Sumitro's advantage

Sumitro's advantage

After having been enlightened by senior economist and former
economics minister Widjojo Nitisastro's speech about conscience,
morality and common sense at the 45th anniversary of the
University of Indonesia's Djakarta School of Economics last
Monday, we were excited upon learning that Sumitro
Djojohadikusumo would be the main speaker at the reunion of that
school's alumni two days later. After all, due to his
personality, integrity and reputation as an intellectual, Sumitro
has the advantage of being able to speak his mind openly without
subtleties and euphemisms.

True to his form, Sumitro did shoot directly from the hip.
After he made a rambling comment on Indonesia's low level of
competitiveness, the gross inefficiency of the economy and the
heavy dependence burden faced by productive workers, he plunged
head on to discard as erroneous the views of State Minister for
Research and Technology B.J. Habibie on the concept and role of
competitive advantage in relation to comparative advantage.

Sumitro pointed out that Habibie's suggestion that emphasis be
put on the development of competitive advantage to the exclusion
of comparative advantage, which is based on cheap labor, contains
two basic errors -- error of fact and error of logic.

He said Habibie committed an error of fact by suggesting that
comparative advantage is entirely based on cheap labor. Sumitro
is convinced the pattern of comparative advantage depends on
interaction among other factors, such as resource endowment and
technology. In Sumitro's view, Habibie's concept also contains an
error of logic because the promotion of competitive advantage
should not be done a priori to the exclusion of economic
activities which are based on comparative advantage.

We see this difference of views as a debate between an
economist who, equipped with well-tested empirical evidence,
prefers a gradual progression from the prevailing condition
towards competitive advantage, and a technology czar who wants to
leapfrog to high-tech industries, such as the aircraft sector, to
generate as much value added as possible.

We reckon that what Sumitro means by prevailing condition is
the blunt reality that Indonesia is still extremely short of the
skilled manpower, manufacturing technology, financial and
marketing capability needed to enter high-tech industry. If we
insist on leapfrogging to high-tech industry now, any such
operations will be isolated from the rest of the economy. Since
such industry will operate as if on an island separate from the
mainstream of the economy it will not have significant multiplier
effects on other sectors of that economy.

Sumitro apparently wanted to point out that comparative
advantage and competitive advantage should be developed
simultaneously in a complementary manner on the basis of the
prevailing conditions. Hence, according to his school of thought,
Indonesia, with a per capita income of less than US$1,000, should
first increase its capabilities in mid-tech industry, such as the
manufacture of processing machinery, heavy equipment and machine
tools, before embarking on the production of high-tech goods. Put
another way, the progression towards higher value added products
should be done in a gradual manner so that the new industries
developed are linked with and supported by existing industries,
domestic human and natural resources, research and development
capacity and services.

Sumitro stopped short of citing the development of the state-
owned IPTN aircraft industry in Bandung as a vivid example to
emphasize his point. However, some people are of the opinion that
the aerospace company, despite the successful maiden flight of
the first prototype of its N-250 propeller passenger aircraft
last month, will most likely have to continue to operate in
isolation from most other domestic economic activities.

Many may wonder what the purpose of Sumitro's point of
argument is now that the government has already decided to
further expand IPTN's development of aircraft to include a
jetliner with a start-up investment of US$2.5 billion.

Nonetheless, we think that Sumitro's comments can still serve
as a warning against further inefficiency or misallocation of
resources. Such a warning is timely because the government is
considering raising the annual economic growth target from 6.2
percent to 7.1 percent. Misunderstanding about the concept of
comparative advantage in relation to competitive advantage might
result in the drawing up of an erroneous scale of development
priorities geared toward achieving the higher growth target.