RI left behind in hi-tech exports

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.