Highlights On Indonesia's Competitiveness - KK (11 Feb 08) - ALL

ASIA COMPETITIVENESS
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Ng Kwan Kee
Research Fellow
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Definitions of competitiveness
Definitions linked to outcome of prosperity and sustainable
growth
 Competitiveness [should] be understood as the ability of

companies, industries, regions, nations and supranational
regions to generate, while being and remaining exposed to
international competition, relatively high factor income and
factor employment levels on a sustainable basis (OECD, 1994)
 Michael Porter believes that competitiveness is the
underpinning of prosperity, based on productive potential of a
nation’s economy, which in turn is ultimately set by the
productivity of its companies determined by:
o sophistication of company operations and strategy and
o quality of microeconomic business environment (Porter, Ketels, &
Delgado, 2006)
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Framework of competitiveness
Sanjaya Lall’s Triangle of Competitiveness
Entrepreneurial
skills
INCENTIVE FACTOR MARKETS

MARKETS
ENTERPRISE
COMPETITIVENESS
Macro Trade Industri Skills Technolo Supplier

polici regim al gy clusters
es e regime
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MARKETS
Education & Technology Finance

training support
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Michael Porter’s Diamond Framework of Competitiveness
Source: (Porter M. ,
2006)
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The Resource, Capabilities and Markets (RCM) and Institutions (I) Framework of Competitiveness
RESOURCES, CAPABILITIES AND

MARKETS INSTITUTIONS
(The ingredients of wealth (The motivation for and regulation of
creation) wealth creating activities)
RESOURCE • Natural resources e.g. land,
A.FORMS B. AREAS OF INSTITUTIONAL INFLUENCE
S untrained human capital
• Created assets, e.g. (IN COMMERCIAL DOMAIN)
technological capacity, Formal institutions • Economic adjustment and stabilization
machines, buildings • Constitutions, treaties, laws, • Intellectual property protection
regulations: provision for learning, • Strengthening economic
CAPABILITI • Intangible assets, skills, upgrading cognition, knowledge, motivation/entrepreneurship
ES educated/trained labour, etc. • Rule setting and societal guidance (e.g.
accumulated experience
Informal institutions reducing ‘bads’ e.g. crime, drugs, etc.)
and wisdom
• • Tradition, cultural mores, trust, • Promotion of entrepreneurship and
Organizational capacity and
governance goodwill, reputation competitive market structure
• Vision/judgement in Enforcement mechanisms • Adequate and effective financial
strategic decision taking • Less formal - self regulation, fear, institutions
• Ability to frame and • Education and training upgrading
retaliation, blackballing
execute appropriate • Security of people and physical assets
policies • More formal - Incentives/penalties,
(fines, enforced transparency, • Innovatory development
MARKETS • Information/knowledge • Incentives/regulation of foreign direct
about/availability of both cancellation of contracts,
imprisonment, etc. investment
domestic and foreign
• Social equity and access to opportunity
markets; both product and
factor markets
• Ability to tap into, exploit
and coordinate markets; Source: summarised by John H Dunning and Feng Zhang in a
and to understand and
cater for specific e.g. draft and not-
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localised needs ready-to-be-quoted paper
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Hämäläinen’s Systemic Framework of Economic Competitiveness and Growth
GOVERNMEN
T ROLE
INSTITUTIONAL FRAMEWORK
Culture-dependent behavioural
norms
Laws and regulations
RESOURCES TECHNOLOGIES ORGANISATIONAL PRODUCT MKT

Natural/Basic Innovation and EFFICIENCY Sophistication
vs diffusion Allocative, of demand &
Created/Advan technical, quality of
ced coordination & supply
dynamic
Feedback
EXTERNAL information,
BUSINESS financial
ACTIVITIES resources and
incentives
Source: (Hämäläinen, 2003)

