Aid for Trade in Lowering Trade Costs: Overcoming Infrastructure and Institutional Constraints in Indonesia

Abstract

This study takes a hard and somewhat sobering look at the state of Indonesia’s physical (hard) and institutional (soft) infrastructure as the country moves into its second year under the presidential leadership of the recently elected Joko Widodo. The study’s focus is predominantly on how well (or poorly) the country is currently positioned to benefit from the positive and welfare enhancing effects of trade and investment liberalization, something that the country implicitly agreed to embrace when ‐ together with over 120 other economies ‐ it became a founding member of the World Trade Organization in 1995. We first examine some critical infrastructure bottlenecks as they affect roads, electricity generation and ports and conclude that, although the country has made some progress in addressing these, there is still much that needs to be done. The next section of the report focuses on the institutional constraints holding back Indonesia’s integration into the world trading system, particularly the glaring shortcomings that affect the judiciary and law enforcement, as well as the legislative and executive branches of government. Our report then turns to an analysis of the prevailing import and export regimes and finds that these are becoming more rather than less restrictive as various actors at different levels of government seek to establish and assert their permit‐issuing powers in a barely concealed effort to generate rents as well as induce shortages that connected parties can benefit from commercially. Finally our report turns to a brief discussion of the need to implement genuine and effective reform, arguing that this is what the Indonesian people voted for when they elected President Widodo, and discusses how the new president has fared in the face of entrenched elites and well‐organized opposing interests. We conclude that policymakers in Indonesia need to take another long hard look at how they ultimately perceive the national economic interest and how trade and investment liberalization frameworks like the WTO, ASEAN and the still ongoing RCEP negotiations can be harnessed to realize the ambitions of the new president and the electorate who voted for him.