Similarly, the manufacture of radios, televisions and communication equipment relies on the service sector for 34.9% of its inputs – of which 8.4% from transport, 10.8% from retail & distribution, and 1.5% from financial & insurance.

These inter-linkages underline the importance of services as inputs for firms across different activities, and the potential economy-wide productivity gains from an improvement in service sector performance. Access to more, better or cheaper services can be expected to improve productivity at Indonesian firms, enabling them to better compete in the global marketplace.

# **3. 2 Policy Restrictiveness in the Service Sector in Indonesia**

Despite the increase in international trade in services, the exposure of service sectors to competition is typically more limited than that for other sectors of the economy, either because the current state of technology does not make particular cross-border trades in the service sector profitable, or because barriers to trade are stricter than in other sectors.<sup>4</sup> As a consequence, domestic firms are typically captive clients of domestic service providers. In many instances, they may be at the mercy of inefficient public monopolies, or other providers who are not faced with incentives to reduce prices or improve quality. Broad-based, productivityenhancing service sector reform should then necessarily encompass measures to increase competition, encourage foreign investment, stimulate innovation and ensure judicious regulation.

Since the East Asian crisis, liberalizing reforms have both increased competition and openness to trade and foreign investment across all sectors of the Indonesian economy. Indonesia appears more active in pursuing trade liberalization within ASEAN.<sup>5</sup> The ASEAN Framework Agreement on Services aims to facilitate the free flow of services throughout ASEAN, entailing commitments to progressively reduce all restrictions in five priority sectors – air transport, eASEAN, Healthcare, tourism and logistics. By 2015, ASEAN investors should be allowed to hold up to 70% of the equity in Indonesian firms in these sectors. These targets are subject to some flexibility (15%) in the case of sub-sectors of national sensitivity. Implementation of these targets, moreover, requires domestic legislation, including amendments to both the Negative Investment List and relevant sectoral legislation.

This Negative Investment List (NIL) is probably the most important reference for prospective foreign investors outside Indonesia. It details those sectors from which foreign investment is proscribed, and those sectors that are open, but carry certain restrictions such as location, company size, special permits and foreign equity limits. This list has undergone a number of incarnations. Both before (1994) and after (2000) the East Asian crisis the Negative Investment Lists lacked sufficient meaningful detail. With the landmark Investment Law of 2007, a new List was developed which was supposed to be the single, comprehensive reference point for

> 4 A recent study by Borchert, Gootiiz and Matoo (2012) reveals that the higher the GDP per capita of a country, the lower the services trade restrictions they impose.. Interestingly, when the set of countries is restricted to those in the East Asia Pacific region, the relationship is inverted: countries with higher GDP per capita tend to impose higher restrictions in services trade..

> 5 Instead, at GATS it remains less active. The World Bank’s GATS Restrictiveness Index, that measures the extent of GATS commitments toward liberalization of a given country, shows Indonesia with a score of 9.52, while the average for East Asia-Pacific is 22.08 (0 indicates no commitments, 100 indicates fully liberalized).

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