Indonesia has joined a growing list of countries observing and experiencing dynamic trade integration, as well as product fragmentation, especially in the East Asian region. However, the country still lacks competitiveness.
To take full advantage of its production network, Indonesia has to increase its investment climate and attractiveness. One of the most important supply constraints in Indonesia lies in its logistics and infrastructure. This includes input, in-house and output logistics, as well as hard and soft infrastructure.
In addition, transporting goods in Indonesia is very costly due to poor logistics and bad infrastructure. Trucking costs are the highest within ASEAN. Furthermore, the country fails to take advantage of its unique archipelagic geography, as it does not have a primary international hub port. Domestic ports are also hindered by sub-optimal performance due to lack of capacity or bad management.
In a study on land transportation costs in 2008, the Institute for Economic and Social Research at the University of Indonesia (LPEM-FEUI) found that the trucking costs for a typical good using a typical truck in Indonesia (a number of provinces in Sulawesi, Java and Sumatra were sampled) reached as high as 34 cents per kilometer. This is higher than the average within ASEAN, which is only 22 cents per kilometer.
A follow-up study by LPEM-FEUI in 2010 tried to measure the trucking costs in provinces that rely on water/sea transportation in addition to land. It was hypothesized that for an archipelagic country, water and sea transportation should be an advantage. However, the study found that the costs reach even higher at 50 cents per kilometer.
As businesses face high logistic costs, it is natural and rational that they try to shift the burden onto consumers. As a result, the price for a given product is higher compared to those produced by other countries. But this has a limit. In many cases, Indonesia is a “price taker” in the international market. Therefore businesses cannot increase their prices forever. Instead, some have to quit the business or cut production. In many cases, this involves cutting employment. All of these factors result in Indonesia’s low competitiveness, which sees it lagging behind the regional production network.
Arianto A. Patunru is Director of the Institute for Economic and Social Research at the Department of Economics at the University of Indonesia.
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