IS INDONESIA READY TO DEVELOP A FREE TRADE ZONE?

As globalization reached the developing countries, including Indonesia, the only way to experience economic growth is to maintain economic competitiveness. One of the most popular geographic economy development concept is the growth centers, introduce by Perroux in the 1950s (Gore, 1984), which now has been customizing with several economic oriented regulations and privileges, known as a free trade zones (FTZ). This concept is believed to boost the economy and increase demand of workers. This short article tries to illustrate how this growth centre based concept practice in the real world. FTZ examples are Batam (Indonesia), Tanjung Pelepas (Malaysia), Subic (The Philipines), Shenzhen (China), and many more in the world.

The first argument is that the free zone could stimulate the economy. Through special privileges, free zone offers lower cost of production by decrease or even removing import tax for input products and combining with lower export tax, FTZ is a paradise for industries, especially export oriented firms. Moreover, additional interesting policies are also introduced to attract new investors, including tax holiday that varies between FTZ, one stop administration service, and low-priced land rent.

Secondly, with significant number of industries in the region, FTZ generates direct and indirect employment. The industries will demand for workers, both at managerial and manufacture operators. While large industries need cheaper suppliers, small industries will be established to fit the demand, which means indirect employment opportunity. Following the growth of new investment and companies, new workers are needed. Thus, more and more Indonesian people can get a job so the number of unemployment can be reduced.

Lastly, by operating free trade zone, there would be knowledge and skill transfer from the foreign company expertise to local workers. This is inline with the main reason that forced the foreign company to enter the free zone – to cut the production cost – through low cost worker, but considerable skill qualification.

With so many advantages for the region and Indonesia, conventional economist still opposed this new economy approach. One of the reasons is that, labors in the developing countries are forced to work over time and low wage per hour. However, Indonesian government has try to overcome this issue with ruling that City of Batam, as the host of FTZ, has the highest minimum wage among other regions, although this has been encountered with the high living cost. Another reason is that, domestic workers in FTZ industries only holds low to medium positions in the managerial level, arguing that knowledge transfer in that level does not succeed.

Third, another reason to versus for this approach is because this FTZ requires large investments in infrastructure. Infrastructure is government’s investment to develop FTZ, so it will be benefits the industries. Such infrastructure includes electricity, water, and telecommunication and also transportation infrastructure to ensure production flow.
Integrated infrastructure within the area will decrease the production cost so the product price could be competitive in the market. This capital investment involves a large sum of money, but for those who against it, the investment will only goes to one particular region, the FTZ. This is a tricky deal, because this seems that the central government only invest in one region, the FTZ, with sacrifice other regions. It is worth noting that FTZ works as a multiplier effect, which is with its growth, other regions will also experience benefits. The benefits might be in industry production related, employment opportunity, or other type of advantages. Without appreciate this concept, it will be difficult to understand and support FTZ development.

Further more, in Indonesia unambiguous policies is also the reason to versus the economic concept. Clear and consistent policy is important, both for industries and workers, so FTZ can perform optimal for each stakeholders benefit.
A simple example, the current state of Batam is FTZ since 2006, but it changes from 1978 as an industrial zone, bonded zone in 1992, and finally FTZ. Moreover, unlike other FTZ in the world, Batam FTZ in Indonesia the free zone area is enclave into two districts, the industrial zone and non-industry zone, each with its own authorities. Obviously, this has confused the private sector since there are two authorities for different purposes. Firms has to contact both authorities, for land issues are the city council responsibility while for industrial subjects are the Batam Industrial Development Authority (BIDA) has to be contacted. Apparently, this has not reflected the benefits of FTZ as a mean to attract foreign investments. As a comparison, in Subic Free Zone and Shenzhen Special Economic Zone, all enquiries are handle by a single authority, Subic Bay Metropolitan Authority (SBMA) and Shenzhen City Council, respectively.
This shows that either concept that is use, government role to encourage investment is very important.  Because FTZ requires an effective and benefit oriented government/authority in order to enhanced the single door for investment, a number of government organization scheme have been studied as below.
A.    Batam Island : The Batam FTZ authority is under supervised by the central government and role the Batam FTZ. On the other hand, the local authority government organize non-FTZ issues within Batam. This scheme is not effective because there sometimes in hard to distinguish the Batam authority and local government job desk.
B.    Subic FTZ: The Subic FTZ authority is within the regional govenment with supervision under the central government.
C.    Shenzhen FTZ : The FTZ authority is within the local autonomy government, where the central government does not play a role

In conclusion, the new economic development approach, free trade zone (FTZ), does seem accurate to stimulate the economy activity. It improves each sector within the economy; the industry activities, foreign direct investment, increase more jobs opportunity, and further more it improves the regions economy. But, in order to be applied in Indonesia, the concept still need some adjustment in all sector including economy, social demography, and government policies.

Bibliography

Gore, C., 1984, Regions in Question: Space, Development Theory and Regional Policy, London, Methuen & Co

The Batam Industrial Development Authority website, <http://www.batam.go.id >

The Shenzhen Municipality website, <http://www.sz.gov.cn&gt;

The Shenzhen Investment website, <http://www.investshenzhen.gov.cn&gt;

The Subic Bay Metropolitan Authority website, <http://www.sbma.com&gt;

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