Our industrial strategy

Our industrial strategy

The Center for Strategic Economic Studies at Victoria
University in Melbourne, Australia, recently released data about
the technology composition of Indonesian industrial exports. What
puzzles us is not the conclusive fact that Indonesia fails to
keep pace with other ASEAN countries in the race to develop
medium and high-tech exports, but rather the analysis which shows
that after the start of the massive deregulation program in 1985,
Indonesia's drive towards higher-technology exports lost its
momentum.

As our contributor, David Ray commented in his article in the
Aug. 26 issue of this newspaper. The article was based on the
research findings that the deregulation freed the market forces
to steer export-oriented industries more in the direction of
Indonesia's comparative advantage in low-tech, labor-intensive
manufacturing.

Throughout the 1970s, up to the early 1980s, the state-led
industrialization strategy, characterized by a comprehensive
import-substitution program and large government investments,
enabled Indonesia to develop a number of technology industries
which would have otherwise not been possible had a free market
strategy been employed.

The research thus concluded that technology development should
better be undertaken through selective strategic interventions
with a measure of protection from import competition rather than
through a free market mechanism, or functional interventions
which allow for competitive and open market competition.

The Indonesian government has been pursuing both approaches --
selective strategic interventions and functional interventions.
Although, according to the World Bank, the selective strategic
interventions in the development of such high-tech industries as
engineering, steel, shipbuilding and aerospace have been a big
failure, the functional intervention in such industries as
textiles have recorded remarkable successes.

The question, though, is which of the two policies is most
effective in bringing Indonesia's manufacturing industry on to a
higher level of technology in view of the keen competition posed
by lower labor-cost countries such as Vietnam, China, India,
Bangladesh and Pakistan. But to avoid misunderstanding it should
be noted that what we mean by a higher level of technology here
is not such high-tech industry as aerospace. However upbeat the
government is after the success of the recent maiden flight of
the N-250, the aircraft industry will likely remain an island of
advanced technology into the foreseeable future due to the weak
base of skilled manpower in the country and the inadequate
supporting industries.

What we are referring to are medium-tech industries, such as
machinery and machine tools, which the country urgently needs in
a bid to further develop production engineering. Such processes
as casting and machining -- learned by producing one item -- can
easily be applied to producing other capital goods, as proven by
the Texmaco group, which has expanded from the manufacturing of
modern textile machinery to the production of machine tools. Such
technological capability will facilitate gradual development of
product engineering to add higher value to industrial products.

We think such mechanical-engineering industries, at least
during their current early stage of development, require
selective strategic intervention, but not to the point of
creating non-tariff barriers to imports and neither to the extent
of providing subsidies. Selective intervention, for example,
could be in the form of preferences in government procurements,
or directives to state banks to seriously recommend local
machinery or plant equipment to their corporate borrowers. Local
machinery or machine tools could also be stipulated in the master
list of capital goods which have to be procured locally by new
investment projects.

The most important factor is that we should carefully select
the kinds of industries to be developed with selective
intervention and preferential treatment to local products, which
should be based on their technical reliability and price
competitiveness measured by an international benchmark.