Indonesia Services Dialogue (ISD), an initiative under APINDO, co-hosted the ‘ASEAN Business Briefing on Services’ with Kadin Indonesia in Jakarta. This event was part of the ASEAN Series held by Kadin Indonesia to discuss the upcoming implementation of the ASEAN Economic Community (AEC) in 2015. ISD was specifically chosen to co-host the event because it is viewed as an increasingly well-known forum for stakeholders in services to discuss obstacles, research, and regulations in their sector.

Chris Kanter, Deputy Chairman of APINDO and Business Coordinator of ISD, said in his opening speech that Indonesian business players’ awareness about the ASEAN Economic Community is relatively low. Although implementation is scheduled for 2015, the ASEAN Economic Community is still seen as something vague and occurring far down the line. As the ASEAN Economic Community is inevitable and Indonesian business players will sooner or later feel the impact of regional economic integration, stakeholders have expressed concerns over the lack of clarity on this subject.

“What opportunities will AEC bring? What are the threats? What will change and what should Indonesian business players prepare to survive? Those are the questions that we need to answer,” Chris Kanter said.

Services are increasingly important for ASEAN economies. On average, services industries contribute 40-50% of GDP in ASEAN countries. In Indonesia services is still treated as a marginal sector despite its significant contribution to the economy. In 2012 services contributed 43% to GDP. Since 2001 this sector has grown 7.2% on average per year, faster than the primary and secondary sectors. In 2012, 55.4 million people (49.2% of total workers) worked in the services industry. It is also important to note that 35% of inputs used in productive sectors are services.

Based on those facts, Chris Kanter concluded that there needs to be serious efforts to provide access to better quality services in order to increase Indonesia’s productivity and competitiveness, especially in manufacturing. Regulatory reforms and trade liberalization are two ways to promote such access.

In the context of ASEAN Economic Community, liberalization in trade in services is done under the ASEAN Framework Agreement on Services (AFAS). Under AFAS so far ASEAN countries have agreed on 8 out of 10 packages of commitment. In 2015, 128 services sectors will be opened for ASEAN foreign equity participation of up to 70%. In addition to this, barriers to cross-border supply and consumption abroad will be eliminated.

Meanwhile, Sjamsu Rahardja from the World Bank highlighted the growing importance of services. He said that the degree to which the manufacturing sector is serviced is an opportunity for value addition. He also added that the services sector depends very much on input from other sectors, quoting a finding that 50-70% of intermediate inputs in the services sector were also services.

Services are also very important in terms of the multiplier effect. Sjamsu said the employment elasticity in services jobs to services GDP is 0.32. This means a 1% increase in services GDP (in construction, transport-communication, and trade sectors) will add 100,000-130,000 jobs in those sectors.

Despite the fact that services are crucial to the Indonesian economy, the proportion of Indonesia’s merchandise exports that it accounts for is lower than that of other ASEAN countries. The same obstacle is found in manufactured goods exports.

“We should see this as a fact that there is still room for us to increase the services element of our exports” said Sjamsu.

Despite the scope to boost growth in services, according to Sjamsu the ASEAN is facing a serious challenge. The Services Trade Restrictiveness Index data shows that in general ASEAN countries still impose high restrictions on trade in services.

In his conclusion, Sjamsu restated the potential benefits of ASEAN economic integration, particularly for Indonesia’s services industry. He added that realizing this potential will depend on a coherent and sound regulatory regime. The government needs to implement good industry-specific regulations (financial prudence, service standards, quality assurance) in parallel with opening up and addressing the capacity constraints of local services providers, such as those related to deficiencies in worker skills and qualifications.

Dionisius Narjoko from the Economic Research Institute for ASEAN and East Asia (ERIA) elaborated further on the technical aspects of AFAS and shared news on the progress of the negotiation. The focus of AFAS, he said, is actually on commercial presence or Mode 3 as Mode 1 and 2 are more or less already open. But he reminded the audience that negotiation for Mode 3 is more difficult because ASEAN countries are expected to commit to more than 49% in foreign equity participation. Another challenge in negotiating AFAS, said Dion, is the variation in the Liberalization Rate among ASEAN countries.

“New members like Vietnam, Lao PDR, and Cambodia tend to be more committed to opening their services sector while other ASEAN countries are less open. For example, Thailand is low on the Liberalization Rate because the country has a regulation that applies to all sectors that limits foreign equity participation to only 49%. A further case is the Philippines which has many ‘footnotes’ attached to its commitments,” added Dion.