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Conceptual blocks of competitiveness ASIA COMPETITIVENESS
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indicators
Competitiveness
Performance
National level output Sectoral level output

indicators indicators
• Real GDP per capita • Real GDP
• Real GDP • Value added
• Labour productivity • Persons employed
• World export market share • Labour productivity
• Share of country GDP in • World export market share
world GDP
• GCR ranking
• BCI ranking
• WCY ranking
• Index of Economic Freedom
• Economic Freedom of the
World Chain-Linked
Summary Index
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indicators
Competitiveness
Determinants
Human Capital Physical Soft Infrastructure Institutional
(National level Infrastructure (National level Environment
• input indicators)
Human Development
(National level input indicators) (National level
Index input indicators) input indicators)
• Technological • Scientific • World Bank Ease of Doing
• Total population infrastructure infrastructure Business Indicators
• Total labour force, indicators indicators • World Bank Worldwide
participation rate, • Transport/logistic • Legal infrastructure Governance Indicators
employed and network and indicators • Corruption Perceptions Index
unemployed infrastructure • Finance by Transparency International
• Students studying indicators infrastructure • Corruption perception survey
abroad • Access to water, indicators by PERC
• International Innovation
power, land Environment (National • World Bank Investment
students level input indicators) Climate Survey
• Education • Country credit rating by
Business • Scientific infrastructure indicators such
infrastructure Institutional Investor
Environment as:
Magazine ranking
(National level • Total R&D expenditure
• Government efficiency
input indicators) • Total R&D expenditure as % of
• Inflation indicators by (National
Environment WCY
GDP
• Components from • Business R&D expenditure level input indicators)
BCI • Business R&D expenditure as %
• Components from of GDP • Share of world total greenhouse
WCY • Total R&D personnel nationwide gas emission
• World Bank • Scientific articles published • Carbon dioxide emissions per
Investment Climate • Number of patents granted to capita
Surveys residents • Energy consumption per capita
• Business efficiency • Number of patents secured • Energy efficiency – GDP per unit
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of energy used
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indicators
Competitiveness
Determinants
Trade (National Investment (National Manufacturing
level input/outcome level input/output Industry (Industry
indicators) indicators) level input/outcome
• Global ranking in inward FDI flow & indicators)
• Global ranking in stock
world trade • Share of global inward FDI flow & stock • Gross fixed capital formation
• Share of world trade • Inward FDI flow & stock in value • Number of employees
• Total trade in value • Inward FDI stock as % of GDP • Number of establishments
• Trade to GDP ratio • Inward FDI flows as % of Gross Fixed • Industry output
• Total trade annual Capital Formation • Value added
growth • Investment risk – Euromoney country • Wages and salaries of
• Export and import credit-worthiness scale employees
growth, average • World Bank Investment Climate • Top industry sector by share
annual Surveys within industry based on
• Global ranking as technology classification
exporter • Value added as % of GDP by
Trade (Industry Investment technology classification
level input/outcome (Industry level • Value added per employee by
indicators) input/outcome technology classification
indicators) • Share of total employment by
• Export portfolio by • Inward FDI flow & technology classification and
cluster stock by sector by key sectors
• Goods export share investing country • Employment structure by
to leading trading sector
partners
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Outcome measures of national ASIA COMPETITIVENESS
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competitiveness
Competitiveness Performance - Standard of Living
 In terms of GDP per capita growth, above ASEAN-4

average before 1997, worst hit during the Asian
Financial Crisis, on par with ASEAN-4 average from
1998-2006.
 In all periods, behind Asian NIEs average, behind
Vietnam, China and India
 In terms of level of GDP per capita, behind ASEAN-
4 average (lowest among ASEAN-4), Asian NIEs,
above CLMV average for all periods.
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competitiveness
Source: International Monetary Fund, World Economic Outlook Database, April 2007 13
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competitiveness
Growth of GDP Per Capita, PPP adjusted
(compound annual growth rate, %)
1980-1990 1990-1997 1997-1998 1998-2006
China 12.2 12.8 8.0 11.0

