Study Meeting on Expansion and Development of the Service Industry in Asia APO Project No. 08-RP-38-GE-STM-B 17-20 June, 2008 At Seoul, Republic of Korea Submitted By: Kenedi Nababan and Romi Prasetio – Indonesia Kenedi NababanRomi Prasetio Arco Backend AgencyBank Sinarmas Hongkong and Shanghai Bank CorporationBank Sinarmas KC. Sukabumi, Jl.

A. Yani No 235 Wisma HSBC JL Asia Afrika No.

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116Ruko No. 3 Sukabumi Bandung 40112Telephone :62-266-229377 Telephone :62-22-4233022Fax :62-226-229366 Fax :62-22-4230182E-mail : romi. [email protected] com E-mail : [email protected] co. id I. Composition of Services Industry in Indonesia : II.

Banking and Finance sector a. Bank b. Insurance c. Other financial institution III. Infrastructure of Health Sector a. Hospital b. Medical Clinic c.

Puskesmas (rural region) IV. Tourism a. Hotel b. Restaurant V. Construction a. Highways b. Bridges c.

Public Services VI. Transportation and Freight a. Air transportation b. Sea Transportation c. Land Transportasion ( bus, railways) VII. Communication a. Fixed Line b.

Cellular TelecommunicationsII. Service Industry Influence to economic Growth An economic growth in Indonesia contain several of main sector, first agriculture (16,8%), services (2. 1%), financing (1%), trade and tourism (0,9%) and electricity (0,6%). Service industry can give composition of national income for the period 1997-2007 20%-22%, tradable sector 30%-31% and tax 40%-45%. III. Growth and influences to the National Vocations In Indonesia, telecommunication is highest sector that can achieve average 20% per year of growth, but influence to the vocation only 2% per year.It is inversely proportional with agriculture, while this sector achieve 3% of growth but can give an influence 42% to the vocation.

In general sectoral contribution of workforce in Indonesia during the periode after crisis in 1998, service sector given a better influence rather than manufacture. IV. Problems and Prospects Investment, infrastructure and unbalance development between east Indonesia with west Indonesia are the main problem in Indonesia. Telecommunication, tourism and transportation are potential prospect in service sector in Indonesia. V. Government PoliciesMany policies has been done by the government, such as facilitate the extraneous investment in Indonesia, FDI growing around 5% per year. And to develop east Indonesia, the government  specifically has been chosen a ministry to make development  in East Indonesia.

Other side, the central government gives discretion to local government to make development in their own state, with divide 80% income for local government and 20% for central government. The government taxes income, in 40% its to funding the public service sector so the service sector could be better. Indonesia is in need of structural reforms.Most important in this respect are improving the country’s business climate and infrastructure. Infrastructure is poor and the cause for high transaction costs, making the country less competitive. The country’s business climate is also less than optimal. The administration is aware of these weaknesses and is making efforts to address them.

However, the House of Representatives systematically blocks reform measures from being implemented. Draft laws on tax and investment have been blocked this year and labour market reforms have been abandoned due to strong union opposition.We expect that the renewed support for the President by the largest party in the House of Representatives will reduce resistance to reforms. Privatisation has been halted for the large part in 2006, but the government met its target at the last moment by selling a 5. 3% stake in the state gas company PGN. Even though the government has announced that privatisation efforts will be stepped up in 2007, this remains to be seen. The 13 state-owned companies that are listed on the Jakarta Stock Exchange represent 40% of market capitalisation in Indonesia.

In more recent years the government has stepped-up efforts to tackle governance and public administration constraints in an attempt to close the investment gap with its south-east Asian competitors. Indonesia’s rates of investment have been slow to recover from the crisis and lag behind regional rivals. There are three main strands to the reforms that are beginning to deliver higher levels of investment: • Strengthening the capacity of local government to, deliver basic services, build infrastructure (especially roads that link farmers to markets), improve the efficiency of public spending and cut red-tape.It will be particular important for local government to effectively spend central government transfers aimed at reducing the large regional disparities. • Improving the investment climate, by strengthening the legislative framework, tackling corruption and reforming the civil service. • Peace building, disaster risk management and climate change adaptation, in a country like Indonesia, the growth prospects of certain regions will be ruined by outbreaks of conflict or natural disasters.Aceh, has received a double boost in the past two years as a result of the peace process and the well-managed response to the devastating tsunami.

