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This month sees Indonesia entering its second 25-year
development period. Economist Pande Radja Silalahi analyzes
the challenges presently facing the nation.
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JAKARTA (JP): It is a fact that the economic development
during the last 25 years produced meaningful results as well as
challenges and problems.

Among the most outstanding changes so far are:
1. The average per capita income at constant prices increased by
more than four times. However, there is still a disparity in the
distribution of income and about 26 million Indonesian people
still live under poverty line.
2. The economy of Indonesia has experienced structural changes
from the previous agricultural base to an industrial base.
3. Economic activities tend to concentrate in cities which
results in urbanization with its related problems.
4. Dependence on foreign aid is increasing even though the
national rate of savings is not that small compared to that of
several other countries.
5. Dependence on the income from oil is still significant, even
though Indonesia has tried hard to increase income from non-
oil/gas exports, as well as tax revenues, over the past several
years.

The many constraints encountered at the beginning of the First
Stage of the Long-Term Economic Development Program were
addressed through the applied import substitution strategy. This
strategy has the character of being centralistic and is not
connected in a planned way to the "export promotion strategy."

The inadequacy of attention to the weaknesses in the strategy
and the inadequacy of consistent endeavors to remove them have
created several problems.

Among them are the weak linkages between the economic sectors,
inadequacy of growth in the number of competent entrepreneurs,
concentration of economic activities among a small number of
people, the weak spirit to achieve and create efficiency and the
concentration of economic activities in certain areas, in
particular the Western part of Indonesia.

Globalization and the drop in oil prices have thrown light on
the weaknesses attached to the strategy of economic development
in Indonesia so that in response over the last few years the
government has taken several steps to make the Indonesian economy
efficient.

It cannot be denied that efficiency in the use of capital in
Indonesia runs far behind that of several countries. Factors
which lead to this condition are well known, even if the weight
of the factors in the creation of the inefficiency is not
precisely known.

Experts have said time and time again that if Indonesia can
increase its "incremental capital output ratio" to the same level
as that in several neighboring countries, then achieving the
level of economic growth set forth in the Second Stage of Long-
Term Development will be possible without depending on foreign
aid.

Indonesia has been successful in reducing its population
growth. However, in order to create jobs for the new employment
seekers it is necessary that there should be a high level of
economic growth. Based on the existing data, it can be said that
the problem of employment will become ever more serious for
Indonesia.

Therefore, matters related to the minimum wage need special
attention, especially because there is a great possibility that
in this Second Stage of Long-Term Development a "market failure"
in the labor sector cannot be avoided.

Keeping economic development centralistic, as has been done up
to now, was possibly the most efficient way of dealing with the
problems in the past. However, in the future this policy cannot
be maintained. It is now necessary to decentralize the economic
development in a planned way, consistently and in stages. This
will not be an easy task since this requires a change in the
existing governmental organization.

Facts show that the great dependence of the Indonesian economy
on the "political psychology commodity" of oil/gas is one of the
main factors which decreases its elasticity in the face of
changes.

The efforts of the government to increase exports goes
together with the endeavor to diversify products and the area of
marketing is the right answer. During the last several years it
has become evident that Indonesian exports can grow at a rapid
rate and that the variety of export products is increasing. The
question is: How much in line with the efforts at creating a
strong linkage between the economic sectors of trade and industry
is that export drive?

The awareness of the importance of human resources as set
forth in the current Repelita VI five year plan is something that
is very important in the development to come. Experience has
shown that the problem resulting due to the non-existence of
strong relations between the institutes which produce manpower
with the users of manpower still exists. Therefore, bridging the
gap on an optimal level is imperative.

The process of globalization, which is moving at ever greater
speeds due to the strength of market forces, has shown clearly
that as competition becomes fiercer, the economies of each
country in the world must become more transparent. Hostilities in
several forms will grow against actions contrary to the market
law.

Therefore, from now on Indonesia must consistently make
efforts to clear away obstacles which can be categorized as being
unfriendly to the market forces, such as the practice of
monopoly, unhealthy competition, disguised protection and
concealed discriminative actions.

In this Second Stage of Long-Term Economic Development it can
be said that the success of Indonesia in creating sustainable
economic development will depends a great deal on its ability to
make the market mechanism operate properly and at the same time
to reduce the disparity occurring in the distribution of economic
activities and the value added factor.

The writer is a senior staff member of the Centre for
Strategic and International Studies.