The ASEAN Economic Community will offer new opportunities

With China and India seeing unprecedented growth over the past decade, global trade has increasingly pivoted towards Asia, putting ASEAN in a favourable position to capitalise on new regional opportunities. Official integration of the ASEAN Economic Community (AEC) is set to have a dramatic impact on future trade growth, both within ASEAN and beyond.

Indonesia’s population and economy are the largest in the AEC, creating opportunities as regional integration unfolds. Investment is expected to rise as foreign companies seek to access the huge domestic consumer base, while export revenues could benefit from easier access to new markets.

However, concerns remain over an anticipated influx of skilled labour, as productivity remains relatively low in Indonesia, while its domestic consumer base offers attractive opportunities to foreign firms and employees. The government is addressing these challenges, and efforts to plug human resource gaps should see workforce productivity rise in the medium term, better positioning Indonesia as a competitive regional investment hub. Ongoing stimulus programmes aimed at supporting small and medium-sized enterprise (SME) exports will also better enable entrepreneurs to capitalise on the opportunities provided by regional integration.

Integration 

The AEC is has four pillars: a single ASEAN market and production base, including provisions for the free flow of skilled labour; an economically competitive region; equitable economic development; and integration with the global economy. In November 2015 all 10 ASEAN members gave final approval to the AEC, and the agreement came into effect on January 1, 2016. This marks a big milestone for regional integration. The Asian Development Bank (ADB) reports that ASEAN’s economy is worth some $2.6trn, making it the seventh-largest globally, with the potential to become the fourth-largest if growth trends continue to 2050.

While the community – which comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei Darussalam, Laos, Cambodia, Myanmar and Vietnam – will not operate under a single currency, it will be one of the biggest global trading blocs once fully integrated, with the AEC’s population of 600m making it larger than both the EU and North America. After China and India, ASEAN has the world’s third-largest labour force. It is also one of the most open economic regions globally, with total merchandise exports of over $1.2trn annually, comprising 54% of regional GDP and 7% of global exports.

Opportunities & Challenges 

Indonesia is uniquely positioned in the AEC. Its population of 250m is more than double that of the next-largest member, the Philippines, and at almost $1trn its GDP is more than twice that of the next-largest ASEAN economy, Thailand. Proportionally, Indonesia accounts for almost one-third of the ASEAN economy and 40% of the region’s population.

In some critical areas, however, the country is lagging many of its ASEAN neighbours. GDP per capita stood at $3492 in 2014, compared to $5519 in Thailand, $10,933 in Malaysia and $56,287 in Singapore. Indonesia’s infrastructure network is also straining under the weight of rapid urban growth (see Economy chapter), resulting in high transport costs. In addition, low labour productivity and a relatively closed economy with stringent investment restrictions weigh on its business climate. Former trade minister Gita Wirjawan recently reported that the country’s workforce can produce $20,000 of goods and services per head annually, compared to $50,000 in Malaysia and $120,000 in Singapore.

In the World Economic Forum’s Global Competitiveness Index 2014-15, Indonesia ranked 34th, below Singapore (second), Taiwan (14th), Malaysia (20th) and Thailand (31st), but outpacing the Philippines (52nd), Vietnam (68th) and Cambodia (95th).

In this respect, the country’s huge population and domestic consumer base could work against it, as the entry of new market players in sectors such as tourism and manufacturing will expose local companies to a much more competitive business environment. According to a 2014 survey of regional businesses by Boston Consulting Group, Indonesians are much more likely than their ASEAN counterparts to view AEC integration as a threat to their businesses. The global consultancy further notes that Indonesia’s companies have the most to lose from foreign competition within ASEAN.

Although free flow of labour only applies to skilled labour, and only within 12 sectors identified by the Ministry of Manpower (MoM), an influx of new workers at the management level, or of those trained in sectors such as oil and gas, would have an impact.

Protectionism VS Liberalisation 

Indonesia is better insulated in other areas. As the world’s largest producer and exporter of coal, it faces limited competition within ASEAN, while a government move to ban mineral exports – along with the creation of a new mining tax and export duties on some ores – should also help to protect domestic industry (see Industry & Retail chapter).

Though the ruling Indonesian Democratic Party of Struggle has long favoured protectionism, President Joko Widodo’s medium-term economic development strategy is focusing on “big bang” economic liberalisation, and his administration has launched stimulus packages and policy reforms aimed at sourcing new foreign capital for high-priority industries.

Government Support 

In January 2015 the government created a one-stop shop for foreign investors in order to reduce the time it takes to establish a business in Indonesia, while its first stimulus package, announced in September 2015, focused on reducing red tape and eliminating overlapping regulations which have slowed the process of investing in the country. Recent reform packages have also sought to expand access to credit for export-oriented SMEs, to help them capitalise on rising regional trade opportunities. In addition, the government is pushing digitisation in the SME segment, which could add up to 2% to annual GDP growth, according to Deloitte (see analysis).

Human Resources 

The government is also taking steps to mitigate rising competition in its labour market, introducing a host of new policies and establishing hundreds of vocational training centres in a bid to boost competitiveness and productivity. In October 2015 the MoM told the media that Indonesia is prepared for AEC integration, noting that the government has taken steps to ensure the country can manage rising domestic competition. For example, the ministry has already established 276 vocational training centres across the nation, which will provide certification and job placements, according to Hanif Dhakiri, the minister of manpower.

Labour policy has also been supportive. In 2012 the MoM rolled out a National Work Competency Standards (SKNNI) policy, in addition to a National Qualification Framework, in 12 priority sectors: tourism, health, logistics, aviation, communications, agriculture, timber, rubber, automotive, textiles, electronics and fisheries. In August 2015 the government set out 482 SKNNIs for each sector, and it is planning to set up systems that will issue workers nationally and internationally recognised qualifications for work competencies in order to maintain a competitive workforce.

Staggered Changes 

Protectionist labour policies are gradually being replaced by investment in human resources, painting a more optimistic outlook for AEC benefits. Until recently, government regulations stipulated that a company must hire 10 Indonesians for every foreign worker, and required that non-residential directors, foreigners attending work meetings and foreigners giving speeches to obtain a work permit. The government repealed these regulations in October 2015, and is now focusing on intra-ASEAN agreements which should provide support for its 128m-strong labour force.

For example, Indonesia has entered into a mutual recognition arrangement with ASEAN members, which recognises education, experience, licences and certifications obtained anywhere in ASEAN in engineering, nursing, surveying, architecture, medicine, dentistry, accounting and tourism. Indonesia has also signed on to establish streamlined visa and employment regulations for skilled labourers engaged in cross-border trade and investment.

The government’s fourth stimulus package focused on labour, and introduced a new national minimum wage policy. Announced in October 2015, the package allows for annual wage increases based on each province’s inflation and economic growth rates. The cost-of-living index used previously had created sharp wage growth in areas such as Jakarta, damaging business confidence (see analysis).

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This article is from the Country Profile chapter of The Report: Indonesia 2017. Explore other chapters from this report.