In the eyes of a local observer

Pande Radja Silalahi, economist at the Jakarta-based think tank CSIS

South Korea has enjoyed spectacular economic growth over the last few decades. In the 1960s, South Korea's per capita income was fairly similar to that of Indonesia's. Now, however, South Korea has left Indonesia far behind, even though the former lacks the latter's abundance of natural resources.

The emergence of South Korea as a nation capable of emulating Japan's success in managing its economy has made the country an interesting case study. Some experts attribute South Korea's success to its ability to develop and harness human resources, while adopting a consistent strategy for economic development.

The history of economic development in some countries clearly shows that some have succeeded in development by following an import substitution strategy. However, this has not infrequently failed or not delivered the expected results because of lack of consistency in implementing this strategy or lack of discipline in the effort to develop.

In the process of the ongoing globalization of the world economy, each country has been seeking and trying to take advantage of its particular areas of economic competence. In this regard, business players have taken various actions, such as market expansion beyond the domestic market, investment in certain countries for reasons of efficiency, and cooperation with foreign countries or business players in the production and marketing of products.

South Korea, which for several years now has emerged as a new exporter of capital, will be looking for places to invest. How and where the capital is invested will depend on various factors that cannot easily be explained in isolation from each other.

Need each other

South Korea's economic ties with Indonesia go back a long way. Even so, the economic links between the two countries are nevertheless at a relatively low intensity. In other words, there is enormous scope for developing the economic ties between the two nations.

Available data show that South Korea's trade links with the United States or European Union far surpass those between South Korea and Indonesia. In 1995-1999, for example, South Korean exports to the U.S. and European Union ran as high as 15.9 percent to 20.5 percent and 10.9 percent to 14 percent of total exports respectively. On the other hand, South Korea's imports from the U.S. and European Union were in the range of 20.7 percent to 22.5 percent and 10.6 percent to 14.1 percent of total imports respectively.

For Indonesia, the figures are not that different. During 1995-1999, Indonesian exports to the U.S. and European Union amounted to 13.4 percent to 19 percent and 14.9 percent to 17.6 percent of total exports. Imports from the U.S. and European Union during the same period were 8.8 percent to 13.1 percent and 16.3 percent to 21.5 percent of total imports respectively.

This data indicates that South Korea and Indonesia need to diversify or reorient their international trade, with the objective of building greater economic resilience to changes that may take place in the nations that comprise their economic partners.

In recent years, South Korea's economic ties with Indonesia have shown significant growth, even though accounting for a relatively low proportion of total trade. In the five years leading to 2000, Indonesian exports to South Korea accounted for 6.4 percent to 7.45 percent of total exports and imports from South Korea for 5.57 percent to 11.64 percent of Indonesia's total imports. From South Korea's perspective, exports to Indonesia during the five-year period amounted to 1.4 percent to 2.6 percent of its total exports and imports from Indonesia were 2.5 percent to 3.3 percent of total imports.

Further analysis points to room for mutually benefecial expansion of the economic ties of the two nations. Indonesia has enormous natural resources potentially waiting to be exploited. So far, Indonesian-South Korean trade has been limited to a number of specific products, such as footwear, textiles, garments, cars and electronic products. It looks as if the two nations, or the businesses from both countries, could strengthen their cooperation for the harnessing of Indonesia's natural wealth, both for the domestic markets of both countries and for the international market as well. In addition, the two nations could form a strategic alliance by taking the best that each country has to offer in both technology and resources.

Deepening ties

Currently, there are 600 South Korean companies operating in Indonesia, with about US$10 billion invested. Until a few years ago, South Korean companies were engaged mainly in labor- intensive activities such as garments, textiles, or footwear. This resembles the general pattern in which South Korean companies relocated their manufacturing operations to certain countries with the objective of entering the domestic markets in the place of investment and ensuring the availability of merchandise needed for domestic consumption.

Indonesia's relatively inexpensive labor is one important reason for some companies, including those from South Korea, to invest in this country. Even so, as Indonesia develops, wage levels will undoubtedly rise, and thus it will not be possible to stake everything on low-cost labor in the future. This means that appropriate attention needs to be devoted to building long- lasting economic ties between the two nations and deepening economic linkages.

When South Korea began to develop its shipbuilding industry, many thought that the nation was unable to compete on the international market. As a newcomer at the time, it was difficult to identify the competence factor that enable South Korea to produce ocean-going vessels on a competitive basis. However, the facts show that through consistent effort taking into account cost and benefit, South Korea was able to turn itself into a world-class shipbuilding nation.

On the other hand, Indonesia, as an archipelagic nation with an enormous need for efficient marina transportation, lags far behind South Korea in the production of seagoing vessels. It appears that this is one activity that could be pursued by both government and businesses.

The history of South Korea's development shows that education played a crucial role in South Korea's success in building its economy. At the micro level, business players keenly understand the importance of human resources for corporate advancement.

In recent years, some South Korean firms have employed Indonesians in factories located in the peninsula. From several angles, this model yields useful benefits. By employing Indonesians in South Korea, labor costs can be reduced, and if the company relocates to Indonesia, it has a greater chance of success because it already has a pool of trained labor.

Trends show that industry is continuing, with relocation, to take advantage of wage differentials, especially in labor- intensive manufacturing. South Korea's model of employing Indonesian workers in South Korea is an appropriate choice that has enabled this relocation to proceed smoothly.

As everyone knows, each country has its own management system appropriate to its society. The differences in the management systems between countries, especially those stemming from cultural differences, arise due to several factors. Some experts claim that the lack of abundant natural resources and a harsh natural environment have helped to shape South Korea's management system and these forces have also shaped Indonesia's management system in its own way. To deepen economic ties, understanding of the culture of the two different societies is crucial. In other words, to strengthen economic ties between South Korea and Indonesia, one extremely important factor is the development of mutual understanding of the two nations.

South Korea has proved its ability to overcome the 1998 economic crisis within a relatively short period. It looks as if Indonesia should take note of this success, or the knowledge and capacity for crisis management could be transferred from South Korea to Indonesia. In this way, economic links could be developed to promote strong foundations between the two nations.