Lowy Institute: A free trade zone for Timor-Leste and Indonesia

Oct 5, 2022 | Features, International Relations, Presidency

Regional stability, economic resilience and mutual prosperity – what’s not to like about a cross-border FTZ?

In July, Indonesian President Joko Widodo received President José Ramos-Horta for the first state visit of the Timor-Leste leader’s term. Both made proposals to deepen economic ties and urged for the establishment of a cross-border economic zone. Such a program has the potential to be groundbreaking because it allows both countries to test and develop novel policies in the effort to build a high-performance economy. These policies are the key features of successful development in advanced economies and in the impressive catch-up trajectory of East and Southeast Asia.

Both Timor-Leste and Indonesia would need to make and implement robust strategic choices, especially in setting up the zone with effective economic development in mind. For Timor-Leste, the country could draw inspiration from many of the Asian nations that industrialised before it, assuming it continues on this path.

There are important factors that contributed to Asia’s successful economic development, such as the crucial role played by significant investments in education, skills development and the accumulation of knowledge and technology, as well as an emphasis on fostering competent firms and learning among the workforce, which produced strong national systems of production and innovation. Economic zones have been used at different stages of development, changing from manufacturing enclaves to multi-activity, high-tech economic hubs that were fully integrated into the urban and economic environment. These proliferated and are still being created.

According to United Nations policy research, more than 4,000 special economic zones currently exist in Asia (approximately 75 per cent of the world’s total), with more than 1,000 in the Association of Southeast Asian Nations (ASEAN) block. Reports from University of ZurichUnited Nations Conference on Trade and Development and related Asian Development Bank studies have shown that in Thailand, development zones are estimated to boost GDP growth by 5 per cent a year. In Malaysia, about 200 economic zones account for 60.5 per cent of national manufacturing and are located within states that contribute 40.2 per cent of national GDP. In China, special economic zones near the coast and near trading partners contributed to a 12 per cent permanent increase in GDP levels for more than 250 cities between 1988 and 2010, and that increase is predicted to reach 20 per cent in the long term.

Continue reading