Regions should have own industrial development vision: UNIDO

Indonesia has just signed a US$10.5 million technical assistance program with the United Nations Industrial Development Organization (UNIDO) to develop the country's small and medium industries, encourage environmentally friendly industry and promote the reconstruction of tsunami-affected and post conflict areas. The Jakarta Post's Zakki P. Hakim talked to UNIDO's country representative in Indonesia, Masayoshi Matsushita, about the deal, which is called the Second Country Service Framework (CSF) for Indonesia, and the industrial problems facing the country. The following are excerpts from the interview:

Question: I understand that UNIDO granted a second CSF to Indonesia in departure from normal practice. Could you elaborate?

Answer: We initially had two different programs: an integrated program and the CSF.

Now, integrated programs tend to be given to smaller countries, like Laos or Vietnam, because overall industrial development has to be properly assessed by experts in UNIDO.

As Indonesia is so large, with 220 million people and over 17,000 islands, each region is at a different stage of development.

We can't formulate an integrated program. Thus, we have the CSF, where we are not responsible for overall industrial development in Indonesia, but we'll provide assistance during each of the different development stages at the region, province or even island level.

Part of the program is to formulate an industrial framework on a regional basis. How does this work?

We are working on the Eastern Indonesia development program and our focus is on the Industrial Development Vision for Sulawesi 2010.

We are working on agro-based industry as Sulawesi has great potential in the fishing, cacao, coconut and corn sectors.

We are utilizing "global value chain analysis", in which we analyze every value chain in an effort to bring Indonesian products to the international market.

We will come up with an industrial framework for Sulawesi first, then we can go to the national level in the future.

We hope to provide it by the end of this year to governors on the island.

Why these four sectors?

We adhere to what we call the "wild geese formation" development paradigm. You know that wild geese fly in a V- formation during migration. So, we select four leading industrial sectors.

If these sectors can develop and then become our leading sectors, other sectors will follow.

This was the Japanese paradigm of industrial development in the 1950s and 1960s. Japan chose iron, steel and heavy chemical industries as the leading sectors. By supporting these sectors, other sectors like metals, automotive, and electronics simply followed their lead.

In the case of Indonesia, perhaps agro-based industries could be one of the leading sectors. But if you look at Java, it could be the automotive, chemical, steel and iron, and heavy industry sectors.

The government had identified its priority industry sectors. How should it now nurture them?

When you talk about industrial policy formulation, people tend to think you are giving subsidies to the leading sectors. This is unfair.

Japan used the wild geese formation approach back in the 1950s, at which time industries were not as diversified as today. Nowadays, it is extremely difficult to choose which should be the leading sectors and receive special subsidies and assistance for development.

If we don't give subsidies, what should we give to the chosen sectors to boost their growth?

Competitiveness is one issue. Why is China so competitive? Because they absorb all the foreign direct investment and seek technology from foreign firms. With low labor costs, they can produce consistently low-cost but good quality goods.

Indonesia's case is the same. Indonesia has to develop technology domestically, and also promote FDI more so that local companies can enter into joint ventures with foreign firms and get high quality technology for products that can prevail on the international market.

How can we compete against unfair trade practices, such as trade distorting subsidies?

We see things differently. We see competitiveness coming from efficiency and technology development.

When we look at non-tariff barriers, for example, like administration, export and import procedures, it becomes too costly for Indonesian manufacturers to do trade in raw materials and capital goods, because all the bureaucratic procedures are high cost.

If we can get rid of this, and find a more efficient way of smoothen out the flow of products, competitiveness will increase dramatically.

What makes the sectors that have been chosen different from the rest?

Let's take fishing as one the leading sectors in Sulawesi. We have studied how Gorontalo fishermen catch yellow fin tuna, which are abundant in the Gulf of Tomini area, and the quality is very high.

But there are no international buyers touching this. The fishermen maintain a very traditional way of catching and processing the fish, and they are only for the domestic market. It is such a waste as the price is very low. Japanese buyers say that if the fish were caught in the modern way, they would buy them at much higher prices.

They need to be well-trained in how to catch fish the modern way in order to be far more efficient in every stage of the value chain. And process them with the necessary skills and technology in order that the fish can be sold on the international market.

We are working on every link in the value chains of the four selected sectors in Sulawesi.

If you can improve each stage of the value chain through a very high level of processing, you get greater added value and can bring the products to higher level domestic markets, and eventually the international market. This is called competitiveness.