RECENT ECONOMIC POLICY CHANGES IN INDONESIA AND THEIR ECONOMIC IMPACTS ON ASEAN FREE TRADE AREA (AFTA)

Abstract

Concerns about a perceived drift towards regionalism and increasing protectionism and the rapid pace of :industrialization of the ASEAN economies have prompted the development of the ASEAN free trade area (AFTA) in January 1992. AFTA is a regional economic cooperation which seeks to reduce tariff rates among member nations to 0-5% for most products by 2003. However, AFTA's main thrust is the objective to develop a competitive production base in ASEAN. This goal can be achieved only if Indonesia, being the largest country in ASEAN, participates productively in implementing the AFTA' s agenda. With the oil price decline in 1986, the Indonesian government embarked on a whole series of wide ranging reforms in both the domestic and external economy. Domestically, the fiscal system was revamped, the financial policies were liberalised intensively and the investment regime was deregulated heavily. In the external economy, trade policies were made more liberal and imports which were previously banned are now allowed although significant anti-export bias still remain in some sectors. Each aspect of this gradual economic reform program is equally important. Appropriate prudent fiscal policy which contributes to macroeconomic stability will make the reforms of the financial sector more likely to succeed. In turn, the liberalised financial markets will be able to support the development of capital markets that can foster greater private domestic and foreign investment. The structural transformation of the Indonesian economy has brought about direct and indirect impacts on AFTA. The direct impacts can be observed from tile serious commitment by the Indonesian government to reduce trade restrictions under AFTA. Since Indonesia pioneered the adoption of the Common Effective Preferential Tariffs (CEPT) scheme in AFTA, it is expected that it would take the lead in speeding up the ASEAN tariff reduction process. Most, if not all, of Indonesia's trade and investment deregulat01y packages have helped in one way or another in achieving AFTA's aims. Particularly, the indirect impacts of the recent change in Indonesia's economic policy on AFTA can be observed through an improvement in Indonesia's intra-industry trade with ASEAN. To further examine the impacts on ASEAN and indirectly on AFTA, it would be useful to include in this study an analysis of a sub-regional economic cooperation; the Southern Growth Triangle. Among the issues that need to be analysed carefully is first the relationship between the growth triangle and AFTA. Growth triangles involve the free movement of goods, capital and facilitate the movement of people between proximate geographic areas. The concept of Open Regionalism encompasses sub-regional economic cooperation such as SIJORI Growth Triangle and AFTA. These two economic cooperative frameworks are mutually consistent and reinforcing. The development of the Southern Growth Triangle must also be viewed in the light of the recent change in Indonesia's (particularly Batam) economic policies. It is noted in the study that fill impacts on the economic growth of the triangular cooperation will have indirect implications on AFTA. In conclusion, the discussions brought forth by this academic exercise seek to show that although almost all the Indonesian reform policies are aimed at internal economic restructuring, any potential impacts on AFTA or the Growth Triangle are likely to contribute to the implementation of the AFTA's agreement.