Jakarta – A quick fix rarely solves a longstanding problem, yet such thinking time and again informs economic policymaking in Indonesia. Our government often relies on specific incentives or disincentives to exact specific behavior from consumers, producers or investors.

A case in point is last year's short-lived palm oil export ban. Implemented in April 2022 to address a shortage of cooking oil supply that was driving up domestic food prices, the ban meant farmers paid the price, as they suddenly got less for their produce because of excess supply in the market.

That in turn threatened to reduce the long-term production of palm fruit and hence jeopardize supply, which would be the exact opposite of the government's goal.

The ban was lifted after less than a month even though cooking oil prices had not come down to the desired level. Not long after that, the government had to intervene again, this time to try and push for more exports amid increasing stockpiles.

Ironically, the sledgehammer of the export ban followed months of other short-term regulatory changes that by and large had failed to bring down cooking oil prices ahead of the Islamic fasting month of Ramadan in 2022.

The lesson to be learned from the experience is that a quick fix is usually no fix at all, because market players have a knack for finding ways around state intervention.

A more robust solution would have involved studying market structures, ensuring supply can adapt quickly in response to changing demand and that there are no dominant players gaming the system.

But that would not have been a quick fix.

Trade policies to promote or protect specific domestic industries change frequently in Indonesia, and while each of those policies may be justified in its own right, the overall effect can be detrimental.

In a press briefing last week, the World Bank suggested that Jakarta reform trade policies that were hurting the manufacturing sector and left Indonesia "relatively marginalized by global value chains".

Specifically, the Bank's chief economist for the East Asia and Pacific region said Indonesia needed to do more to facilitate imports and exports to undo a downward trajectory in the country's manufacturing sector.

Notably, the World Bank opined that, to improve exports, the government should facilitate imports. Manufacturers have long complained that local content requirements put them at a disadvantage vis-a-vis foreign competitors in the global market.

The government has demonstrated a willingness to grant leeway for imports of certain materials or equipment where this is needed for domestic producers, but such detailed intervention creates the overall impression of a very restricted economy, and that impression is hurting the investment climate.

Jakarta has no problem going the extra mile to attract investors. For its megaproject to build a new capital city in Kalimantan, the government is offering generous tax incentives, duty exemptions, land rights and foreign worker permits. It has also rolled out the red carpet for electric vehicle (EVs) producers.

The results in both cases are less than convincing.

Undoubtedly, a lot of paperwork would be involved for companies to avail themselves of such incentives. Furthermore, given the changeable nature of business regulations in Indonesia, investors may worry about the red carpet being pulled out from under their feet in the future.

Overly selective policies, even if some of them are there to support business actors and attract investment, can do more harm than good. They are not helpful at a time when Indonesia is budding for a key role in industrial supply chains.

Protectionist policies may provide short-term relief for uncompetitive domestic players, but in the long term they prevent the necessary adaptation that could prepare those players for the harsh reality of the open markets envisioned by regional trade pacts.

Instead of providing all sorts of specific exemptions and specific incentives for specific investments, it might be better for the government to not get overly involved in matters of imports, exports and employment and simply let manufacturers go about their business.

Source: https://www.thejakartapost.com/opinion/2023/10/10/the-trap-of-protectionism.htm