Japan 7.7 3.6 (0.9) 3.8
India 7.8 5.9 5.1 7.1
Asian NIEs 11.3 8.2 (2.6) 6.8
Hong Kong 9.9 5.8 (5.4) 7.0
South Korea 12.0 8.6 (6.5) 7.6
Taiwan 11.0 8.4 4.8 5.7
Singapore 9.4 7.6 (3.6) 6.3
ASEAN-4 7.2 6.9 (9.9) 5.7
Indonesia 7.8 7.6 (13.5) 5.7
Malaysia 7.5 8.9 (8.5) 5.5
Philippines 3.4 3.2 (1.7) 4.7
Thailand 10.3 8.0 (10.6) 6.3
CLMV 7.1 7.8 4.3 9.0
Vietnam 8.2 8.9 5.3 8.1
Cambodia 9.0 3.8 3.6 9.5
Lao People's Democratic 7.2 6.3 2.7 6.4
Republic
Myanmar 3.5 6.3 3.0 12.3
Note: Cambodia's growth rate for the category 1980-1990 is from 1986-1990
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competitiveness
GDP Per Capita, PPP adjusted
(current international dollar)
1980 1990 1998 2000 2006
China 418 1,318 3,302 3,913 7,598
Japan 9,060 19,046 24,226 25,695 32,647
India 648 1,375 2,159 2,392 3,737
Asian NIEs 3,275 9,525 16,099 19,027 27,304
Hong Kong 6,170 15,834 22,247 25,864 38,127
South Korea 3,674 10,462 19,336 22,067 30,084
Taiwan 2,588 8,022 13,346 16,179 23,926
Singapore 5,104 12,485 20,167 24,066 32,867
ASEAN-4 1,295 2,592 3,734 4,139 5,814
Indonesia 909 1,922 2,776 3,045 4,323
Malaysia 2,265 4,657 7,728 8,738 11,858
Philippines 2,139 2,999 3,673 3,997 5,314
Thailand 1,362 3,623 5,561 6,182 9,084
CLMV 413 819 1,443 1,674 2,886
Vietnam 430 942 1,807 2,037 3,367
Cambodia n/a 1,146 1,537 1,867 3,170
Lao People's Democratic Republic 446 889 1,398 1,570 2,304
Myanmar 384 543 855 1,074 2,161
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competitiveness
Competitiveness Performance - Economic Performance
 Real GDP grew faster than ASEAN-4 average before

Asian Financial Crisis but lagged behind after that
 Lagged behind China and Vietnam for all periods
 Grew faster than India only in 1990-1997

 Indonesia has the largest share among the ASEAN-4
in terms of Share of World GDP (PPP terms)
 Greater than CLMV in total, in fact doubled CLMV
total for 2006
 However, share quite stagnant since 1990
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competitiveness
Real GDP Growth
(compound annual growth rate, %)
1980-1990 1990-1997 1997-1998 1998-2006
China 9.2 11.5 7.8 9.3

Japan 3.9 1.7 (2.0) 1.4
India 5.8 5.4 6.0 6.7
Asian NIEs 8.1 7.0 (3.0) 5.1
Hong Kong 6.8 5.3 (5.5) 5.3
South Korea 8.7 7.2 (6.9) 5.7
Taiwan 8.0 7.0 4.5 3.9
Singapore 7.4 8.6 (1.4) 5.6
ASEAN-4 5.3 6.6 (9.4) 4.8
Indonesia 5.5 6.9 (13.1) 4.4
Malaysia 6.0 9.2 (7.4) 5.4
Philippines 1.7 3.1 (0.6) 4.6
Thailand 7.9 6.7 (10.5) 4.9
CLMV 7.0 6.8 5.1 8.8
Vietnam 5.9 8.3 5.8 7.2
Cambodia 6.8 6.3 5.0 9.5
Lao People's Democratic 5.6 6.5 4.0 6.5
Republic
Note: Cambodia's growth rate for the category 1980-1990 is from 1986-1990 17
Myanmar Monetary Fund, World Economic Outlook
Source: International 1.3 Database,5.8April 2007 5.8 11.9
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competitiveness
Share of World GDP (PPP terms, 1980 1990 1998 2000 2006
%)
China 3.2 5.6 10.3 11.0 15.1
Japan 8.2 8.8 7.7 7.2 6.3
India 3.4 4.3 5.2 5.4 6.3
Asian NIEs 1.6 2.6 3.2 3.4 3.4
Hong Kong 0.2 0.3 0.4 0.4 0.4
South Korea 0.8 1.3 1.5 1.7 1.7
Taiwan 0.5 0.8 1.1 1.1 1.0
Singapore 0.1 0.1 0.2 0.2 0.2
ASEAN-4 2.6 3.0 3.4 3.4 3.5
Indonesia 1.0 1.3 1.4 1.4 1.4
Malaysia 0.2 0.3 0.4 0.5 0.5
Philippines 0.8 0.7 0.7 0.7 0.7
Thailand 0.5 0.8 0.9 0.9 0.9
CLMV 0.3 0.4 0.5 0.5 0.7
Vietnam 0.18 0.23 0.34 0.35 0.43
Cambodia n/a 0.04 0.05 0.05 0.07
Lao People's Democratic 0.01 0.01 0.02 0.02 0.02
Republic
Source: Myanmar 0.10
International Monetary Fund, World Economic Outlook Database,0.08
April 2007 0.10 0.12 0.18
Total from above 19.2 24.6 30.2 31.0 35.3
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competitiveness
Competitiveness Performance - GDP per Capita,
Labour Productivity and Employment
GDP per capita can be seen as a product of two

