TECHNOLOGY AND INDONESIAS INDUSTRIAL COMPETITIVENESS

by THEE Kian Wie P2E-LIPI, Jakarta & ADBI, Tokyo

Industrial development during the Soeharto era (1966 1998)

Late Sukarno era (1959-66): hyperinflation & economic stagnation; Soeharto era (1966-98): Sustained rapid economic growth averaging 7%. 1993: Indonesia: one of the eight high-performing Asian economies (HPAEs) & one of the three second tier newly-industrialising economies (NIEs). Manufacturing: double digit growth; 1991: manufacturing contributed more to GDP than agriculture; 1996: Indonesias manufacturing sector seventh-largest (MVA) after PRC, Brazil, Republic of Korea, Argentina, Mexico and India.

Phases in the policies towards manufacturing

Late 1960s-early 1970s: Liberalisation trade and foreign investment regimes; 1970s: Interventionist policies; IS policies extended to second-stage IS due to windfall oil revenues (establishment of basic, state-owned industries (e.g. steel industry, aluminium smelter); Mid-1980s 1996: Export-promotion policies after end oil boom era (1982) through: deregulation policies to improve the investment climate for private, including foreign, investors; trade reforms to reduce anti-export bias of trade regime (duty exemption and drawback scheme);

Surge and slowdown of manufactured exports

1985-88: Average annual growth of manufacturing : 13% manufactured exports: 27%; 1989-92: Manufacturing growth: 22%; manufactured exports 27%; 1993-97: Manufacturing growth: 12 %; Manufactured exports: 7%. Concern among policy-makers: Indonesia losing comparative advantage in resource- and low skill labour-intensive exports; HIID and ADB reports:: Indonesia behind international competitors in laying foundation for developing skill- and capital-intensive exports.

Response of Indonesian government to slowdown in manufactured export growth Dual track industrialisation strategy: Broad spectrum policy of outward-looking industrialisation (Department of Industry and Trade); Promoting 10 strategic industries (Dr. Habibie), including state-owned, hi-tech aircraft assembling enterprise; Early 1990s up to Asian economic crisis: debates between economic technocrats (concerned about costly & and not economically viable strategic industries) and the technologs (mostly engineers) led by Dr. Habibie.

Industrial development after the Asian economic crisis

Sharp slowdown in manufacturing growth: 12% in 1996; 1998: 11.4% contraction in 1998, 6.7% in 2004 and 6.4% during Q1 of 2005. Immediate prospects for rapid manufacturing growth: still cloudy because: unfavourable business environment (inflexible labour market); excesses of regional autonomy (various new local taxes and levies by regional governments); discretionary tax and customs assessments by corrupt tax and customs officials, crumbling physical infrastructure.

Indonesias low industrial competitiveness

Some indicators: Low percentage of high technology, manufactured exports compared to Asian competitors; Findings of recent case studies; Sanjaya Lalls assessment: Low level of Indonesias industrial technological capabilities (ITCs), hampering long-term industrial growth and upgrading, due to: backward and shallow technological base; underdeveloped capital goods sector, weak and narrow domestic capabilities to absorb and improve upon complex imported technologies, Little technological effort (during Soeharto era concentrated and distorted by focus on strategic (hi-tech) industries.

Enhancing Indonesias industrial competitiveness through industrial technological development (ITD)

Basic and enabling conditions affecting Indonesias ITD: Basic conditions: Sound macroeconomic policies Pro-competition policies Upgrading quality of human resources. Enabling conditions: Improving firms access to foreign technologies; Improve availability adequate finance to firms investing in ITD; Improve effectiveness technology support services (metrology, standardisation, testing and quality assurance, MSTQ) services.

Other possible measures to promote Indonesias ITD Tax credits for R & D expenditures; Coordination of enterprises in clusters; Encouragement of joint research initiatives; Public funding of strategic enterprises.

Conclusions Past industrial policies in Indonesia not effective in nurturing internationally competitive manufacturing industries; Perhaps only realistic choice for Indonesia: attract more FDI, but this effort hampered by poor investment climate; With higher economic growth: Not only reliance on FDI, but also intensifying technological efforts to develop its ITCs by: improving incentive system for firms to invest in ITCs; steps to enable firms to improve supply-side capabilities.