Securing higher levels of public and private investment, particularly in area that boost the income earning opportunities of the poor, such as feeder road building, agricultural extension and rural electrification, will be crucial to continue Indonesia’s trend of growth and poverty reduction. This would allow Indonesia to move up swiftly through the ranks of middle income countries, and continue to reduce poverty.Comparation with Other Country ASEAN’s sectoral composition of output can be discussed with particular reference to the size of three major sectors: agriculture, manufacturing and services. In their study, Gani and Clemes (2002) identified three distinct features of ASEANs sectoral composition. First, the authors showed that the service sector was the dominant contributor to GDP in Philippines, Singapore, Thailand and Viet Nam during 1995-1999, while in Indonesia, the service sector’s contribution to GDP was slightly below that of the manufacturing sector for the same period.Second, they reveal that since 1980, the contribution of the agricultural sector to GDP has declined gradually in many ASEAN economies while the share of services to GDP has increased over time in Brunei Darussalam, Indonesia, Philippines, Thailand and Viet Nam. The share of services to GDP was highest in Singapore among all ASEAN countries.

Third, the authors identified that the services sector has experienced high growth rates since 1980 onwards, with Malaysia ranked at the top of the list averaging 8. per cent per annum. Causes of Productivity differences/inferiority in service sector compare to manufacturing sector While the services sector has dominated in terms of its contribution to ASEAN GDP, the contribution of the manufacturing sector to GDP cannot be ignored. As a share of GDP, the manufacturing sector averaged just over 24 percent in the last decade. In Indonesia, Malaysia and Thailand, manufacturing valued added to GDP has continuously increased over the last three decades.An efficient services sector should lead to improved performance of the manufacturing sector by improving distribution and information transactions. In modern economies, there is increasing demand from both consumers and business for efficient service sectors.

In many cases, competitive parity has already been reached in manufactured goods making it difficult for most global corporations to differentiate their tangible outputs on product quality alone.This forces business to increasingly turn to higher levels of customer service to facilitate their homogeneous product offerings, increase their overall productivity, improve their competitive advantage and ultimately to create customer value. Increasing consumer and producer confidence will boost economic activity in Indonesia in the forecast period. Inflationary pressures have largely ceded, leaving room for cuts in interest rates, which will also stimulate growth. On the back of high commodity prices, Indonesia’s exports thrived and provided support for the current account.External debt reductions improved Indonesia’s liquidity position. However, the government has been unable to implement reforms that would improve the business climate, which remains poor in Indonesia and continues to hamper development.

Expenditure on development (infrastructure, health and education) has also been sub-optimal due to political squabbling. Moreover, the administration’s fight against corruption is waning. Failure to push ahead with economic reforms will negatively affect Indonesia’s economic prospects.Furthermore, Indonesia remains a high risk country from a credit point of view, resulting in high borrowing costs. While all forms of investment are important for growth, studies suggest that Foreign Direct Investment (FDI) can yield additional productivity benefits associated with the accompanying know-how and technology. FDI is particular important to help grow Indonesia’s oil, gas and minerals sectors. From very low levels up until 2004, FDI has now picked up to the equivalent of 4% of GDP a year, closing in on the relative levels of Thailand and Vietnam that lead the way in South East Asia.

Recent improvements in FDI reflect a steady improvement in the investment climate that has been a central policy platform for the government since 2004. However, the investment climate still compares poorly in cross-country surveys. The World Bank’s Cost of Doing Business Survey ranks Indonesia 135 our of 155 countries, indicating that, despite recent reforms it still ranks as one of the worst countries in the world to do business. Indonesia does do better in certain categories including access to credit, protecting investors and trade, but does poorly in terms of starting a business, employing workers and enforcing contracts.Starting a business takes 97 days compared with a regional average of 47. Non- wage labour costs are the same as the regional average but hiring and firing workers is found to be more than twice as difficult as compared with the rest of the region. While Indonesia’s total business tax rate compares favourably with its neighbours, they take almost twice as long to pay, and consist of twice the number of payments as countries in the region.

Indonesia does compare well on costs associated with trade facilitation.Export costs are some 40% lower than the regional average and take about the same length in time. However, in comparison to China exports are seven days slower to process in Indonesia and 40% more expensive. The government is implementing an investment climate reform package that has established more transparent regulations governing investment, streamlined customs processes and strengthened the land market. Overall, in the coming years domestic consumption and investment are expected to play a much greater role than trade in driving growth.This is because both public and private investment is set to increase as local government capacity and the investment climate improve and consumer spending will increase as unemployment falls and consumer credit grows. Indonesia is one of the fast-track members of the Association of South- East Asian Nations (ASEAN) along with Brunei, Malaysia, the Philippines, Singapore and Thailand.

In accordance with the 2004 “roadmap” these nations are set to abolish tariffs on a number of sectors, including rubber, electronics, textiles, air travel, fisheries and wood by the end of this year.Further tariff-abolitions are planned by 2012 creating a single market for some 530m. While ASEAN probably represents one of the best functioning free trade areas outside of Europe and North America, several countries use exemptions to protect “sensitive” sectors. ASEAN’s low income countries will implement tariff cuts on a slower time line. Indonesia is also a member of Asia Pacific Economic Co-operation (APEC) forum. APEC agreed an ambitious target in 1994 to eliminate all trade barriers by 2020.