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.