Constraints on technology (1)<\/p>\n
By David Ray<\/p>\n
How does Indonesian industry move up the technological ladder?
\nIn the face of low industrial productivity levels, low value
\nadded export production as well as the threat of increased
\nregional competition in low-tech labor-intensive manufacturing
\nfrom countries such as China, India and Vietnam, the question is
\nof increasing importance to Indonesian economists, policy makers
\nand industrialists alike. This article, presented in two
\ninstallments, is an attempt to isolate the four key issues which
\nexplain why Indonesia is losing the regional technology race and
\nwhat the implications are.<\/p>\n
BANDUNG (JP): Crucial to any developing country's attempt to
\ndevelop better technological capacity is its own human resources
\ndevelopment. Unlike in the case of an industrially advanced
\ncountry where technological development rests upon the ability to
\ndevelop new products or technologies, technological development
\nin a development context depends essentially upon the ability to
\nscan, asses, import and adapt existing foreign technologies.<\/p>\n
Clearly, education and skill levels are extremely important.
\nWithout an adequate supply of well trained technicians,
\nengineers, computer operators and scientists, a developing
\ncountry will find it difficult to effectively use modern forms of
\ntechnology.
\n1. Human resources development:This first point represents a key
\nfactor in explaining the successful development experiences of
\nthe Asian Newly Industrialized Countries (NICs). Over the past
\nthree to four decades, countries such as Japan, Hong Kong, Taiwan
\nand Singapore, by virtue of their relatively high human capital
\nlevels (and favorable macro-policy environments) have been able
\nto effectively use a backlog of unexploited technology from the
\ndeveloped countries as a means to develop highly competitive and
\nsophisticated manufacturing sectors.<\/p>\n
Indonesia clearly lags behind its regional competitors in its
\ncommitment to raise human resource levels. According to most data
\nsources (e.g. UNDP, UNESCO, World Bank, etc.) Indonesia commits
\nless public resources to education (as a percentage of total
\ngovernment expenditures) and the differences with other Asian
\ncountries in this regard are becoming more pronounced.<\/p>\n
Hence, while Indonesia has for some time been able to boast an
\nalmost 100 percent enrollment rate at the primary school (SD)
\nlevel, at the higher end of the education spectrum enrollment
\nrates are nowhere near as impressive. Whilst basic reading and
\nwriting skills (i.e. primary education) are important elements of
\nany industrialization program, they are generally only adequate
\nat the early stages of industrialization.<\/p>\n
More advanced stages of industrialization require greater
\ntechnological know-how. This is where Indonesia falls behind. In
\nterms of the ratio of university enrollments to the 20 to
\n24-year-old population, Indonesia (0.1 percent) ranks well behind
\nSouth Korea (0.37) and Taiwan (0.27).<\/p>\n
More important however is the type of graduates the local
\neducation system is producing. Given the high cost of machinery
\nand laboratories necessary for educating scientists and
\nengineers, Indonesian universities over the past few decades have
\ntended to produce mainly humanities and social science graduates.<\/p>\n
Thus, it is not surprising to find that in 1993 the 22-year-
\nold populations of South Korea, Singapore and Taiwan had on
\naverage 12 times more natural science and engineering graduates
\nthan the 23-year-old Indonesian population (the usual age for a
\nfirst university degree). Even when Indonesia is successful in
\nproducing scientists and engineers an alarming number find
\nthemselves lured by higher wages to the finance sector where they
\ncannot fully utilize their technical skills.
\n2. Policy Environment: Without the necessary macro and micro
\npolicy measures that ensure economic stability and consistency,
\nfew entrepreneurs or industrialists would feel confident
\ninvesting in raising their respective firm's technological
\ncapability.<\/p>\n
In this regard, the New Order government's macro measures to
\nrestrain inflation and to minimize budget and current-account
\ndeficits must represent a plus for Indonesia's technological
\ndevelopment. On many other fronts, however, there appears to be
\nmuch that policy could do to promote Indonesia's drive toward
\nhigher technology production.<\/p>\n
First, by ensuring a competitive business environment.
\nCompetition is arguably the key factor behind a country's
\ntechnological development. Competition for limited profits drives
\nbusinesses to innovate as a means to make better quality and\/or
\ncheaper -- and therefore more competitive -- products.<\/p>\n
However, if an industry is controlled by just a few companies
\n(in Indonesia's case conglomerates and BUMN) cartels and
\ncollusion usually become the norm. Oligopolistic activities such
\nas price fixing become common and there is little incentive to
\ncompete toward attaining best standard practices by using latest
\ntechnological forms.<\/p>\n
As highlighted by the mid-year research report by Econit and a
\nrecent spate of articles in the business media, Indonesian
\nindustry appears to be becoming more oligopolistic -- i.e.
\nconcentrated in the hands of a few. Furthermore many smaller
\nfirms are tending to shun competition in favor of the protection
\noffered by associations and cartels. This clearly is an unhealthy
\nsituation if Indonesian industry is to become technologically
\ncompetitive.<\/p>\n
Second, by ensuring that the trade regime provides the
\nnecessary incentives for local producers to export. Throughout
\nmuch of the 1970s and early-mid 1980s Indonesian industry was
\ninward looking and protected by high tariff barriers.<\/p>\n
Much of these barriers have since been reduced through
\nderegulation. However, most empirical work on this issue such as
\nthat carried out by economist Paul Wymenga, show that the
\neffective rate of protection enjoyed by the import-competing
\nmanufacturing industries is still much higher than that of the
\nexport oriented industries suggesting that Indonesia's trade
\nregime continues to exhibit a strong anti-export bias.<\/p>\n
Further evidence of this anti-export bias can be seen by
\ndominance of the conglomerates within the Indonesian economy and
\ntheir tendency to exploit their privileged state-sponsored
\nposition to control domestic markets rather than to expose
\nthemselves to the rigors of international competition.<\/p>\n
This bias away from export production in turn has important
\nimplications for Indonesia's technological development. By
\nencouraging firms to produce for a protected domestic market
\nthere is little or no incentive for those firms to develop or
\nadopt latest forms of technology required to maintain
\ninternational competitiveness.<\/p>\n
Furthermore the inability to develop a competitive and
\ntechnologically sophisticated export sector (such as the Korean
\nand Taiwanese electronics industries) prevents Indonesia from
\nenjoying the growth benefits associated with the export sector
\nacting as a kind of "leading sector" in the diffusion of modern
\ntechnology from abroad.<\/p>\n
Third, by ensuring intellectual property rights. Like many
\nother developing countries, Indonesia is yet to develop or
\nimplement the necessary legal framework to protect intellectual
\nproperty rights. Not only does Indonesia lack the necessary laws
\nbut also the professional ability to determine what to protect
\nand when a reproduction should be regarded as a pirated copy.<\/p>\n
Currently, there is little incentive to carry out innovation
\nor invention as the returns to such investment can so easily
\nenjoyed by others at little or no cost.<\/p>\n
The writer is a doctoral candidate at the Center for Strategic
\nEconomic Studies, Victoria University, Australia. He is currently
\nin Bandung carrying out research towards his PhD.<\/p>",
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