ratios: Labour productivity and employment rate of
population
Labour productivity and GDP per capita growth rates
generally on an upward trend after Asian Financial
Crisis
Population growth trending downwards
Unemployment growing since 1996, with a blip in
2000
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competitiveness
Source: International Monetary Fund, World Economic Outlook Database, April

2007
World Bank World Development Indicators on-line database, 2006;
International Labour Organisation LABORSTA database, 2007 20
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competitiveness
Source: International Monetary Fund, World Economic

Outlook Database,
April 2007
World Bank World Development Indicators on-line
database, 2006;
International Labour Organisation LABORSTA
database, 2007
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Indonesia’s Performance among Competitiveness Indices
 The Business Competitiveness Index (BCI) by World Economic Forum (WEF)
ranked 121 countries (GCR 2006-2007 Edition) according to overall business
competitiveness made up of the two dimensions in Porter’s Microeconomic
foundation of productivity:
o Sophistication of company operations and strategy, and
o Quality of the national business environment
 The World Competitiveness Yearbook (WCY) by the International Institute for

Management Development (IMD) ranked 55 countries (WCY 2007 Edition)
according to their ability to create and maintain an environment that sustains the
competitiveness of enterprises. The national environment is divided into 4 factors:
o Economic performance
o Government efficiency
o Business efficiency
o Infrastructure
 Each of the 4 factors are further sub-divided into 5 sub-factors
 Sub-factors are further made up of criteria
 Altogether 323 criteria (127 are hard data, 119 are survey data, 77 for
background information)
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Source: GCR, 2006-2007
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Indonesia’s Performance among Competitiveness Indices
 The 2007 Index of Economic Freedom by the Heritage Foundation

and The Wall Street Journal ranked 157 countries across 10 equally-
weighted factors of economic freedom. They are:
o Business Freedom
o Trade Freedom
o Fiscal Freedom
o Freedom from Government
o Monetary Freedom
o Investment Freedom
o Financial Freedom
o Property Rights
o Freedom from Corruption
o Labour Freedom
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Indonesia’s Performance among Competitiveness
Indices
 Economic Freedom of the World Chain-Linked Summary Index

by the Fraser Institute ranked 38 countries by the degree to
which policies and institutions of these countries are
supportive of economic freedom. It is divided into 5 areas of
economic freedom:
o Size of government
o Legal structure and security of property rights
o Access to sound money
o Freedom to trade internationally
o Regulation of credit, labour and business
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Selected Competitiveness
Determinants of Indonesia
Determinants and measures of national
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Business Environment
 The Business Competitiveness Index (BCI) by World Economic Forum

(WEF) ranked 121 countries (GCR 2006-2007 Edition) according to
overall business competitiveness made up of the two dimensions in
Porter’s Microeconomic foundation of productivity:
o Sophistication of company operations and strategy, and
o Quality of the national business environment
 “Sophistication of company operations and strategy" is further
divided by into 15 components (all are survey data), and
 "quality of the national business environment" is divided into 44
components (38 are survey data, 6 are hard data)
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 From BCI, it seems that there was a great improvement in the

national business environment for Indonesia for the year 2006
which led to an improvement in the BCI score and ranking.
 The improvement in BCI ranking for Indonesia from 2005 to
2006 is due to the following most improved factors:
Top 10 Most Improved Factors for BCI from 2005 to 2006
Code Variable Change in index
scores
I. COMPANY OPERATIONS & STRATEGY
uq0803be Ease of access to loans 2.85
uq0907be Extent of market dominance 2.09
uq0906be Effectiveness of antitrust policy 2.01
uq0804be Venture capital availability 1.91
uq0909be Local availability of process machinery 1.69
II. NATIONAL BUSINESS ENVIRONMENT
uq1011cos Willingness to delegate authority 1.77
uq1012cos Extent of incentive compensation 1.70
uq1013cos Reliance on professional management 1.62
uq1009cos Breadth of international markets 1.44
uq1007cos Control of international distribution 1.18 34
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competitiveness
 However, it should be noted that the following factors shown

