, storage, and communication. Hand-held devices now carried by delivery drivers are one example of the adoption of this technology. Parham (2004) gives the example of the transport subsector’s response to the car industry’s interest in cutting its 6. Parham (2004) finds significant contributions to productivity growth in Australia from services subsectors, including transport and storage, and finance and insurance.


39

TABLE 4 Average Growth in Labour Productivity, Selected Sectors and Countries, 1990–2005 (% per year)


Major sectors Agriculture, hunting, forestry, & fisheries Manufacturing Services Wholesale & retail trade, & restaurants Transport, storage, & communication Finance, real estate, & business services Community & government services Others Mining & quarrying Electricity, gas, & water Construction Aggregate economy

India

Malaysia

Thailand Indonesia Philippines

1.3 3.8 5.5

3.1 4.1 4.2

3.9 2.6 –0.7

2.6 3.3 1.8

1.0 0.9 0.8

4.6

4.0

–2.5

1.0

0.4

6.2

4.1

3.9

0.7

0.9

–2.9

5.0

–2.9

1.3

0.7

6.4 1.3 1.5 2.8 1.2

2.7 0.7 2.7 5.3 –0.4

0.6 –0.1 6.4 5.9 –4.8

2.0 –1.3 –0.6 6.5 –0.3

0.7 –0.2 4.6 2.9 –2.0

4.1

4.0

3.0

2.7

0.9

Source: Data from Lee and McKibbin (2014).

inventory: manufacturers changed their parts distribution system from one based on storage to one based on ‘fast flow-through’, to make better use of logistics. These sorts of changes have helped to improve productivity in the services sector, including in Indonesia, where, as of March 2015, about 50% of the population had access to a smartphone, and that number is growing by 5 million people every quarter (Roy Morgan Research, press release, 24 Aug. 2015). Growth in smartphone ownership will support the development of new services such as Go-Jek, an Uber-like motorcycle-taxi (ojek) referral service for passenger transport and goods delivery. It will also support the expansion of e-commerce, in the first instance by firms such as Tokopedia, Bukalapak, and Lazada. New ICT capabilities, and access to them, provide new business opportunities and increase the international tradability of services. Urbanisation is another important driver of the growth of the services sector. Greater urban density facilitates the organisation of services transactions at a large scale, as well as the development of specialist firms that provide services. According to the ADB (2012, figure 2.2.7), the share of services in the Indonesian economy lies just below the trend line, which is surprising, given the country’s level of urbanisation. In 2010, over half the population lived in urban areas, and this share is expected to rise to two-thirds by 2035 (Jones 2014). In an urban setting, it is easier for creative people to share information and ideas that enrich each other’s projects. The stock of members of a creative community also matters for innovation, and the quality of the urban amenities nearby—including their variety of services and consumer goods, their aesthetics and physical setting, their


40


number of public services, and their transport speed (Glaeser, Kolko, and Saiz 2001)—is important for attracting and retaining members of that community. There are, however, connections in the opposite direction, from services to urbanisation. One of Baumol’s (1967) original concerns was the implication of the lack of productivity growth in the services sector for the cost of, and demand for, a range of urban services, including cultural services and restaurants, as well as health services, education, and municipal services. Baumol foresaw a crisis for cities, and a threat to ‘many of the activities that do so much to enrich our existence’ (422). He was concerned about a dynamic that would lead to the continual decline of both urban amenities and the interest in living in urban areas, at least in the central parts of those areas. Were this to come true, it would undermine the role of cities as drivers of innovation. Certainly, issues remain in many urban jurisdictions, evident in the budget constraints that their governments face, the choices being made about which services to provide, and the threats to future spending (from expectations of rising expenditure on health services, for example). At the same time, productivity is growing in these urban services sectors, as is an interest in the concept of ‘smart cities’ (Anttiroiko, Valkama, and Bailey 2014). The main questions, then, concern the drivers of performance. The ADB (2012) concludes that three critical elements drive productivity growth in services: the regulatory environment, as it applies to services; the quality of the national infrastructure; and access to human capital. We argue that policy factors that affect incentives to invest are fundamental. The quality of the national infrastructure, for example, reflects earlier policy choices, as do decisions on investments in human capital. We discuss the role of policy in more detail later. We note here another trend in services delivery: the bundling of services and goods. These are embedded services that are offered alongside a finished product in a package, such as repairs or after-sales service for a durable product. The development of digital technology and the connection of communication devices and sensors to ‘things’ has facilitated the development of these services—for example, some car makers monitor purchased vehicles in order to advise owners on maintenance, while some cement makers provide ‘cement equipped with sensors to monitor stresses, cracks, and warpages . . . before they cause a catastrophe’ (Wired.com, 21 Nov. 2014). These are examples of new services created by the development of machine-to-machine communication, the so-called Internet of things. This may increase productivity in service delivery and improve the experience of consuming goods and services. SERVICES AND THE REST OF THE ECONOMY In this section we explore aspects of the interaction of services, which connect with the rest of the economy by way of backward and forward linkages (table 5). Backward linkages identify the output effects in supplying sectors when output changes in a particular sector, whereas forward linkages identify the use of outputs of a particular sector in the rest in the economy. Overall, the total output multipliers of these linkages are greater than one, which indicates that a 1% change in the output of the subsectors in table 5 will have a greater effect than the same change in the rest of the economy. Some subsectors have relatively weak backward linkages: communication services, for example, and real estate and business services. Others have strong backward linkages—that is, where increases in their


