Services Trade in Indonesia

Executive summary

Services play an important role in the economic development and structural transformation of emerging economies. Transportation, courier, logistics, and distribution services are essential in supporting the creation of well-functioning and resilient supply chains, as well as integration into existing ones. Telecommunications, audio-visual and computer services shape digital connectivity and promote the adoption of digital technologies, in addition to fostering innovation in the digital economy. Legal, accounting, insurance, and banking services are pivotal in facilitating business, trade, and finance. Architectural, engineering, and construction services are the cornerstones of the physical infrastructure, and tourism services represent an extraordinary economic opportunity for value creation and employment. Lastly, health and education directly contribute to the development of human capital and to better lives.

Trade in services creates opportunities for growth across all sectors of the economy and represents an access channel to international markets. However, barriers to services trade embedded in domestic regulations remain high and limit the potential contribution of services trade to economic development.

In 2022, Indonesia was the fourth most populous country in the world and had the sixth largest economy in the Southeast Asia and Pacific regions in terms of gross domestic product. The country returned to positive economic growth following the COVID-19 pandemic, which temporarily interrupted its long and steady growth since the end of the Asian financial crisis in the late 1990s.

Indonesia’s economic development has shown a clear pattern of structural transformation toward the services sector, which accounts today for almost 60% of the country’s total value added and employment. In comparison to many regional economies in the Association of Southeast Asian Nations (ASEAN), however, Indonesia trades less in services relative to manufacturing and agricultural goods. Moreover, while the services sector has expanded its relative importance in the country’s economic activity, Indonesia’s contribution to global shares of services trade flows did not steadily increase in the last two decades prior to the outbreak of COVID-19 in 2019.

The analysis presented in this study shows that services imports, either through cross-border trade or supplied via locally established affiliates of foreign services providers, represent an important channel for Indonesian firms and consumers to access services for which the domestic sectors are relatively small. These sectors include digital network services such as telecommunication, computer, and information services, as well as professional, scientific and technical services. On the export side, the data show strong performances in tourism and construction services. Sectors such as distribution, financial and insurance, telecommunication, computer and information services, and professional, scientific and technical services also display positive trends in terms of services sales by Indonesian multi-national enterprises abroad.

The design of an effective policy strategy to leverage the potential of services trade for economic development must be based on a granular assessment of services trade-related policies and regulations across all sectors. The present analysis of the policy data identifies economy-wide barriers that undermine trade and investment not only in services, but across other economic activities. These barriers affect in particular strategic sectors such as financial services, a number of professional services, telecommunications, and several transport and logistics services. In physical infrastructure services, however, Indonesia maintains an open regulatory environment, even when compared to OECD countries.

Services trade and services trade policies are not easy to measure. Notwithstanding the improvements in methodology, an accurate and comprehensive empirical assessment of services trade flows across sectors and modes of provision remains challenging. Similarly, trade policies for services are inherently more complex than those for goods, with implications for the availability of detailed and standardised data. This study therefore relies on databases at the forefront of statistical efforts in the field of services trade and services trade policy, including the OECD-WTO Balanced Trade in Services database, the international benchmark for analytical estimates of balanced services trade flows constructed from the balance of payment statistical framework; the OECD Analytical Activity of Multinational Enterprises database, which builds on the foreign affiliate statistics framework and enables to assess services supplied through the establishment of commercial presence or Mode 3 services trade; and the OECD Services Trade Restrictiveness Index database, an evidence-based tool that provides information on regulations affecting trade in services in 22 sectors across 50 countries.

Building on recent OECD analytical work, this study shows that Indonesia would gain from reforms that target services trade not only in terms of significant reductions in the current structure of services trade costs, but through significant positive economic spillovers along supply chains, particularly in manufacturing sectors that use services intensively as intermediate inputs, such as finance, telecommunications, and transport. Assessments via potential reform scenarios substantiate these findings and provide solid options for policy action that promote services trade.

Policy implications

Services will be the driver of growth in Indonesia/ They account for 58% of total value added in Indonesia’s economy, generate 37% of the value added in gross exports, and employ over half of all Indonesian workers. Yet despite a vibrant and increasingly digital economy, Indonesia’s trade in services is subdued compared to regional and international trade partners, highlighting the need for a targeted national services trade strategy and a regulatory reform agenda to strengthen the competitiveness of the country’s services providers domestically, regionally, and internationally.

Prioritise high-impact economy-wide reforms/ International markets represent an important channel of access to foreign state-of-the-art services, technology, and capital. Removing economy-wide barriers are important low-hanging fruits as their benefits tend to spill over to other economic activities. The objective of removing restrictions to services trade should not be pursued in isolation, but accompanied by efforts to identify other relevant barriers that could prevent economic actors taking full advantage from greater openness. As such, Indonesia should prioritize policy reforms that have economy-wide effects, including by easing localisation requirements for foreign companies, further facilitating the temporary entry of foreign personnel and key foreign services providers, and enhancing access to public procurement markets.

Leverage the momentum to accelerate liberalisation in key services sectors: Indonesia’s major regulatory reforms over the past three decades have contributed to a more open, competitive, and innovative services sector. Further liberalisation efforts could concentrate on sectors where trade cost reductions and productivity gains are the highest, including financial services, telecommunications, transport, and professional services. Indonesia could also leverage ongoing international efforts by, for example, joining the Joint Statement Initiative on Services Domestic Regulation and related Reference Paper at the WTO, and by reiterating its commitments to good practices on domestic licensing procedures and regulatory transparency. Positive spill overs would be more widespread as these sectors provide intermediate inputs to other industries, such as manufacturing and agriculture sectors, that would benefit from cheaper and better-quality services inputs.

Embrace global digital trade through enabling policies and regulations: The rapid digitalisation of economic and social activities, as well as increased access to Internet by Indonesian firms and consumers present important opportunities for growth, job creation, and well-being. To reap the benefits of digital trade, Indonesia should aim to lower unnecessary trade barriers that affect digitally-enabled services and promote policies that allow Indonesian firms and consumers to participate more widely in digital trade while benefiting from greater access to foreign digital services.