RI left behind in hi-tech exports

By David Ray

BANDUNG (JP): The maiden flight of the N-250 airplane here on Aug. 10 was indicative of Indonesia's rapid and successful development of an aerospace industry. But despite the high- technology nature of this kind of industry, Indonesia remains firmly behind its regional competitors in the race to develop medium- and high-tech exports.

Evidence of Indonesia's comparative technological backwardness can be found using an index of technology composition of exports as developed by researchers at the Center for Strategic Economic Studies in Melbourne, Australia. The researchers have been able to construct an index of technology composition for manufactured exports which shows that over the past two decades Indonesia has failed to keep pace with regional competitors in the race to develop medium- and high-tech exports.

Their approach is to divide a country's exports into 22 main industry groups according to their degree of knowledge intensity as measured by the average level of research and development (R&D) expenditure per unit of production for those industry groups in the industrialized countries.

The highest R&D-production ratios are found in industries such as aerospace (20.0 percent), computers (12.4 percent) and electronics (10.8 percent), whilst the lowest are in the wood and furniture (0.1 percent), paper and printing (0.2 percent), and textiles and clothing (0.2 percent) industries.

Export values are then weighted using these R&D ratios, summed and re-based, to produce an index of technology composition whereby an index value greater than one indicates that a country's exports are concentrated in industries with a high R&D intensity whilst a value less than one indicates a concentration in industries with low R&D intensities.

Using index values for both 1970 and 1993 (see Table) the center is able to provide an indication of technology composition for Asian exports over the past two-and-a-half decades. Clearly evident in the above figures is the dramatic move into more knowledge/R&D-based export production by many Asian economies, but not by Indonesia. The most rapid improvers in this regard are Singapore and Malaysia, both of whose technology composition index value for 1993 is in excess of 1.7.

This compares extremely well with the same 1993 index values from a number of advanced western economies such as the EEC7 (0.96), USA (1.52), Canada (0.86), Australia (0.57) and New Zealand (0.21).

Unlike many of her immediate neighbors, Indonesia has yet to make any significant moves into more knowledge-intensive export production. Even the Philippines, the least-successful developing economy in the Asian group, and China, Indonesia's most visible competitor in the production and export of low-technology, labor- intensive manufacturing, have been able to outperform Indonesia in the drive toward higher-technology exports.

Although starting from a lower base, Indonesia was able to keep pace with her Asian neighbors throughout the 1970s and early 1980s. However, beginning in 1982/1983, Indonesia's drive toward higher-technology exports lost momentum to such an extent that, by the early 1990s, Indonesia's index of technology composition is dramatically lower than the Asian average and, furthermore, is yet to regain the high attained a decade before.

To explain this dramatic fall in the index of technology composition for Indonesia's manufactured exports we need to consider the type of industrialization strategies that Indonesia has pursued over the past few decades.

Throughout much of the 1970s and early 1980s Indonesia pursued a state-led industrialization strategy characterized by a comprehensive import-substitution program and large-scale government investment - both of which were made possible to a large degree by the windfall in state revenue associated with the oil boom.

Given the high degree of intervention by the government in the economy, market forces were unable to be the sole determinant of prices or investment flows. Hence, Indonesia was able to develop a number of higher technology industries that would have otherwise not been possible had a free market or deregulation strategy been employed.

However, all this changed in the early-to-mid 1980s when oil prices collapsed, forcing the Indonesian government to deregulate the economy as a means of diversifying the export base. As a consequence, the type of industrialization strategy employed moved rapidly from one of import substitution to one of export promotion.

Given Indonesia's abundant raw materials and inexpensive, yet low-skilled labor it was not surprising that the successful export industries of the 1980s were those that were low-tech and labor-intensive.

Hence we find that during the state-led industrialization period of the 1970s and early 1980s Indonesia was able to progressively increase its index of export technology composition, reaching a high in 1982, but that this soon decreased as the deregulation program initiated in the early-mid 1980s allowed market forces to steer the industrial export sector more in the direction of Indonesia's comparative advantage in low-tech, labor-intensive manufacturing.

Given the likelihood of increased regional competition in the production and export of low-tech labor intensive manufactures from countries such as China, Vietnam and Bangladesh, the empirical work associated with the above index provides strong analytical backing for assertions continually made by Indonesian politicians and economists that Indonesian industry must intensify its efforts to "move up the technological ladder" if it is to remain internationally competitive in the future.

The writer is a researcher and doctoral candidate at the Center for Strategic Economic Studies, Victoria University. He is currently in Bandung carrying out research towards his PhD.