41

TABLE 5 Backward and Forward Linkages in Services, Indonesia, 2005


Subsector Electricity, gas, & water Construction Wholesale & retail Restaurants & hotels Rail transport Road transport Water transport Air transport Services allied to transport Communication Financial intermediation Real estate & business services Government & defence Education, health, & other social services Other services, including recreation, culture, & sporting services, & personal services

Backward linkage

Forward linkage

Total output multiplier

Total input multiplier

1.83 1.84 1.68 1.97 2.06 1.77 1.74 1.70 1.59 1.30 1.49 1.42 1.64

2.22 1.14 1.65 1.28 1.54 1.82 1.52 1.56 2.07 1.74 2.46 1.99 1.09

1.72

1.10

1.63

1.91

Source: Data from AIPEG (2014).

output increase the demand for services from other subsectors. Examples include rail transport; restaurants and hotels; and electricity, gas, and water. There are strong forward linkages in financial intermediation; electricity, gas, and water; services allied to transport; and real estate and business services—an increase in the output of these subsectors would have strong supply-side (supply-induced) effects on the other subsectors. The significance of these linkages indicates that the costs of the services inputs (also called embodied services) contribute to the cost of the final product and therefore its competitiveness. The contribution of services to output in other sectors applies not only to manufactured products but also to agriculture and to services within agriculture.7 In many agriculture markets in developing countries, for example, there are gaps in which services that help to connect smallholders to markets do not exist. Reardon et al. (2015, 372) highlight the role of ‘new market channels and actors’ in providing services to develop rural–urban value chains. They also point out that the ability of farmers to meet modern market requirements depends on government support of both hard and soft infrastructure, the latter requiring ‘good commercial regulations and an enabling business environment’ (373). These factors are linked to the levels of confidence in contracting, which we discussed earlier. With respect 7. For example, Indonesia’s director-general of domestic trade and the regent of Brebes, in Central Java, recently launched the export of Brebes shallots to Thailand. The project certainly benefited from cooperation between a large number of smallholders and an exporter of shallots, but it also depended on access to warehousing, packaging, and transport services.


42


to the linkages within services, an example is tourism, where access to services on the ground, such as transport, hotels, and restaurants that meet the expectations of international travellers, is a necessary condition for traffic growth. Common now in manufacturing is the internationalisation of value chains, in which previously consolidated value-adding processes are distributed to different locations, so the benefits of lower-cost production, achieved by the right choice of location, more than offset the transport and communication costs. These chains help developing countries enter manufacturing; entry can be gained by adding value to components, without the need to construct a finished product. Global value chains are particularly important for small and medium firms, for whom they create opportunities to participate in the world economy.8 Each step in these value chains involves the consumption of a number of services, such as transport and communication. The availability of these services at lower costs has supported the growth of these chains in food and manufacturing, and, by association, the industrialisation of developing countries. Golub, Jones, and Kierzkowski (2007) develop a measure of ‘service links’ on the basis of the reliability of electricity supplies, the cost of telecommunications, the time to connect a telephone line, and a country’s ranking in Transparency International’s Corruption Perceptions Index. They also include a measure of the performance of the customs system. They find that this service-links variable explains many of the variations in total manufactured exports across countries. A measure of the extent of a country’s participation in global value chains is the share of imported intermediate products that are subsequently used in exports. The OECD comments that the share for Indonesia is less than 20%, well below the OECD average (of more than 39%).9 We suggest that a low level of participation in global value chains may be due to the poor performance of services links—that is, because of a lack of access to services at global combinations of prices and quality. If a country’s services sector is not competitive, the costs of participating in global value chains will be higher, the host country is less likely to be competitive, and there will be fewer imported intermediate products in exports. The share of services embodied in exports (the breakdown of the sources of value of exports) can indicate the competitiveness of a country’s service sector. Where the service sector is competitive, this share would be expected to be greater than what it would be otherwise. Table 6 shows the services value added embodied in manufacturing exports across countries. At 21%, Indonesia’s exports have the lowest services content among the BRIICS economies.10 8. Even the export of Brebes shallots is an example of a global value chain, since the seeds for the shallots were grown in the Philippines and the final product is sold to Thailand and Vietnam. 9. Imported intermediate inputs can be used in a different sector; imports of mining products, for example, may be exported as metals. See http://www.oecd.org/sti/ind/ TiVA_2015_Guide_to_Country_Notes.pdf. 10. Data are also available on the services shares of exports by subsector. There are relatively high shares in ICT, electronics, and machinery, as well as in rubber and plastics. Overall, the shares of services in exports across sectors lie in a remarkably narrow range (with the exception of mining exports, in which the share is low). Across all sectors in Indonesia, the shares are much lower than the OECD average.