the most decline from 2005 to 2006:
Top 10 Most Deteriorated Factors for BCI from 2005 to 2006
Code Variable Change in
index scores
I. COMPANY OPERATIONS & STRATEGY
uq0604be Quality of port infrastructure -0.79
uq0307be University/industry research collaboration -0.76
uq0601be Overall infrastructure quality -0.74
uq0603be Railroad infrastructure -0.68
uq0801be Financial market sophistication -0.49
uq0508be Reliability of police services -0.40
uq1101be Stringency of environmental regulations -0.35
uq0315be Laws relating to ICT -0.26
II. NATIONAL BUSINESS ENVIRONMENT
uq1002cos Value chain breadth -0.47
uq1001cos Nature of competitive advantage -0.24 35
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Human Capital
 The Human Development Index (HDI) by United Nations Development

Programme (UNDP) is a summary measure of human development.
 It measures the average achievements in a country in three basic
dimensions of human development:
o A long and healthy life, as measured by life expectancy at birth.
o Knowledge, as measured by the adult literacy rate (with two-thirds weight) and
the combined primary, secondary and tertiary gross enrolment ratio (with one-
third weight).
o A decent standard of living, as measured by GDP per capita in purchasing
power parity (PPP) terms in US dollars.
Human development classifications

All countries included in the HDI are classified into one of three clusters by achievement in human development:
high human development (with an HDI of 0.800 or above), medium human development (HDI of 0.500–0.799) and
low human development (HDI of less than 0.500).
Income classifications
All countries are grouped by income using World Bank classifications: high income (gross national income per capita
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of USD10,066 or more in 2004), middle income (USD826–USD10,065) and low income (USD825 or less).
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HDI Selected State of Human Life Adult Combined GDP per Life Education GDP
rank Countries human development expectanc literacy gross capita expectan index index
developmen index (HDI) y at birth rate enrolment (PPP US$) cy index
t value, 2004 (years) (% ages ratio for 2004
2004 15 and primary,
older) secondary and
2004 tertiary
schools
(%)
2004
7 Japan High 0.949 82.2 85 29,251 0.95 0.94 0.95
22 Hong Kong, High 0.927 81.8 77 30,822 0.95 0.88 0.96
China (SAR)
25 Singapore High 0.916 78.9 92.5 87 28,077 0.9 0.91 0.94
26 Korea, Rep. of High 0.912 77.3 98 95 20,499 0.87 0.98 0.89
61 Malaysia High 0.805 73.4 88.7 73 10,276 0.81 0.84 0.77

74 Thailand Medium 0.784 70.3 92.6 74 8,090 0.75 0.86 0.73
81 China Medium 0.768 71.9 90.9 70 5,896 0.78 0.84 0.68
84 Philippines Medium 0.763 70.7 92.6 82 4,614 0.76 0.89 0.64
108 Indonesia Medium 0.711 67.2 90.4 68 3,609 0.7 0.83 0.6
109 Viet Nam Medium 0.709 70.8 90.3 63 2,745 0.76 0.81 0.55
126 India Medium 0.611 63.6 61 62 3,139 0.64 0.61 0.58
129 Cambodia Medium 0.583 56.5 73.6 60 2,423 0.52 0.69 0.53
130 Myanmar Medium 0.581 60.5 89.9 49 1,027 0.59 0.76 0.39
133 Lao People's Medium 0.553 55.1 68.7 61 1,954 0.5 0.66 0.5
Dem. Rep.

East Asia 0.76 70.8 90.4 69 5,872 0.76 0.84 0.68
and the
Pacific
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Human Capital

