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.