43


TABLE 6 Services Value Added Embodied in Manufacturing Exports from BRIICS Countries, 2011 (%) Brazil

Russia

South Africa

India

China

Indonesia

Wholesale, retail, & hotels Real estate, renting, & business activities Finance & insurance Transport & telecommunications Community, social, & personal services Construction

13.0

17.4

12.1

14.6

12.2

9.5

10.9 5.0

5.0 4.5

6.0 4.1

4.4 6.1

6.6 5.0

3.0 2.4

4.9

8.7

7.7

7.0

5.6

3.8

3.2 0.8

0.6 1.3

6.1 0.6

1.0 0.8

1.5 0.3

1.6 0.4

Total

37.7

37.5

36.7

33.8

31.1

20.7

Source: The OECD’s Trade in Value Added database. Note: BRIICS = Brazil, Russia, India, Indonesia, China, and South Africa. Discrepancies are due to rounding.

Why is Indonesia’s share of services in exports so low? Other than there being little incentive for firms to contract out (owing to the sector’s lack of competitiveness), some subsectors may be less amenable to contracting out or have less scope for firms to do so. Services transactions also incur costs. Our hypothesis is that the high costs involved in agreeing on the scope of the service to be provided, monitoring the delivery of the service, and confirming that the terms of the contract have been met make firms less willing to contract out, thereby reducing the share of services in the economy and, most likely, in exports. SERVICES-SECTOR REGULATION The operations of services markets are often highly regulated, in part because of the nature of production. The simultaneity of consumption and production leads to concerns that providers without the right skills or capacity will impose high costs on their customers, who may lack the information to assess their providers’ capabilities. There is also a concern that the nature of production creates first movers, or pioneering firms whose early presence in a sector gives them significant advantages. Some services markets may not be competitive, owing to the nature of production and the presence of sunk costs, and there may a case for introducing regulations to resolve issues of market power. The efficiency with which these regulatory arrangements are managed may hinder competition in services, including by impeding the entry of foreign and domestic firms, or it may raise the costs of operations of services firms. Either outcome will lead to a higher-cost services sector, which we suggest reduces the incentive for firms to contract out. A poor regulatory environment is therefore likely to reduce the share of services in exports.

44


FIGURE 8 OECD Services Trade Restrictiveness Index, Indonesia, 2015 1.0

Other discriminatory measures Barriers to competition Regulatory transparency Restrictions on the movement of people Restrictions on foreign entry

0.9 0.8 0.7

ASEAN average

0.6 0.5


0.4 0.3 0.2 0.1 0.0

1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22

Source: OECD.Stat database. 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.

The OECD and the World Bank have recently assessed the quality of regulatory arrangements in different countries. Both organisations produce indices of the policy environment for services: a services trade restrictiveness index (STRI). Figure 8 shows the values calculated for Indonesia by the OECD. An index score of zero means a subsector is completely open to foreign investment; a score of one means it is completely closed. Indonesia has a relatively high score, and the highest on average of the emerging economics, including the BRIICS.11 Figure 9 shows the relation between an average STRI index value and the services sector’s share of exports.12 As might be expected, the relation is generally negative: a more restricted policy environment leads to lower services content in exports. India is an outlier; despite its restrictive policy regime, it has a high share of services content. Another outlier is Indonesia, which lies below the trend line; 11. The original BRICS economies were Brazil, Russia, India, China, and South Africa. All were assessed to be at an advanced stage of development at which they had arrived relatively recently. There has been some discussion that Indonesia should be added, making the expanded group the BRIICS. 12. The average OECD STRI values in figure 9 are based on a subset of the 22 available subsectors—that is, they refer only to services in commercial banking, telecommunications, air transport, maritime transport, road freight, rail freight, and construction.


45

FIGURE 9 The OECD Services Trade Restrictiveness Index and Services Content in the Gross Value of Exports, BRIICS Countries, 2015 (%) 90 80 70


60

India

50

Brazil

40

South Africa Russia

30 20 0.00

China

Indonesia 0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Services trade restrictiveness index Source: Adapted from He and Findlay (2014). Note: The services trade restrictiveness index ranges from 0 to 1, where 0 is completely open and 1 is completely closed.

