The Indonesian interisland shipping industry : a case study in competition and regulation

While economic planning has been widely advocated as essential to the development of poor countries, there remains great ignorance of the impact of government policies at the industry level. This study of Indonesian interisland shipping argues that government policies have been the main cause of inefficiency in the industry. Policies toward infrastructure, licensing and controls, freight rates, and investment are analysed in turn. Inefficiency appears to have arisen directly from the neglect of infrastructure and the diversion of resources into the making and evasion of regulations and indirectly from the weakening of competition as less efficient firms have been protected artd new firms have been discouraged from entering the industry. More generally, the government has failed to create an environment conducive to productive private investment. Despite these handicaps, the market has nevertheless been effective In transferring output from less to more efficient firms. When firms are divided into growing and declining on the basis of changes in capacity and their characteristics examined, growing firms appear to be the more efficient and declining firms the less efficient. This transfer of capacity (and thereby output) is consistent with the characteristics of the industry's structure and the apparent absence of collusion, which permit the industry to be best described as monopolistically competitive. The personal connections and internal organisation of the firm are also important. Personal connections influence the rate of growth or decline. Internal organisation accounts for a small desired size among private firms; together with a high opportunity cost of capital, this appears to produce a life cycle of rapid growth through reinvestment of surpluses followed by withdrawal of surpluses for diversification into other ventures. In view of this life cycle, the efforts of the government (encouraged by foreign advisers) to reduce the number of firms in the industry are particularly harmful to competition. Although these findings cannot readily be generalised without knowledge of competition and regulation in other industries, they do suggest that the Indonesian government may frustrate rather than exploit the capital and entrepreneurial resources of the private sector, in what remains a mixed economy