Mon, 17 Jan 2000

Indonesia's future: Competition and education

By Elwin Tobing

BOSTON (JP): In his book, The Wealth of Nations, published in 1776, Adam Smith, the founder of modern economics, made famous the idea of the invisible hand. Smith observed that in properly functioning commercial markets, businesses and business people serve society even if to do so is not a conscious intention. Smith's notable lines, "...every individual generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain... By pursuing his own interest he frequently promotes that of society."

Smith wrote this book two decades before the Industrial Revolution took place, before Alfred Morse invented the telegraph in 1838, and before the first electronic computer, ENIAC, was unveiled in 1946 at University of Pennsylvania, U.S. It was one century before Karl Marx's Capital. Smith lived during a time and in a society where business people were considered to be second class citizens.

With today's revolution in information technology, the undisputable triumph of capitalism, and the emergence of business people as important figures in society, the invisible hand theory no longer seems relevant. Businesses have been compelled to serve the public interest consciously out of a need to survive. The driving force is the relentless competition in the marketplace. Competition is proving to be a marvelously effective regulator of commerce.

Unrelenting competition today has forced businesses to maintain the highest levels of product quality and customer service. At the same time, competition compels producers to keep their prices low. Ultimately, businesses, if they want to survive, must strive to serve the interests of society.

Microsoft is a good example. Its success is due to its ability to upgrade the quality and simultaneously lower the prices of its products. The same strategy applies for many Internet companies. and have gained popularity through offering lower prices than that of their competitors.

Several factors are contributing to this new era of unrelenting competition which renders the invisible hand irrelevant. First is the demise of Marxism. Its failure has elevated capitalism to an uncontested position in the economic and business worlds. Almost anywhere in the world today, from Beijing to New York, the spirit of capitalism is thriving and driving everyone from the most privileged to the working class into the markets. The victory of capitalism is the triumph of the market.

Clearly, we are not only living in the Information Age but also the Marketing Age. All commerce is subsumed into marketing. Products, services and even people, increasingly succeed contingent on their marketing strategy. The need to market has become so urgent and the marketing so insistent that an individual consumer can not hide from increasingly sophisticated marketing campaigns. Advertisements are everywhere. In the U.S. for instance, the average consumer is subjected to approximately three thousand advertisements every day. Any business that does not keep up with consumer expectations of cost, quality and service will loose their market share and eventually their business as well.

The second factor contributing to the irrelevancy of the invisible hand theory is the drastic reduction in business start- up costs. The revolution in information and communication technology have reduced the cost of information and made it much cheaper to establish new businesses. According to the U.S. Commerce department, new business start-ups in the U.S. are approaching one million per year. This means that a growing pack of hungry new competitors are ready to capture market share, increasing the tension of competition.

In 1997, when Joseph Park and Yong Kang, two high school students in New York, were not satisfied with a company's online service, they set up their own online shopping company with the concept of same-day free one-hour delivery for all products. Today, the company has revenues of million dollars.

The growing Internet economy has created a new and intensely competitive environment for everything from retailing to securities marketing. In 1999, the Internet economy already amounted nearly to US$350 billion, according to figures released by the Center for Research in Electronic Commerce at the University of Texas.

It is estimated that the amount will jump to US$1.3 trillion in 2003, accounting for 9.4 percent of total business to business sales (Business Week, Oct. 4, 1999).

Another key factor is the entrepreneurial boom. In today's information and marketing age, admiration and appreciation seem to follow those who have had distinctive success in the business arena. This has promoted the status of business people in society. Steve Jobs, Jeff Bezos (founder of and Bill Gates are as famous as Bill Clinton, and they are role models for a young generation of people throughout the world. Entrepreneurial courses of study in the U.S. colleges have become as attractive as computer and information management courses.

So, what are the implications for our economic development? No one could argue that our consumer agency, aiming to protect and promote the rights of consumers, is still very inefficient. On a macro level, the economic and industrial policies conducted during the New Order regime tended to put consumers' rights secondary to that of producers.

Our national economy is still far from being customer- centered. Rather, it tends to be producer-centered. This has created inefficiencies in our economy as producers are not compelled to deliver products with the highest quality, cheapest prices and best customer service.

The primary agenda for our commercial policy should be to convert our business orientation from being producer-centered to being customer-centered. A customer-centered economy, as Adam Smith suggested, is beneficial to everybody: producers, suppliers, customers and stockholders.

This conversion can be achieved by enhancing fair and free competition in all segments of industry. It's time to end monopolistic practices across industries, from cement to agriculture products, which extensively developed during the New Order regime. This is especially true for the communications industry. The Telkom and Indosat monopolies have made the cost of information and communication very expensive for Indonesians, creating and spreading inefficiencies throughout all industries.

To catalyze the conversion in our society, another essential factor is the promotion of an entrepreneurial culture within our society. Entrepreneurial skills have to be an integral part of the educational curriculum from junior high school to the college level. Unemployment rates for the high school educated labor force are still very high. Joseph Park and Yong Kang are only 19 years old, but they have already created more than 300 jobs.

In today's knowledge-based economy, creativity, which is inspired by knowledge, is much more important to the wealth of nations than either capital or labor. The imperative of economic competition is clear: the future of our economy must be based on the entrepreneurial skills and creativity of our young generation. This will only be achieved through a significant improvement in the quality of our education system. Spurring our economic performance is impossible without education.

As Peter Drucker, a guru of modern management, remarked, "the greatest change will be in the form and content of knowledge, in its meaning and its responsibility, and in what it means to be an educated person."

The writer is an economist who lives in Boston, the United States.