even for a country with a high degree of restrictiveness, its share of services in exports is relatively low. These data, combined with the earlier commentary on participation in global value chains, suggest that a low rate of participation in global value chains is associated with a poorly performing services sector, and that this is a consequence of a highly restrictive policy environment.13 We also note, however, that other factors might contribute to a smaller share of services in exports, including the composition of exports (and the significance of minerals exports). Furthermore, the costs of contracting out might also reduce the size of the services sector. In looking to explain the small share of services in Indonesia’s exports, we undertook an econometric analysis to test the significance of all three variables— the STRI, the composition of exports (measured by the share of fuels and minerals in exports), and the costs of contracting—as well as of control variables such as GDP per capita (He et al. 2015). We found that the STRI values (from either the OECD or the World Bank) in our sample explain more of the variation in the services shares than in the other variables. Export composition was the next most 13. Inefficiencies in logistics, which are often due to the protection of domestic transport and distribution or to the monopoly of state-owned enterprises on ports and airports, have often been said to reduce Indonesia’s export competitiveness and thus the country’s ability to be part of global value chains (see, for example, World Bank 2016).


46


important variable, followed by the costs of managing contracts. Both of these variables were statistically significant. These results reinforce our argument about the fundamental importance of the policy environment, but the focus on contracting also points to the importance of institutions—especially those related to the rule of law.14 Poor domestic policy settings reduce the export performance of the services sector itself. In health services, for example, restrictive policies on the participation of foreign investors and talent has made Indonesia a net importer, which benefits its ASEAN neighbours, while other ASEAN countries with more open regimes have become net exporters of health services. According to Indonesia’s Ministry of Health, the number of Indonesians who went abroad to seek medical treatment and health checks increased from 350,000 in 2006 to 600,000 in 2012 (IMTJ.com, 4 Jan. 2013), while the amount they spent overseas doing so is estimated to have risen from $500 million to $1.4 billion. Two-thirds of Indonesian health tourists go to Malaysia, and the next biggest destination is Singapore. Malaysia, Thailand, and Singapore, on the other hand, have opened up their health services, becoming competitive and meeting international standards in human resources and facilities. All three countries are more open than Indonesia in their policies on entering joint ventures with foreign health-care providers and cooperating with foreign medical personnel. In 2012, it was estimated that Thailand received 700,000 medical tourists, resulting in $3.8 billion of foreign exchange, which came from many countries (including Japan, the United Kingdom, the United States, and Australia). The most prevalent health-care service for health tourists in Thailand was cosmetic plastic surgery (Wilson 2011, 124). Ahsan et al. (2015, 103–6) argue that the main contributors to Thailand’s success in exporting health services were the adoption of international standards for hospital accreditation, the development of complementary policies to manage the risk of an uneven distribution of medical services, and the relaxation of constraints on private-sector participation in providing health services.15 As for Malaysia, in 2011 there were an estimated 580,000 inbound medical tourists, 57% of whom were Indonesian, which earned the country $1.8 billion in foreign exchange (Lin 2012). Singapore, meanwhile, is estimated to have earned $2.5 billion (Lock 2013), half of which came from Indonesia. Indonesia has had opportunities to reform its entire services sector, including as part of its international commitments under AFAS and the ASEAN Economic Community (AEC). The earlier of the two agreements, AFAS, was agreed upon in 1995 as part of the intra-ASEAN liberalisation of trade in services. It adopted the approach of the WTO’s General Agreement on Trade in Services (GATS) for making requests and offers, as well as for promoting the flows of professionals through mutual recognition agreements (MRAs). Little progress was made 14. World Bank governance indicators show a significant increase in performance in a number of measures in Indonesia in the last decade. See http://info.worldbank.org/ governance/wgi/index.aspx#reports. 15. Ahsan et al. also find that the performance of Malaysia’s higher-education sector, which has relevance for Indonesia, is related to a willingness to liberalise; to allow in private providers, including prestigious foreign universities; and to establish an internationally benchmarked quality-assurance framework.



