Indonesia losing competitiveness: ADB

Indonesia losing competitiveness: ADB

MANILA (AFP): The Asian Development Bank said yesterday the Indonesian economy had performed well in 1996, but warned the country was losing its competitiveness due to declining productivity.

"The Indonesian economy continued to perform well in 1996," ADB said.

The bank said in its latest annual Development Outlook report Indonesia's GDP growth remained robust, although it slowed to 7.8 percent from 8.2 percent in 1995.

ADB said inflation was also checked through a combination of a relatively tight monetary policy, a conservative budget, and a more flexible exchange rate policy.

But the report noted that Indonesia's competitiveness was declining.

"Continued increases in minimum wages, not matched by productivity increases, appear to have harmed Indonesia's competitiveness, especially in labor-intensive industries such as textiles, garments and footwear," the bank said.

"This seems to be part of the reason for these products' lackluster export performance," it said, adding that average minimum wages doubled in real terms between 1990 and 1995.

"Minimum wages were raised again in 1996 at a rate higher than inflation," ADB said.

The bank said there were some risks that Indonesia's labor- intensive industries might be losing their competitiveness in international markets.

It said between 1993 and 1996, the growth of exports (excluding oil and gas) fell below the targets set out in the sixth, five-year development plan.

ADB said labor productivity kept up with large increases in minimum wages until 1993.

"But since then available data suggested productivity had fallen behind, resulting in higher average labor costs and an erosion of competitiveness in labor-intensive manufacturing."

ADB recommended Indonesia move into manufacturing higher value-added products, particularly in clothing and textiles. "To maintain its growth momentum, Indonesia will have to continue with policies to improve its competitiveness in international markets," ADB said.

It suggested further reforms should include deregulation and restructuring to increase competition in internal markets, encourage continued inflows of capital and improve productivity.

Asia

The report expected Asia's economic growth to stabilize at the 1996 level of 7.4 percent over the next two years as the region innovates to compensate for a sharp drop in export growth.

The slowdown was due to slumping electronics exports amid excess capacity, economies adopting tight fiscal and monetary policies to prevent overheating and a 53-percent appreciation of the U.S dollar against the yen, the bank added.

"In some respects, the slowdown in 1996 should not come as a surprise, as it was over-optimistic to expect that the extraordinary export growth of 1994 and 1995 could be sustained indefinitely," the report said.

"As economies catch up, then an indigenous capacity to innovate become more important. The critical issue facing a number of Asian economies is whether they can create the capacity for technical innovation as it becomes necessary."

Newly industrializing economies (NIEs) -- Hong Kong, South Korea, Singapore and Taiwan -- are projected to grow 6.3 percent in 1997 and 6.6 percent in 1998.

Exports, which fell to 6.3 percent in 1996 from 7.5 percent in 1995 because of weak global demand in semiconductors and computer peripherals, are expected to revive as these economies restructure and move into higher technology production, ADB said.

Southeast Asia's growth rate is forecast at 7.3 percent in 1997 and 7.5 percent in 1998 as the global trading environment improves. Real growth dropped to 7.4 percent in 1996 from 8.2 percent in 1995.