RI needs incentive environment

RI needs incentive environment

By David Ray

BANDUNG (JP): Investigating determinant of Indonesia's long
term economic growth is a difficult task. Short term issues cloud
the long-run horizon. Since Indonesia gained independence in the
late 1940s the country has undergone so many dramatic changes in
its economic and political circumstances that it is difficult to
isolate what has been the key determinant of long-run growth.

Throughout much of the 1950s and early 1960s, political
instability and poor economic management prevented the economic
from achieving a higher rate of development. From the mid-1960s
to the mid-1970s economic rehabilitation and the introduction of
a more liberalized policy environment generated a number of
short-run growth benefits. Beginning in the early 1970s and
extending until the crash of international oil prices in the mid-
1980s, the Indonesian economy was driven by the huge inflows of
oil money and the subsequent highly interventionist and
regulatory policy stand of the government. Since the mid-1980s
Indonesia has enjoyed the previously unexploited short run growth
benefits associated with the move by industry into low technology
labor intensive manufacturing -- the area where Indonesia is most
competitive according to proponents of the comparative advantage
trade theory.

But is this final stage representative of Indonesia's long-
run growth path? To answer this we need to consider what has been
the key determinants of long-run growth internationally.

Economists have struggled to come up with a realistic and
consistent theory on why some countries grow faster than others.
The one point where there is consensus is that technology is an
essential feature of modern long-run growth. It is no
coincidence, for example, that the dramatic improvement in global
economic conditions that has occurred over the past two centuries
has also been accompanied by equally dramatic technological
developments.

Thus it is ideas of knowledge about the way we make or do things
that generates economic value and therefore growth. Consider the
example of two computers, one built this year and the other ten
years ago. The raw materials required to produce both computers
are essentially the same. The big difference, however, is the
more sophisticated knowledge required for the production of the
newer computer.

So where does this analysis leave us in terms of Indonesia's
long-run growth path? The answer is simple. To generate higher
long-run growth, Indonesia need to move into more knowledge based
or value-added production. Low-technology, labor-intensive
manufacturing has given Indonesia a decade of impressive growth
but this will not continue. The recent downturn in many of
Indonesia's export prima donnas suggests that the next decade
will not be as simple as making use of an abundance of low-
skilled cheap labor.

The emergence of China and India -- who themselves have been
able to move into more knowledge based production -- as regional
competitors in low-technology and labor-intensive manufacturing,
as well as the development of a number of labor saving
technologies in the West, compels Indonesia to move up the
technology ladder. This means better and more innovative designs
and processes. More importantly, it means cheaper products so
that Indonesian goods such as shoes. garments, textiles, wood and
electronic products remain internationally competitive.

But Indonesia should not continue to produce just these types
of goods. Patriotic sentiment and indeed good economic sense
require that Indonesian industry diversify to new knowledge based
goods. The computer and electronics industries (beyond the
assembly stage) is the most apparent choice right now.

So the key question is how to improve the technology or
innovation capacity of Indonesian industry. Rather than
selectively developing just a few high-tech industries which end
up operating in a high income enclave with little or no linkages
to the local economy, a more effective policy approach is to
provide functional assistance to all industries.

Such functional assistance could include policies to improve
human resource levels since skillful, educated people are better
equipped to deal with modern technology. Similarly, government
research and development needs to be better linked and driven by
the private sector. Foreign investment needs to feel more welcome
here -- particularly technology intensive long term investment.
The right sort of arrangements must be established to facilitate
technological transfer like in Malaysia.

But most importantly, Indonesia needs to have the right
incentive environment that will foster private sector innovation.
This means ensuring a competitive domestic environment where
industries are not controlled by a few large firms or cartels,
but where firms compete with each other to produce better quality
and lower-price goods.

The writer is a researcher and doctoral candidate at the
Centre for Strategic Economic Studies in Melbourne, Australia.