47

compared with the reduction in tariffs achieved for intra-ASEAN trade in goods, and in 2006 AFAS changed its approach to that of the AEC Blueprint, which was more target-based and had a timeline across the four modes of trade-in-services delivery (as well as MRAs).16 There were to be nine rounds of negotiations to reach the end goal of free trade in services and free movement of professionals in ASEAN. As is well known, the AEC vision is to achieve the ‘free flow of goods, services, investment, and skilled labor, as well as freer flow of capital’ (ASEAN. org, press release, 28 June 2005). According to the AEC Blueprint, all restrictions on trade in services should have been completed in the four priority sectors (air transport, e-ASEAN, health care, and tourism) by 2010, in logistics by 2013, and in all sectors by 2015. Restrictions on GATS modes 1 and 2 were to be removed, and ASEAN equity participation was to move to 70% by 2010 for priority sectors and to 100% by 2015 for all sectors. AEC commitments are open for modes 1 and 2, but do not allow for wholly owned ASEAN equity, and the MRAs are confined to certain professions for now. Dee (2015) finds that AFAS has made improvements in the number of sectors included (called the extensive margin) and within sectors (called the intensive margin). She comments that improvements in the intensive margin are generally difficult to make, and that progress in both margins occurs because AFAS is a process rather than a one-off event. But she notes that commitments lag actual policy. This gap is common across different stages of development. Dee attributes this situation to a demand for ‘policy space’ by policymakers. We agree with her criticism that the commitments then offer no restraint on a reversal to a less restricted regime. Likewise, Ahsan et al. (2015) find that AFAS has made significant progress towards meeting its commitments but that its ambitions are modest (and that it falls short of the liberalisation provided by many trade agreements). They stress that, in order to make progress on liberalisation, attention will have to be given to regulatory barriers to trade and investment. According to Dee, Indonesia shares with other ASEAN members a significant gap between actual and committed policies on health and medical services and on maritime services. Indonesia’s policies changed little in these subsectors between 2010 and 2014 (except for some opening up in medical and maritime services), as did its commitments.17 In other observations on Indonesia’s commitments, Dee notes that restrictions remain on the movement of people in medical services, and that these restrictions limit the value of any liberalisation of investment rules. She also comments on the use of geographic limitations on commitments in tourism; the ‘odd’ restrictions in maritime services (including those on forms 16. The four modes of GATS services delivery are as follows: mode 1 (cross-border supply) comprises transactions across borders, including via the Internet; mode 2 (consumption abroad) comprises the movement of consumers, as in tourism; mode 3 (commercial presence) comprises foreign investment; and mode 4 (movement of natural persons) comprises the relocation of people. 17. In some cases—in telecommunications, banking, and insurance, for example—commitments are more liberal than actual policy, because of discrimination in favour of other ASEAN members (which is recorded as a commitment). It could also follow from the treatment of prudential measures and their exclusion from reference in the commitments but their inclusion in the data on actual policy.


48


of establishment); a regression in the treatment of data communications and Internet-access services (that is, that the regime is ‘more closed in precisely those sectors that are likely to dominate the future’ [2015, 22]); and the application of new requirements on reinsurance (but in areas where the measures are arguably prudential). Ahsan et al. (2015) find two areas in which services integration in ASEAN has been noticeable: air transport and the development of MRAs for professional services.18 MRAs have been completed in engineering, nursing, architectural services, medical and dental services, accountancy, and hospitality. Standards have been agreed on, and all these subsectors are establishing certification frameworks. In hospitality, for instance, there has been ASEAN-wide agreement on the standards of competency for 32 professions; another agreement on the certification process itself and on the institutions that will be allowed to award certifications; and the establishment, in Indonesia, of a regional coordination secretariat for the subsector. In response, Indonesia’s Ministry of Tourism, in cooperation with the stakeholders and associations of the hospitality industry, has made concerted efforts to increase the number of certified professionals in hospitality.19 The movement of professionals has yet to be tested, however, because domestic rules and regulations on permission to work still apply. These rules and regulations, such as the recently introduced (but later revoked) language requirements for foreign workers in Indonesia, can be a major barrier to the free movement of professionals. Nikomborirak and Jitdumrong (2013) point out that even though there are MRAs in various professions, the number of professionals who meet the MRA standards is limited. On top of that, domestic regulations make it difficult for professionals to cross borders. Nikomborirak and Jitdumrong also note the restrictive effect of behind-theborder measures on international trade in services, despite other commitments to liberalise. This is the case in Indonesia. First, opening up a subsector, such as international logistics, will not increase foreign investment unless related services, like domestic logistics and distribution, are also opened up. The focus should be on a group of services rather than on a single subsector. Furthermore, the dominance of state-owned enterprises in certain subsectors, such as transport and telecommunications, prevents full liberalisation. Second, domestic regulations related to a license to operate can still impede foreign investments entering the services sector. Third, there are many domestic requirements related to language or specialised local knowledge which will continue to hamper the movement of professionals. Fourth, there is still a strong preference for limiting foreign ownership in ‘strategic’ sectors. The restrictions are evident in the negative investment list, as well in sectoral laws that contain ownership restrictions in anticipation of the 70% ASEAN ownership limit under the AEC.

18. See Tan’s (2013) paper for more detail on the ASEAN experience in air transport. 19. The government has allocated funds to subsidise training and certification, in co operation with the Association of Indonesian Hotels and Restaurants (which has fulfilled the requirements for awarding certifications). The training of major hotel chains has been integrated into the relevant competency standards.



