RI needs incentive environment<\/p>\n
By David Ray<\/p>\n
BANDUNG (JP): Investigating determinant of Indonesia's long
\nterm economic growth is a difficult task. Short term issues cloud
\nthe long-run horizon. Since Indonesia gained independence in the
\nlate 1940s the country has undergone so many dramatic changes in
\nits economic and political circumstances that it is difficult to
\nisolate what has been the key determinant of long-run growth.<\/p>\n
Throughout much of the 1950s and early 1960s, political
\ninstability and poor economic management prevented the economic
\nfrom achieving a higher rate of development. From the mid-1960s
\nto the mid-1970s economic rehabilitation and the introduction of
\na more liberalized policy environment generated a number of
\nshort-run growth benefits. Beginning in the early 1970s and
\nextending until the crash of international oil prices in the mid-
\n1980s, the Indonesian economy was driven by the huge inflows of
\noil money and the subsequent highly interventionist and
\nregulatory policy stand of the government. Since the mid-1980s
\nIndonesia has enjoyed the previously unexploited short run growth
\nbenefits associated with the move by industry into low technology
\nlabor intensive manufacturing -- the area where Indonesia is most
\ncompetitive according to proponents of the comparative advantage
\ntrade theory.<\/p>\n
But is this final stage representative of Indonesia's long-
\nrun growth path? To answer this we need to consider what has been
\nthe key determinants of long-run growth internationally.<\/p>\n
Economists have struggled to come up with a realistic and
\nconsistent theory on why some countries grow faster than others.
\nThe one point where there is consensus is that technology is an
\nessential feature of modern long-run growth. It is no
\ncoincidence, for example, that the dramatic improvement in global
\neconomic conditions that has occurred over the past two centuries
\nhas also been accompanied by equally dramatic technological
\ndevelopments.<\/p>\n
Thus it is ideas of knowledge about the way we make or do things
\nthat generates economic value and therefore growth. Consider the
\nexample of two computers, one built this year and the other ten
\nyears ago. The raw materials required to produce both computers
\nare essentially the same. The big difference, however, is the
\nmore sophisticated knowledge required for the production of the
\nnewer computer.<\/p>\n
So where does this analysis leave us in terms of Indonesia's
\nlong-run growth path? The answer is simple. To generate higher
\nlong-run growth, Indonesia need to move into more knowledge based
\nor value-added production. Low-technology, labor-intensive
\nmanufacturing has given Indonesia a decade of impressive growth
\nbut this will not continue. The recent downturn in many of
\nIndonesia's export prima donnas suggests that the next decade
\nwill not be as simple as making use of an abundance of low-
\nskilled cheap labor.<\/p>\n
The emergence of China and India -- who themselves have been
\nable to move into more knowledge based production -- as regional
\ncompetitors in low-technology and labor-intensive manufacturing,
\nas well as the development of a number of labor saving
\ntechnologies in the West, compels Indonesia to move up the
\ntechnology ladder. This means better and more innovative designs
\nand processes. More importantly, it means cheaper products so
\nthat Indonesian goods such as shoes. garments, textiles, wood and
\nelectronic products remain internationally competitive.<\/p>\n
But Indonesia should not continue to produce just these types
\nof goods. Patriotic sentiment and indeed good economic sense
\nrequire that Indonesian industry diversify to new knowledge based
\ngoods. The computer and electronics industries (beyond the
\nassembly stage) is the most apparent choice right now.<\/p>\n
So the key question is how to improve the technology or
\ninnovation capacity of Indonesian industry. Rather than
\nselectively developing just a few high-tech industries which end
\nup operating in a high income enclave with little or no linkages
\nto the local economy, a more effective policy approach is to
\nprovide functional assistance to all industries.<\/p>\n
Such functional assistance could include policies to improve
\nhuman resource levels since skillful, educated people are better
\nequipped to deal with modern technology. Similarly, government
\nresearch and development needs to be better linked and driven by
\nthe private sector. Foreign investment needs to feel more welcome
\nhere -- particularly technology intensive long term investment.
\nThe right sort of arrangements must be established to facilitate
\ntechnological transfer like in Malaysia.<\/p>\n
But most importantly, Indonesia needs to have the right
\nincentive environment that will foster private sector innovation.
\nThis means ensuring a competitive domestic environment where
\nindustries are not controlled by a few large firms or cartels,
\nbut where firms compete with each other to produce better quality
\nand lower-price goods.<\/p>\n
The writer is a researcher and doctoral candidate at the
\nCentre for Strategic Economic Studies in Melbourne, Australia.<\/p>",
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