Three decades of Indonesia's economic growth (4)

This is the fourth of four articles on Indonesia's economic development by Yoshihara Kunio, an economics professor at Kyoto University.

KYOTO, Japan (JP): The high-growth economic design described in part three would have been a daydream a decade ago, but probably not any more. As to egalitarianism, because of disillusionment with a welfare state, people in the industrial countries are re-assessing the importance of self-responsibility. In general, conservatism, which sees more good in hierarchy and less in egalitarianism, is replacing liberalism as the dominant ideology. This is bound to affect the intellectual climate of Indonesia.

As to the other pillar of my design -- no government intervention unless it promotes economic growth through the restructuring of exports -- it has a much better chance of getting implemented because of Indonesia's commitment to the AFTA (ASEAN Free Trade Area) and APEC (Asia-Pacific Economic Cooperation).

When AFTA materializes, the ASEAN region becomes virtual free trade zone. It is not quite like the European Union, since a member country can still impose an up-to-5-percent tariff on imports from other member countries, but it is the maximum rate of protection from imports.

This means that Indonesian textile companies, for example, cannot compete with Thai companies if their cost of production is higher than the cost of production of Thai companies, plus a 5 percent tariff plus the cost of transportation. As a rule of thumb, one can say that Indonesian companies will be in big trouble if their cost of production is more than ten percent higher than the Thai cost.

The government will exhort Indonesian companies to become more efficient, but it has to create a favorable business environment. For example, if the Indonesian textile companies have to buy synthetic fibers from Indonesian fiber producers and their prices are higher than in Thailand, they are not facing a level playing field. So, the Indonesian companies have to be given the freedom to import if domestic goods are too expensive.

The AFTA will enhance trade with industrial countries as well. If Thai textile companies can import machinery and raw materials from industrial countries with lower tariffs than Indonesian companies, the former are in advantage. So the Indonesian government has to cut tariffs to the Thai levels.

Liberalization will also occur in finance. In March 1993, Thailand started offshore banking called Bangkok International Banking Facilities. Thai exporters can freely borrow money at low interest rates from foreign offshore banks in the country and pay back with export proceeds. If Indonesian textile companies have to borrow at higher rates, they face higher capital costs and cannot compete with Thai imports. So, pressure will be put on the Indonesian government to liberalize foreign capital flow as well as to allow more competition in commercial banking.

The first step for Indonesia is the implementation of the AFTA, but it should also start thinking seriously about how to implement last year's Bogor Declaration, which committed APEC members to free trade and investment.

The Bogor Declaration may be more difficult for Indonesia and other ASEAN countries to implement than AFTA. In the case of the latter, there is no large difference in industrial technology among the member countries, so that, although there are problems in its implementation, they seem surmountable. But in the case of competition with industrial countries, they fear the import substitution industries they have been nurturing as the next leading sectors may be wiped out.

But Indonesia should push the implementation of the Bogor Declaration for the following three major reasons: First, there are 25 years until its full implementation (2020 for Indonesia and other developing countries, but 2010 for the industrial countries). The liberalization of some goods may have to start earlier, but this is negotiable. In the meantime, the industries which are not viable should be phased out, and assistance be concentrated on those which have a chance to compete internationally. Don't forget that many of the protected industries are imposing high costs on the economy.

Second, the APEC free trade and investment zone will greatly contribute to sustaining high growth. Although Indonesia may lose some industries, industrial products are very diverse, and new products are emerging every year with new technologies. Indonesian companies will establish niches in a number of such goods as the country's income goes up and the work force becomes better educated. Taking advantage of larger markets and employing better-trained personnel, they will become the vanguard of the economy.

Third, by forming a common front with other ASEAN countries, Indonesia can ask for a larger flow of development assistance from the industrial countries. They have already promised development assistance. What needs to be done is to specify what type of aid is most needed. Indonesia, in consultation with other ASEAN countries, should initiate a large-scale technological development plan covering the next 25 years and ask the industrial countries to finance a large part of it as a condition for the implementation of the Bogor Declaration.

Indonesia may want to ask Japan to coordinate the industrial countries for technological aid since it may be most susceptible to the demand. While American Overseas Development Aid (ODA) has been declining, Japan's ODA has been increasing and is now the largest in the world. Japan is also interested in Southeast Asia and wants to play a useful role in the region's development. And it has a number of technologies no longer needed in the country but still useful in Southeast Asia.

The technological aid I have in mind is not an ad hoc type which has been given so far. It should be in accordance with the long-term technology development plan I mentioned earlier, and should be on a large scale comparable to the Marshall Plan so that it has galvanizing effects on the technology situation in the region.

For high growth, Indonesia has to undergo industrial transformation. This is not simply an increasing set of machines. Behind it must exist a large pool of scientists, engineers, and technicians who can, among other things, produce advanced machines and their parts. They are the people most needed for the country's industrial transformation, not machine operators.

APEC is not simply a matter of larger markets. It also gives a chance to upgrade the technological base, which is indispensable for transforming Indonesia into an industrial country.

Dr. Yoshihara Kunio is Professor of Economic Development at the Center for Southeast Asian Studies, Kyoto University. He has lectured at various universities in the United States and Asia and has written numerous books including The Rise of Ersatz Capitalism in Southeast Asia.