49

Thus, despite being more visionary than the GATS approach, the services-sector liberalisation in AFAS is not ambitious, does not involve the full opening up of GATS mode 3, and lacks concrete commitments in GATS mode 4. In addition, the flexibilities for countries to stray from their targeted commitments are many and vague. Actual commitments are still behind AEC goals and the applied policies of ASEAN countries. All these observations apply to Indonesia. Studies have also shown that past episodes of liberalisation have come not from regional or international commitments but from unilateral policies (Francois and Hoekman 2010). One case in point is Malaysia’s developing its services sector according to its medium-term planning documents. Since 2013, when Indonesia hosted APEC, there have been moves within the association to develop a better understanding of the importance of the services sector and its benefits. In Indonesia, however, despite its AEC commitments and this push within APEC, there is still a lack of progress in opening up the services sector, for several reasons. First is the lack of understanding of the importance of the services sector to the competitiveness of other sectors and to the economy as a whole, including the capacity to join emerging cross-border value chains. As such, there is no strong political will from the top to ensure coordination between sectors. This was evident in the implementation of Law 25/2007 on Investment, which sought to bring Indonesia into line with international best practices in national treatment, negative investment lists, and dispute settlement. In the case of the negative investment list, the law and its implementing regulations clearly state that restrictions on foreign ownership will be applied through regularly updated government regulations on which sectors and subsectors are closed and which are open with restrictions. The rest of the economy will be open for 100% foreign investment. Despite clear direction from the Coordinating Ministry for Economic Affairs that all ownership restrictions should be listed in the regulations and discussed in a coordinated way, a number of sectoral laws—including in the services sector—were passed with foreign-ownership limitations. Law 12/2012 on Higher Education, for example, limits foreign ownership to 49%. Second, there is pressure to keep the health and education subsectors closed to protect domestic institutions and professionals. This pressure is evident in the foreign-ownership limit in the higher-education law, mentioned above, and the restrictions in both subsectors on cooperating with foreign institutions (and foreign professionals) that are delivering services via GATS mode 4. Opening up these subsectors to foreign institutions and talent could benefit the institutions and professionals delivering health and education services, thereby accelerating human capital development and reducing imports of such services. Given the sensitivities in these subsectors, Indonesia could consider establishing a special economic zone for the delivery of health and education across all modes. Law 39/2009 on Special Economic Zones includes such provisions. Third, there is likely to be strong resistance to opening up subsectors dominated by state-owned enterprises, such as transport, banking, infrastructure-related services, and fixed-line telecommunications. In the recently announced deregulation package, which relaxes the negative investment list, there were not many such sectors in services, except for distribution. There are hopeful signs, however, of high-level political commitment to enhancing Indonesia’s competitiveness, diversifying its economy, developing new

50



sources of foreign-exchange earnings, and creating high-quality jobs. These signs include recent announcements on Indonesia’s intention to join the Trans-Pacific Partnership and on the resumption of its Comprehensive Economic Partnership Agreement with the European Union, as well as its continued participation in the AFAS process under the AEC, the consolidation of the ASEAN+1 free-trade agreements under the Regional Comprehensive Economic Partnership, and and its plans to review and remove restrictions in the negative investment list.20 Indonesia must use its international commitments to shape its reforms, including in the services sector. But for there to be a strong and consistent political will to reform the services sector, the benefits for productivity, growth, and employment must be clearly articulated. CONCLUSIONS The history of Indonesia’s services sector is a story of lost opportunities. Compared with its main ASEAN neighbours, Indonesia is a low- or middle-ranking performer in services, as shown by its low level of competitiveness, its small share of services in exports, and its poor productivity relative to manufacturing. This outcome is of major concern, given the value of diversifying Indonesia’s economy and the evidence that higher shares of efficient services can help other sectors become more competitive. A modern services sector can also provide a wider range of high-wage, formal-sector jobs and dispel the sector’s reputation as the employer of last resort. In another policy environment, we would expect a different outcome. We find that Indonesia’s highly restrictive policy regime has contributed to the sector’s poor performance. We use an indicator of the shares of services in exports, and we test for—and find—a significant relation between this measure and policy regimes in different countries, allowing for the composition of exports. We also find a great need to improve both the ease of contracting and the environment in which to do business. Such improvements depend on long-term institutional and governance changes, which are under way in Indonesia. The country’s immediate priority, however, should be policy reform in the services sector itself. We note the contribution of reform in other ASEAN economies to export performance in the services sector—in health services, for example. Reforming the services sector is not easy for any country. There must first of all be an understanding of the importance of the sector to growth and competitiveness. This understanding is necessary for political commitment. New information on policy settings is now available, which will help to guide policy. Indonesia 20. The head of Indonesia’s Investment Coordinating Board (BKPM), Franky Sibarani, has revealed that, in order to increase investment, the negative investment list, which indicates which sectors are closed to foreign investment, will be reduced by opening up more business sectors. A new presidential regulation on the list’s revision was set to be issued in March 2016. It was reported that discussions on opening up foreign investment in three industrial sectors—namely, tourism, the creative economy, and health care—had almost been concluded. Five business sectors in the creative economy, including film production and cinemas, will be opened up (Jakarta Post, 25 Jan. 2016), as will other services-related areas, such as e-commerce (Jakarta Post, 16 Jan. 2016).



