Muhammad Lutfi, Minister of Trade: Interview

Interview: Muhammad Lutfi

To what extent will China’s economic slowdown and lower commodity prices impact Indonesia’s goals?

MUHAMMAD LUTFI: China is an important trade partner for us as it is our second-largest partner in the world. Despite China’s economic slowdown, the growth in trade between our two nations continues to reach double digits and we enjoyed about a 16% growth in trade in 2013. On a wider scale, although Indonesia is maintaining a trade deficit, trade with both traditional and new partners is growing. The trade balance with the US, for example, has gone from declining year after year to a positive balance. Furthermore, the structure of trade between Indonesia and nations across the world is shifting.

While our exports in the past have consisted of commodities and raw materials, with our new partners we are seeing high growth in trade featuring the prevalence of finished goods. Our trade growth with the UAE, for example, was 116% over between 2012 and 2013. Similarly high growth, with partners across Africa and Latin America, is being observed as well: 187% growth in trade with Peru; 117% with Nigeria; and 72% with South Africa, to mention a few.

A crucial point is that with these nations, our exports mainly consist of finished or half-finished products: crude palm oil, cooking oil, detergent, or textile products. Indonesia is very competitive in these product segments. So while our relationship with our traditional trade partners in the Pacific remains important, right now we are more interested in seeing development with non-traditional markets. It is clear that the Indonesian economy is connected to the world economy and I am confident that both will prosper in coming years.

How will Indonesia ensure its readiness for integration into the ASEAN Economic Community in 2015?

LUTFI: The success of the ASEAN Economic Community (AEC) is particularly important to Indonesia as we are the largest economy in the region. The Indonesian economy comprises about half of ASEAN’s combined economy and Indonesians account for about 40% of ASEAN’s population. Some people are nervous about the changes that ASEAN integration will bring and do not fully understand the aim of the AEC.

The foremost goals of the AEC are to create a single market and production base, to develop a globally competitive economic region, to have equitable economic development across the region and to integrate the region into the global economy. These goals are conducive to the success of the Indonesian economy and, as the largest economy in the region, Indonesia has the most to gain. As for the increased openness of trade within the region, Indonesia is well prepared as we have long been a champion of free trade.

The way I see it, our trade laws mandate that the government empower trading parties, both national and international, without differentiation, and integration will truly serve to advance this goal. There are, however, some areas of preparedness in which Indonesia has some ground to make up, such as the ability of our workforce to speak English, which is a barrier to the nation in exporting its talent to the region and the world.

What measures is Indonesia taking to improve manufacturing values, and what more can be done?

LUTFI: Although Indonesia has extensive resources, our exports lag behind some regional neighbours in industry. We need more processing capacity in Indonesia, but this is not going to come without infrastructure and a sound regulatory environment. I think that we are taking the right steps toward this positive evolution of the nation’s manufacturing and processing capacities. One change that needs to take place for Indonesia to achieve its potential is to improve the connectedness of the archipelago. We have 50m people in East Indonesia who are ready to become the next middle class, but are prevented from doing so because they are not connected to production systems. Indonesia needs to improve electrification and infrastructure in these regions to spur industry and create a production base catering to regional and international trade.