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.