51

must participate in coordinated attempts to reduce the restrictiveness of trade in services (in the OECD, for example) and continue to develop its own monitoring tools. This will enable it to bring its policies into line with its desired outcomes. We saw that services subsectors themselves use other services, so that their own competitiveness and therefore their capacity to respond to reform—and so their support for reform—depend on their access to services inputs. The policy information now available provides more scope for coordinating and sequencing reforms for this purpose. Indonesia could use its leadership and participation in regional forums to shape its services reforms. Opportunities to use AFAS, for example, have not been taken, and this is evident even for the other ASEAN countries. Nor has the process of services reforms under the Regional Comprehensive Economic Partnership been any more advanced. Another possible route is the recently agreed APEC framework on services, which is likely to draw wide-ranging support; it started when Indonesia was chairing APEC, and is more about the process than the negotiations.21 Given the disruptive role of ICT and other technologies, the use of such technology can open an exciting chapter for Indonesia by enabling the participation of SMEs and creative and productive workers from all over the country. New technology is creating new forms of service transactions and, in many cases, greater scope for competition. By doing so, it is diminishing the case for regulation in subsectors where lack of competition had been a concern. We noted earlier the apparent links between services-sector growth and urbanisation, the expectations of which in Indonesia also provide significant opportunities. The clever use of this two-way relation in cities could not only support the growth of the sector but also lead to a more dispersed pattern of development in services. We can imagine the emergence of creative urban hubs in locations such as Bandung, Banjuwangi, Surakarta (Solo), Yogyakarta, Makassar, Padang, and many parts of Bali. These areas are run by committed local governments and, should they develop in this way, they would also add to the membership of the coalition for reform. In summary, we argue that contributors to success include the strategies to capture changes in technology and trends in urbanisation that will support the growth of a modern services sector. Indonesia must make the most of recent advances in services reform, including (and especially) in export sectors and urbanising areas.22 With better policy information now available, policymakers can map out and coordinate a reform program that is documented and reinforced by commitments in AFAS and other trade agreements and by capacity-building in APEC.

21. http://www.apec.org/Meeting-Papers/Leaders-Declarations/2015/2015_aelm/2015_ Annex%20B.aspx. 22. Forums such as the Indonesian Services Dialogue are important in bringing together producers and users of services: ‘Services-users such as manufacturing companies as well as natural resources companies are also engaged to voice their input as the services users to obtain higher quality services with better efficiency’. See http://isd-indonesia.org/about-us/.

52


REFERENCES


Abrenica, Joy, Christopher Findlay, and Aik Hoe Lim. 2009. ‘Future of Trade in Services for Developing Countries’. In Trade and Poverty Reduction in the Asia-Pacific Region: Case Studies and Lessons from Low-Income Communities, edited by Andrew L. Stoler, Jim Redden, and Lee Ann Jackson, 341–63. Cambridge: Cambridge University Press. ADB (Asian Development Bank). 2012. Asian Development Outlook 2012 Update: Services and Asia’s Future Growth. Manila: ADB. Ahsan, Ahmad, Aaditya Mattoo, Batshur Gootiiz, Juan Sebastian Saez, Martin Molineuvo, and Peter Walkenhorst. 2015. ASEAN Services Integration Report: A Joint Report by the ASEAN Secretariat and the World Bank. Washington, DC: World Bank. AIPEG (Australia Indonesia Partnership for Economic Governance). 2014. ‘Integrated Policy Advice: Report on Services’. Unpublished report, AIPEG, Jakarta. Anttiroiko, Ari-Veikko, Pekka Valkama, and Stephen J. Bailey. 2014. ‘Smart Cities in the New Service Economy: Building Platforms for Smart Services’. AI & Society 29 (3): 323–34. Baumol, William J. 1967. ‘Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis’. American Economic Review 57 (3): 415–26. Dee, Philippa. 2015. ‘Monitoring the Implementation of Services Trade Reform towards an ASEAN Economic Community’. ERIA Discussion Paper 2015-44, Economic Research Institute for ASEAN and East Asia, Jakarta. Eichengreen, Barry, and Poonam Gupta. 2013. ‘The Two Waves of Service-Sector Growth’. Oxford Economic Papers 65 (1): 96–123. Francois, Joseph, and Bernard Hoekman. 2010. ‘Services Trade and Policy’. Journal of Economic Literature 48 (3): 642–92. Glaeser, Edward L., Jed Kolko, and Albert Saiz. 2001. ‘Consumer City’. Journal of Economic Geography 1 (1): 27–50. Golub, Stephen S., Ronald W. Jones, and Henryk Kierzkowski. 2007. ‘Globalisation and Country-Specific Services Links’. Journal of Economic Policy Reform 10 (2): 63–88. He Xiaobo, and Christopher Findlay. 2014. ‘Policy Restrictions and Services Performance: Evidence from 32 Countries’. Journal of International Commerce, Economics and Policy 5 (1): 1–19. He Xiaobo, Christopher Findlay, Mari Pangestu, and Reza Siregar. 2015. ‘The Determinants of the Role of Services in Exports’. Working paper, University of Adelaide. Hill, T. P. 1977. ‘On Goods and Services’. Review of Income and Wealth 24 (4): 315–38. Ito, Keiko, and Masatoshi Kato. 2016. ‘Does New Entry Drive Out Incumbents? The Varying Roles of Establishment Size across Sectors’. Small Business Economics 46 (1): 57–78. Jensen, J. Bradford. 2013. ‘Overlooked Opportunity: Tradable Business Services, Developing Asia, and Growth’. ADB Economics Working Paper 326, Asian Development Bank, Manila. Jones, Gavin, 2014. The 2010–2035 Indonesian Population Projection: Understanding the Causes, Consequences and Policy Options for Population and Development. Jakarta: United Nations Population Fund. Kommerskollegium. 2012. Everybody Is in Services: The Impact of Servicification in Manufacturing on Trade and Trade Policy. Stockholm: Kommerskollegium. Lee, Jong-Wha, and Warwick McKibbin. 2014. ‘Service Sector Productivity and Economic Growth in Asia’. ADBI Working Paper 490, Asian Development Bank Institute, Tokyo. Lin, Mary Wong Lai. 2012. ‘Overview of the Development of Malaysia Healthcare towards Medical Tourism’. Presentation given at the Global Connected Care Conference and 3rd MediTour Expo, Las Vegas, 6–8 May. Lock, Stephen. 2013. ‘Medical Tourism in Southeast Asia: Indonesia’s Opportunity Cost’. Edelman Indonesia (blog), 28 August. http://www.edelman.id/ medical-tourism-in-southeast-asia-indonesias-opportunity-cost/.



