Reform of industrial structure urged

MEDAN, North Sumatra (JP): Economists suggested here yesterday that deregulation measures are essential but not enough to improve the efficiency and, consequently, competitiveness of Indonesia's manufacturing industry.

Rizal Ramli told the second-day meeting of the 13th Congress of the Indonesian Economists Association that the industrial structure should also be reformed from an oligopolistic one to a structure that allows for more competition.

"Our manufacturing industry has been concentrated too heavily in the hands of a few groups, thereby allowing for monopolistic and oligopolistic practices," Rizal, a director of the Jakarta- based Econit research institute, pointed out.

Arief Ramelan Karseno, an economist from the Yogyakarta-based Gadjah Mada University, blamed the inefficiency of the industry partly on the extreme involvement of the government in the kinds of manufacturing operations that should be left to the private sector.

"The government's involvement in manufacturing, which should be more open to competition, has resulted in the virtual neglect of heavy industry where the government should play the leading role as the catalyst," Karseno noted.

"No wonder our industry remains dependent mainly on imported capital goods," Karseno noted.

Rizal compared Indonesia's manufacturing industries with those of other countries and showed that Indonesia lags far behind such countries as Thailand, Malaysia, South Korea and Taiwan.

Rizal's comparison of manufacturing industries used output, contribution to gross domestic product, the depth of the industrial structure, the value added per unit of output and industrial export per capita as the main indicators.

"The comparison shows that Indonesia lags far behind," he pointed out.

Indonesia's manufacturing industry, according to him, also performed poorly with regard to the ability to absorb surplus labor from the agricultural sector.

"This problem, I think, was caused by the high capital intensity of our manufacturing industry and the lack of economic linkages between the big and medium and small-scale industrial enterprises," he said.

He cited two disadvantages of the economic linkages between big companies and medium and small-scale enterprises.

The first is the inability of the industry to absorb a large number of the surplus labor from the agricultural sector because it is the medium and small-scale enterprises that are labor intensive.

The second negative impact is that the manufacturing industry has remained largely dependent on imported basic and intermediate materials.

Rizal blamed Indonesia's poor industrial performance on its slowness in reorienting its manufacturing operations from import substitution to export orientation.

"While such countries as South Korea, Thailand, Malaysia and Taiwan reoriented their industries to the export market from the mid-1970s, Indonesia started reorientation only in the mid- 1980s," he pointed out.

Moreover, according to Rizal, the process of Indonesia's decision-making in economic policies has often been on an ad hoc basis and is often restricted by vested interests or by what he called decision-making within bounded rationality.

He cited the high portion of invisible costs in the cost structure of manufacturing industries and the high concentration in the ownership of industries as other barriers to improve the efficiency of the manufacturing sector.

"According to my study, invisible costs such as illegal levies account for as high as 14 percent of the total cost," he added.

He said the high concentration of industrial ownership enables the existing industrial groups to erect barriers to entry, thereby leading to monopolistic and oligopolistic practices.

"This problem cannot be touched by tariff deregulation alone but should also be tackled through a reform of the ownership structure to allow for more competition," Rizal said. (vin)