Trade Protectionism and Indonesian Policy for Intermediate Industry

Cali,Massimiliano

Trade Protectionism and Indonesian Policy for Intermediate Industry (Anglais)

Résumé

Indonesia, like many other emerging countries, views the development of a thriving intermediate inputs industry as a cornerstone of its industrialization process. The government has been increasingly leaning towards protecting domestic producers in order... Voir la suite Indonesia, like many other emerging countries, views the development of a thriving intermediate inputs industry as a cornerstone of its industrialization process. The government has been increasingly leaning towards protecting domestic producers in order to promote the industry’s development. However the record of this import substitution strategy across the globe is not particularly successful and more often than not trade protection has created excessive rents for a few domestic producers at the detriment of international competitiveness. Our empirical analysis suggests that protectionism is ineffective to promote domestic industries also in Indonesia. According to our results protecting a sector through higher tariffs is likely to hurt both domestic producers in that sector and domestic users of intermediates. In addition the most dynamic sector among domestic intermediates – auto-parts - has the highest concentration of foreign owned plants, hinting at the importance of foreign capital as a source of innovation and productivity growth. Auto-parts has also been rapidly switching its sourcing from imported to locally produced inputs, dispelling the myth that foreign ownership may be associated with lower development of domestic linkages. This evidence suggests that maintaining as open a trade and investment regime as possible is going to be a pre-condition for the further development of intermediate industries in Indonesia. In addition the successful industrialization of countries like South Korea and Taiwan shows that more positive forms of support to producers, such as reducing costs of investment and of production inputs can play a key role in spurring industrialization as long as they address existing market failures. However in order to be effective this strategy requires the state to adequately rationalize industries and discipline firms recipient of assistance. This task requires in turn efficient screening and monitoring mechanisms and an institution relatively impermeable to firms’ lobbying. Such targeted support should not crowd out more horizontal interventions, which Indonesia needs to invest in if it aims to achieve a sustained industrial development path. Réduire

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Trade Protectionism and Indonesian Policy for Intermediate Industry (Anglais)

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