53

Manning, Chris, and Haryo Aswicahyono. 2012. Trade and Employment in Services: The Case of Indonesia. Jakarta: International Labour Organization. Nikomborirak, Deunden, and Supunnavadee Jitdumrong. 2013. ‘ASEAN Trade in Services’. In The ASEAN Economic Community: A Work in Progress, edited by Sanchita Basu Das, Jayant Menon, Rodolfo Severino, and Omkar Lal Shrestha, 95–140. Singapore: Institute for Southeast Asian Studies. Nordås, Hildegunn Kyvik. 2008. ‘Trade and Regulation: Computer Services and Other Business Services’. Paper presented at the OECD Services Expert Meeting in Business Services, Paris, 24 June. Parham, Dean. 2004. ‘Sources of Australia’s Productivity Revival’. Economic Record 80 (249): 239–57. Park, Donghyun, and Kwanho Shin. 2013. ‘Is the Service Sector in Asia an Engine of Growth?’. In Developing the Service Sector as an Engine of Growth for Asia, edited by Donghyun Park and Marcus Noland, 51–76. Manila: Asian Development Bank. Productivity Commission. 2004. ‘ICT Use and Productivity: A Synthesis from Studies of Australian Firms’. Research paper, Productivity Commission, Canberra. Reardon, Thomas, Randy Stringer, C. Peter Timmer, Nicholas Minot, and Arief Daryanto. 2015. ‘Transformation of the Indonesian Agrifood System and the Future beyond Rice: A Special Issue’. Bulletin of Indonesian Economic Studies 51 (3): 369–73. Repucci, Sarah. 2015. ‘Democracy Is Good for Business’. Freedom at Issue (blog), 3 August. https://freedomhouse.org/blog/democracy-good-business. Suryahadi, Asep, Gracia Hadiwidjaja, and Sudarno Sumarto. 2012. ‘Economic Growth and Poverty Reduction in Indonesia before and after the Asian Financial Crisis’. Bulletin of Indonesian Economic Studies 48 (2): 209–27. Tan, Alan Khee-Jin. 2013. ‘Toward a Single Aviation Market in ASEAN: Regulatory Reform and Industry Challenges’. ERIA Discussion Paper 2013-22, Economic Research Institute for ASEAN and East Asia, Jakarta. Thangavelu, Shandre Mugan, Lili Yan Ing, and Shujiro Urata. 2015. ‘Services Productivity and Trade Openness: Case of ASEAN’. ERIA Discussion Paper 2015-56, Economic Research Institute for ASEAN and East Asia, Jakarta. Wilson, Ara. 2011. ‘Foreign Bodies and National Scales: Medical Tourism in Thailand’. Body & Society 17 (2–3): 121–37. World Bank. 2016. Indonesia Economic Quarterly: Private Investment is Essential. March. Washington, DC: World Bank. WTO (World Trade Organization). 2010. ‘Logistics Services: Note by the Secretariat’. S/C/W/317, WTO, Geneva. http://www.oecd.org/tad/services-trade/46335248.pdf. ———. 2015. World Trade Report 2015. Geneva: WTO.

An Efficient Route to Tetrahydronaphthols via Addition of Ortho

Recommend Documents