Constraints on technology (1)

Constraints on technology (1)

By David Ray

How does Indonesian industry move up the technological ladder?
In the face of low industrial productivity levels, low value
added export production as well as the threat of increased
regional competition in low-tech labor-intensive manufacturing
from countries such as China, India and Vietnam, the question is
of increasing importance to Indonesian economists, policy makers
and industrialists alike. This article, presented in two
installments, is an attempt to isolate the four key issues which
explain why Indonesia is losing the regional technology race and
what the implications are.

BANDUNG (JP): Crucial to any developing country's attempt to
develop better technological capacity is its own human resources
development. Unlike in the case of an industrially advanced
country where technological development rests upon the ability to
develop new products or technologies, technological development
in a development context depends essentially upon the ability to
scan, asses, import and adapt existing foreign technologies.

Clearly, education and skill levels are extremely important.
Without an adequate supply of well trained technicians,
engineers, computer operators and scientists, a developing
country will find it difficult to effectively use modern forms of
technology.
1. Human resources development:This first point represents a key
factor in explaining the successful development experiences of
the Asian Newly Industrialized Countries (NICs). Over the past
three to four decades, countries such as Japan, Hong Kong, Taiwan
and Singapore, by virtue of their relatively high human capital
levels (and favorable macro-policy environments) have been able
to effectively use a backlog of unexploited technology from the
developed countries as a means to develop highly competitive and
sophisticated manufacturing sectors.

Indonesia clearly lags behind its regional competitors in its
commitment to raise human resource levels. According to most data
sources (e.g. UNDP, UNESCO, World Bank, etc.) Indonesia commits
less public resources to education (as a percentage of total
government expenditures) and the differences with other Asian
countries in this regard are becoming more pronounced.

Hence, while Indonesia has for some time been able to boast an
almost 100 percent enrollment rate at the primary school (SD)
level, at the higher end of the education spectrum enrollment
rates are nowhere near as impressive. Whilst basic reading and
writing skills (i.e. primary education) are important elements of
any industrialization program, they are generally only adequate
at the early stages of industrialization.

More advanced stages of industrialization require greater
technological know-how. This is where Indonesia falls behind. In
terms of the ratio of university enrollments to the 20 to
24-year-old population, Indonesia (0.1 percent) ranks well behind
South Korea (0.37) and Taiwan (0.27).

More important however is the type of graduates the local
education system is producing. Given the high cost of machinery
and laboratories necessary for educating scientists and
engineers, Indonesian universities over the past few decades have
tended to produce mainly humanities and social science graduates.

Thus, it is not surprising to find that in 1993 the 22-year-
old populations of South Korea, Singapore and Taiwan had on
average 12 times more natural science and engineering graduates
than the 23-year-old Indonesian population (the usual age for a
first university degree). Even when Indonesia is successful in
producing scientists and engineers an alarming number find
themselves lured by higher wages to the finance sector where they
cannot fully utilize their technical skills.
2. Policy Environment: Without the necessary macro and micro
policy measures that ensure economic stability and consistency,
few entrepreneurs or industrialists would feel confident
investing in raising their respective firm's technological
capability.

In this regard, the New Order government's macro measures to
restrain inflation and to minimize budget and current-account
deficits must represent a plus for Indonesia's technological
development. On many other fronts, however, there appears to be
much that policy could do to promote Indonesia's drive toward
higher technology production.

First, by ensuring a competitive business environment.
Competition is arguably the key factor behind a country's
technological development. Competition for limited profits drives
businesses to innovate as a means to make better quality and/or
cheaper -- and therefore more competitive -- products.

However, if an industry is controlled by just a few companies
(in Indonesia's case conglomerates and BUMN) cartels and
collusion usually become the norm. Oligopolistic activities such
as price fixing become common and there is little incentive to
compete toward attaining best standard practices by using latest
technological forms.

As highlighted by the mid-year research report by Econit and a
recent spate of articles in the business media, Indonesian
industry appears to be becoming more oligopolistic -- i.e.
concentrated in the hands of a few. Furthermore many smaller
firms are tending to shun competition in favor of the protection
offered by associations and cartels. This clearly is an unhealthy
situation if Indonesian industry is to become technologically
competitive.

Second, by ensuring that the trade regime provides the
necessary incentives for local producers to export. Throughout
much of the 1970s and early-mid 1980s Indonesian industry was
inward looking and protected by high tariff barriers.

Much of these barriers have since been reduced through
deregulation. However, most empirical work on this issue such as
that carried out by economist Paul Wymenga, show that the
effective rate of protection enjoyed by the import-competing
manufacturing industries is still much higher than that of the
export oriented industries suggesting that Indonesia's trade
regime continues to exhibit a strong anti-export bias.

Further evidence of this anti-export bias can be seen by
dominance of the conglomerates within the Indonesian economy and
their tendency to exploit their privileged state-sponsored
position to control domestic markets rather than to expose
themselves to the rigors of international competition.

This bias away from export production in turn has important
implications for Indonesia's technological development. By
encouraging firms to produce for a protected domestic market
there is little or no incentive for those firms to develop or
adopt latest forms of technology required to maintain
international competitiveness.

Furthermore the inability to develop a competitive and
technologically sophisticated export sector (such as the Korean
and Taiwanese electronics industries) prevents Indonesia from
enjoying the growth benefits associated with the export sector
acting as a kind of "leading sector" in the diffusion of modern
technology from abroad.

Third, by ensuring intellectual property rights. Like many
other developing countries, Indonesia is yet to develop or
implement the necessary legal framework to protect intellectual
property rights. Not only does Indonesia lack the necessary laws
but also the professional ability to determine what to protect
and when a reproduction should be regarded as a pirated copy.

Currently, there is little incentive to carry out innovation
or invention as the returns to such investment can so easily
enjoyed by others at little or no cost.

The writer is a doctoral candidate at the Center for Strategic
Economic Studies, Victoria University, Australia. He is currently
in Bandung carrying out research towards his PhD.