Regional Value Chain, AEC andChallenges for Archipelagic Countries

Yose Rizal DamuriCentre for Strategic and International Studies Jakarta

ESRI Workshop on the Potentials of the Asian Economic Zone, Tokyo 27 September 2013

Regional and Global Value Chain

Slicing-up production at finer level; Each unit is responsible forsmaller task in value chain

Placing them at different locations Based on comparative advantages

Involving trade-investment-services nexus Trade Investment International contract manufacturing

Global Value Chain

Manufacturing products areno longer produced in onecountry

But outputs of a processinvolving numerousproduction bases spreadaround the world “made in the world”

In this method ofproduction, trade becomeone of the most importantaspects Components need to cross

border several times

Global Value Chainof I-Phone

Manufacturing products areno longer produced in onecountry

But outputs of a processinvolving numerousproduction bases spreadaround the world “made in the world”

In this method ofproduction, trade becomeone of the most importantaspects Components need to cross

border several times

Global Production Network: Indonesia’s Position

The graph shows position ofcountries in global productionnetwork The central nodes show more

important countries Closer countries indicate more

importance Production networks are

regional in scope EA countries tend to be closely

linked Easiness in conducting trade

However, both Indonesia andPhilippines seem to be inpheripery Archipelagic condition poses

challenges in developing andjoining production networks

The graph shows position ofcountries in global productionnetwork The central nodes show more

important countries Closer countries indicate more

importance Production networks are

regional in scope EA countries tend to be closely

linked Easiness in conducting trade

However, both Indonesia andPhilippines seem to be inpheripery Archipelagic condition poses

challenges in developing andjoining production networks

Source: Damuri 2012, International Production Sharing: Insights from Network Analysis

East Asia’s Indicators of GVC: Electronics

1.52

2.53

3.54 This shows the length

of value chain in EastAsia countries Indonesia and Philippines

again have problems inextending theirinternational value chain

The graph also showsthe distance to the finalconsumers Indonesia mainly focuses

on

00.5

11.5

Domestic International Distance

This shows the lengthof value chain in EastAsia countries Indonesia and Philippines

again have problems inextending theirinternational value chain

The graph also showsthe distance to the finalconsumers Indonesia mainly focuses

on

Source: Calculated from OECD TIVADatabase

Closer look At Indonesian situation:A Case of Archipelagic country

Closer look At Indonesian situation:A Case of Archipelagic country

Comprises of: 17,508 islandsOf which around 6000 inhabitedFive main island

Extends 5120 km from west to east and 1760 km from North toSouth

Land Area: 1.904.443 sq kmSea Area: 3.116.163 sq kmTotal Area: 5.020.606 sq km

Traditionally not in the heart of the WorldMain Trade Routes

Shipping Costs

It is cheaper to ship goods to othercountries than to other parts of Indonesia

Poor Quality of Infrastructure

3.74

3.64

3.23

Indonesia (92)

Philippines (98)

Vietnam (119)

5.44

4.86

4.28

3.81

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Malaysia (29)

Thailand (49)

China (69)

India (87)

Infrastructure Quality Index 2012 (1-7)WEF Global Competitiveness Index

Lack of infrastructure investment….

Source: World Bank 2013

Has resulted to high-cost economic activity, especially inlogistics

For example: congestions in ports long waiting timefor exports and imports

Dwell Time inTanjung Priok Container Terminal

Source: JICT

ASEAN Economic community:Opening-up Some Opportunities

ASEAN Economic community:Opening-up Some Opportunities

ASEAN Economic Community

In 2007, ASEAN leaders agreed toaccelerate the establishment of AECby 2015 ASEAN is committed to strengthening

economic integration of its existinginitiatives

In order to achieve AEC at the rightschedule, ASEAN members adoptedAEC Blueprint A significant development in the

process of integration as previously it isprocess-driven and open ended

Divided into 4 primary objectives 17 elements and 176 priority actions Carried out in four implementation

periods

In 2007, ASEAN leaders agreed toaccelerate the establishment of AECby 2015 ASEAN is committed to strengthening

economic integration of its existinginitiatives

In order to achieve AEC at the rightschedule, ASEAN members adoptedAEC Blueprint A significant development in the

process of integration as previously it isprocess-driven and open ended

Divided into 4 primary objectives 17 elements and 176 priority actions Carried out in four implementation

periods

Trade Facilitation: Number of Days toExport/Import

Trade Facilitation: Single Window

Trade Facilitation: Single Window Since 2008, Indonesia already operated a National Single Window (NSW) portal Enable firms to submit necessary papers, verify status, and get decision related to the

importation and exportation of goods All trade services have been done through the NSW portal that can be accessed

everywhere Currently, there are 14 agencies have been linked up to NSW apart from customs

and excise In 2015 there will be 3 more agencies to be linked up Nine major ports, including airports, account for 90 percent of the value of Indonesia’s

foreign trade INSW has already facilitated 20 thousand companies

This is part of ASEAN Single Window initiative that connects customs and relatedagencies in the region Indonesia achieved 97% total score in 2010 NSW Scorecard Review

