Three decades of Indonesia's economic growth (4)

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.