Utterly uncompetitive

Utterly uncompetitive

With extensive practices of bad governance, poor-quality
institutions and highly inimical business environments, Indonesia
predictably ranked very low in both indices of the Global
Competitiveness Report 2003 which was prepared and issued by the
Geneva-based World Economic Forum last Thursday.

Even though Indonesia scored significant improvement in the
category of macroeconomic environment, it miserably declined to
72nd place, from 66th rank, in the growth competitiveness index,
but rose slightly to 58th place from 64th in the business
competitiveness index.

However, Indonesia's overall rankings should be set against
the new perspective in that the number of countries surveyed for
the 2003 report increased to 102 from 80 last year. But even
among the larger number of countries, Indonesia's overall
performance remained miserably poor and was in fact, the worst
among the six ASEAN countries covered by the survey.

Indonesia, according to the report, made the 5th biggest
improvement in its macroeconomic environment score, marked mainly
by a dramatic decrease in the area of government wasteful
spending.

However, efficient government expenditure and the ratio of the
public sector's expenditure to gross domestic product is only one
of the many factors assessed in the area of macroeconomic
environment, which itself is only one of three main components
(pillars) analyzed in drawing the growth competitiveness index.

Indonesia performed very poorly in the other two main
components -- the quality of public institution and the usage of
technology. The quality of public institution is quite vital for
economic competitiveness because businesses have to deal with
institution either for law enforcement, which is crucial for the
running of a market economy, licensing and other regulatory
requirements.

Both indices of the report which measure the levels of growth
and business competitiveness are actually interrelated in that a
country's scores or ranks in both indices are never wide apart.
Hence, Indonesia ranked very low both in the growth and business
competitiveness indices.

The inter-relationships are simply rational because, as the
report argues, even though stable political, legal and social
institutions and sound macroeconomic policies create the
potential for improving national prosperity, wealth is actually
created at the microeconomic level, in the ability of companies
to efficiently create valuable goods and services.

Along the line of this thought is that macroeconomic policies
that are conducive for investment will not lead into higher
productivity if microeconomic policies do not encourage the right
kind of investment, do not stimulate the creation of company
skills and the establishment of supporting industries and good
corporate governance practices.

The three pillars of the growth competitiveness --
macroeconomic environment, public institution and usage of
technology with their respective myriads of subcomponents --
greatly influence the two main components that measure the level
of business competitiveness: The sophistication of company
operations and strategy and the quality of national business
environment.

The competitiveness -- meaning productivity -- of a country is
ultimately determined by the productivity of its business units.
An economy can never be competitive if its business units are not
highly productive, but the productivity of firms is inter-wined
with the quality of the national business environment.

As Indonesia's overall business environment is highly inimical
to productivity, the level of its business competitiveness has
been very low even though its comparative advantages -- natural-
resource endowments and large pool of low-cost labor -- are very
big.

The report rightly suggests that companies must shift from
competing on comparative advantages to competing on competitive
advantages arising from superior products and processes, if
successful economic development is to occur.

The Global Competitiveness Report once again reaffirms the
great importance of microeconomic reform. This message should be
a reminder to the Indonesian government to push ahead with the
long list of structural reform stipulated in the White Paper on
the new reform agenda to replace the International Monetary Fund
program later this year.

Without these structural reform growth will be debilitated as
the economy will suffer double blows from falling exports (lower
external demand) and depressed demand from the domestic market
caused by high unemployment and stagnant wages.