However, our survey in 2013 shows that NSW does not run smoothly all the time. IT infrastructure General infrastructure (electricity) Coordination issue – especially in non-major ports

Since 2008, Indonesia already operated a National Single Window (NSW) portal Enable firms to submit necessary papers, verify status, and get decision related to the

importation and exportation of goods All trade services have been done through the NSW portal that can be accessed

everywhere Currently, there are 14 agencies have been linked up to NSW apart from customs

and excise In 2015 there will be 3 more agencies to be linked up Nine major ports, including airports, account for 90 percent of the value of Indonesia’s

foreign trade INSW has already facilitated 20 thousand companies

This is part of ASEAN Single Window initiative that connects customs and relatedagencies in the region Indonesia achieved 97% total score in 2010 NSW Scorecard Review

However, our survey in 2013 shows that NSW does not run smoothly all the time. IT infrastructure General infrastructure (electricity) Coordination issue – especially in non-major ports

PhysicalPhysicalConnectivityConnectivity

InstitutionalInstitutionalConnectivityConnectivity

PeoplePeople--toto--PeoplePeopleConnectivityConnectivity

ASEANICT

MasterPlan

ASEANStrategicPlan on

Transport

TransportFacilitationAgreements

ATIGAASEANTourismStrategic

PlanMRAs

ASEAN Connectivity

ASEANICT

MasterPlan

ASEAN Planof Action for

EnergyCooperation

ASEANStrategicPlan on

Transport

CrossCross--Pillar CoordinationPillar Coordination

AFAS

TransportFacilitationAgreements

ATIGA

ACIA

ASEANTourismStrategic

PlanMRAs

ASEANEducationWork Plan… … …

ASEAN Connectivity in Action

Master Plan for the Acceleration and Expansionof Indonesia’s Economic Development (MP3EI)

MP3EI is a roadmap that isformulated as an attemptto:“Transform theIndonesian economyinto a developednation, which recognizedby the worldcommunity, throughhigh, inclusive, andsustainable economicgrowth.”

The vision is “to create aself-sufficient, advanced, just, andprosperous Indonesia”

MP3EI is a roadmap that isformulated as an attemptto:“Transform theIndonesian economyinto a developednation, which recognizedby the worldcommunity, throughhigh, inclusive, andsustainable economicgrowth.”

The vision is “to create aself-sufficient, advanced, just, andprosperous Indonesia”

Strengthening Connectivity in MP3EI MP3EI is planning to strengthen connectivity that integrates growth

centers inside economic corridors Also between corridors

It further strengthen international connectivity especially to facilitateinternational trade as well as an entry point for foreign tourists

MP3EI is planning to strengthen connectivity that integrates growthcenters inside economic corridors Also between corridors

It further strengthen international connectivity especially to facilitateinternational trade as well as an entry point for foreign tourists

MPAC and MP3EI Although MP3EI describes the importance of

international connectivity, it mostly focuses ondomestic connectivity Attempt to connect separated centers of production and

commerce Unlike policy in some other countries that aimed

connectivity to outside economies Indonesia seems to be in the periphery of

infrastructure planning of SEA Especially on land transportation connectivity

The MPAC found little enthusiasts in Indonesia Partly because of the intention to connect directly with the

ROW

Although MP3EI describes the importance ofinternational connectivity, it mostly focuses ondomestic connectivity Attempt to connect separated centers of production and

commerce Unlike policy in some other countries that aimed

connectivity to outside economies Indonesia seems to be in the periphery of

infrastructure planning of SEA Especially on land transportation connectivity

The MPAC found little enthusiasts in Indonesia Partly because of the intention to connect directly with the

ROW

Indonesia and Regional Value Chain: OtherIssues Joining GVC and RVC remains to be difficult for Indonesian

companies Part of the problem is lack of sufficient infrastructure As an archipelagic country, it poses unique problems of connectivity

However, many other problems are also related to economicpolicy and regulations Poor business and investment climate that hold back FDIs and

outsourcing Restrictive trade policy that make it difficult to source inputs from

abroad: obsessions to added-value and import-phobia Poor quality of supporting services Monopoly and SOEs dominance in various services lead to high-cost

economy Many business services necessary for GVC remain to be closed

Joining GVC and RVC remains to be difficult for Indonesiancompanies Part of the problem is lack of sufficient infrastructure As an archipelagic country, it poses unique problems of connectivity

However, many other problems are also related to economicpolicy and regulations Poor business and investment climate that hold back FDIs and

outsourcing Restrictive trade policy that make it difficult to source inputs from

abroad: obsessions to added-value and import-phobia Poor quality of supporting services Monopoly and SOEs dominance in various services lead to high-cost

economy Many business services necessary for GVC remain to be closed