8 - Indonesia's Services Sector: Performance, Policies and Challenges

Summary

INTRODUCTION

In any developing country, the services sector plays a crucial role in promoting economic growth. Unfortunately, the competitiveness and productivity levels of Indonesia's services sector are significantly lower than those of the country's peers in the region. The Groningen Growth and Development Centre (GGDC) database, for example, shows that Indonesia's labour productivity figures are very low when compared to other Asian countries. It is therefore not surprising that the country, for some time now, has been a net importer of services. The policies designed to improve the performance of the sector have been relatively restrictive in terms of foreign investment and workers, as reflected by the Foreign Direct Investment (FDI) Policy Index, the Services Trade Restrictiveness Index (STRI), and Indonesia's services liberalization commitment under its Free Trade Agreements.

This chapter evaluates the performance of Indonesia's services sector under the Joko “Jokowi” Widodo presidency and shows that some policies have, in fact, proved to be quite useful. For example, the government established the Creative Economy Agency (Badan Ekonomi Kreatif) with a mandate to facilitate the development of creative economy (which mainly includes the services sector). The policy towards foreign investment has also been relaxed, with the introduction of new “negative list” in 2016 which permits high foreign share in certain industries. In March 2018, the government enacted Regulation no. 20 on foreign workers to simplify recruitment procedures.

However, these policy changes are still quite restrictive when compared to the international best practice, and do not significantly improve the overall performance of the services sector. This chapter shows that such restrictive policies have led to a shortage of capital and professionals, resulting in the poor performance of the services sector in the country.

The chapter is structured as follows. The second section discusses Indonesia's recent services sector performance. The subsequent section focuses on the relationship between newly implemented sectoral policies and the resultant performance. The fourth section highlights the remaining challenges for the sector, while the final section concludes and offers some policy recommendations.

THE SERVICES SECTOR IN INDONESIA

The contribution of the services sector to Indonesia's economy is quite significant, roughly accounting for 41 per cent of GDP over the past twentyfive years.