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.