'Economy still not efficient'

'Economy still not efficient'

JAKARTA (JP): Indonesia's most senior economist Sumitro
Djojohadikusumo reaffirmed last night the urgent need to reduce
the incremental capital output ratio and the dependency ratio in
order to raise the international competitiveness of the
Indonesian economy.

Sumitro told a gathering of thousands of the alumni of the
University of Indonesia's Djakarta School of Economics at the
Convention Center that Indonesia's economy is still grossly
inefficient, citing the latest annual World Competitiveness
Report.

"The 1995 World Competitiveness Report of the Geneva-based
World Economic Forum puts Indonesia in the 33rd rank among 48
countries covered ...far behind even Malaysia and Thailand, which
are in the 21st and 26th rank, respectively," Sumitro noted.

Indonesia should therefore work harder to improve the
efficiency of its economy by reducing its the amount of capital
investment needed to generate one unit of output, a ratio known
by the acronym "ICOR," as well as the dependence ratio of the
productive workers, he said.

A lower ICOR, he added, would make investments more efficient
and effective, therefore strengthening the competitiveness of the
economy.

Misunderstanding

On the occasion Sumitro noted what he saw as a
misunderstanding regarding "comparative advantages" and
"competitive advantages" in relation to efforts to strengthen the
competitiveness of the economy.

In this context, he referred to a report in the Kompas daily
on Sept.5 which quoted State Minister for Research and Technology
B.J. Habibie as saying that "we should zero in on our competitive
advantages and leave out our comparative advantages, which are
predicated on cheap manpower."

He said if the daily's quotation of Habibie's remarks was
correct, the statement contained a double error -- an error of
fact and an error of logic.

"Forgive me, even though personally I am on excellent terms
with Habibie -- and nowadays ministers cannot make errors and are
always right -- I should speak my mind about the errors of fact
and logic," Sumitro said, adding that he found confusing the
practice of ministers to talk in different languages.

"But I also fully realize that under the Pancasila democracy,
differences of opinion are tolerated," he said.

Sumitro continued: "I am afraid a double error occurred: an
error of fact and an error of logic."

Habibie's statement contained an error of fact because
comparative advantage is not identical with the employment of
cheap labor, Sumitro said.

The economic theories on comparative advantage conceived
first by economist David Ricardo, then by Heckscher and Ohlin
Haberler, clearly hold that the pattern of comparative advantage
by itself depends on the interaction among the factors of
proportions, such as resource endowments, technology, Sumitro
said.

The error of logic in Habibie's statement lies in the fact
that in order to increase the competitive advantage a country
need not, a priori, disregard economic activities based on
comparative advantage.

"The real issue is how can we deploy our given comparative
advantage to improve the efficiency of our national economy so as
to strengthen the competitive edge of our economy," he added.

Therefore, the problem is not "either/or," he said. Rather,
the two kinds of advantages should be developed simultaneously in
order to complement and strengthen each other, according to
Sumitro.

In contrast to his previous public speeches, which have always
been well-prepared and well-structured, Sumitro spoke from only
brief notes last night.

His speech included a number of wide digressions and asides,
at one point addressing the subject of democracy.

According to Sumitro, one of the two main prerequisites for
the development of democracy is a high degree of tolerance of
differences of opinions.

"Another prerequisite is that those who issue regulations
or directives should be the first to honor those rules," Sumitro
added. (rid/vin)