 Based on HDR, Comparing Indonesia with countries similarly classified
as having a medium level of human development but ranked higher, it
has competitive weaknesses in life expectancy, adult literacy rate, lower
combined gross enrolment ratio for primary, secondary and tertiary
schools and GDP per capita but generally speaking, the extent of the
weaknesses is greater for life expectancy and gross enrolment
ratio.
 Comparing Indonesia with Vietnam, it has competitive strengths in adult
literacy rate, higher combined gross enrolment ratio for primary,
secondary and tertiary schools and GDP per capita, but it has
competitive weakness in life expectancy.
 Based on trend analysis of HDI, the gap is narrowing between Indonesia
and Malaysia, Thailand and Philippines (catching up with the ASEAN-4),
but the gap is widening between Indonesia and China (lagging further
behind China), and Vietnam is following closely behind.
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Trade Competitiveness
 Although trade volume increases over the years, global ranking

and share of world trade drops in 2005 (global ranking of 26 in
2000 vs 34 in 2005; share of world trade of 0.8% to 0.7% from
2000 to 2005)
 In fact, share of world trade remained constant since 1980 (0.8%
in 1980 vs 0.7% in 2005)
1980 1990 2000 2005
Global Ranking in World 31 28 26 34
Trade
Share of World Trade (%) 0.8% 0.7% 0.8% 0.7%
Total Trade of Indonesia, Bil 32.7 47.5 109.0 155.0
US$
World Trade, Bil US$ 4,109.0 6,999.0 13,175. 21146.
 The following indicators to be added later: 0 0
o Source: World Trade Organisation
trade to GDP ratio
o total trade annual growth
o export and import growth, ave annual %
o global ranking as an exporter 41
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Competitiveness in Foreign Direct Investment
 Indonesia’s share of the world’s inward FDI flows remained fairly

constant in 1980-2005 (0.5% in 1980 vs 0.6% in 2005), but share of
inward FDI stock declined (0.8% in 1980 vs 0.2% in 2005)
 In 2005, inward FDI stock as percentage of GDP at 7.7% - ranked 13th
out of 15 selected Asian countries
 In 2005, inward FDI flows as percentage of GFCF at 8.5% - ranked 7th out
of 15 selected Asian countries
1980 1990 2000 2005
Global Ranking in Inward FDI 21 26 209 37
Flow
Share of Inward FDI Flow (%) 0.5% 0.5% -0.3% 0.6%
Inward FDI Flow of Indonesia, Mil 300 1,092 -4,550 5,260
US$
World Inward FDI Flow, Mil 55,272 201,614 1,409,56 916,277
Year
US$ end 1980 1990 20008 2005
Global Ranking in inward FDI 22 32 37 55
stock
Share of inward FDI stock (%) 0.8% 0.5% 0.4% 0.2%
inward FDI stock of Indonesia, 4,680 8,855 24,780 21,118

Mil US$
World inward FDI stock, Mil 561,403 1,789,30 5,802,93 10,129,73
US$ 3 3 9
Source: World Investment 42
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Inward FDI Stock as a 1980 1990 2000 2005 Inward FDI Flows as a 1980 1990 2000 2005
Percentage of Gross Percentage of Gross
Domestic Product Fixed Capital Formation
Hong Kong, China 73.2 59.4 275.4 299.9
Singapore 45.7 82.6 121.7 158.6 Hong Kong, China 7.6 16.3 138.9 97.0
Vietnam 33.3 25.5 66.1 61.2 Singapore 25.9 46.8 59.8 78.9
Cambodia 3.0 2.2 43.8 45.6 Cambodia .. .. 22.1 31.5
Myanmar 0.0 5.4 54.8 43.6 Malaysia 12.2 17.9 16.4 15.2
Malaysia 21.1 23.4 58.4 36.5 Viet Nam .. 21.2 15.0 11.3
Thailand 3.0 9.7 24.4 33.5 China 0.1 3.5 10.3 9.2
Lao People's Democratic 0.7 1.6 32.1 24.5 Indonesia 2.0 3.4 -13.9 8.5
Republic Philippines 1.3 5.4 13.9 7.5
Philippines 3.9 7.4 16.9 14.4 Thailand 2.1 7.5 12.4 7.2
China 0.4 5.4 17.9 14.3 Lao People's Democratic .. 6.1 9.4 5.8
Taiwan 5.8 6.1 5.7 12.1 Republic
South Korea 2.0 2.0 7.3 8.0 India 0.2 0.3 3.5 3.5
Indonesia 6.5 7.7 16.5 7.7 South Korea 0.1 0.8 5.4 3.1
India 0.2 0.5 3.8 5.8 Taiwan 1.2 3.7 6.4 2.3
Japan 0.3 0.3 1.1 2.2 Japan 0.1 0.2 0.7 0.3
Source: World Investment 43

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Inflation
 Indonesia experienced very high inflation in consumer prices from 1998 to 1999
 Thereafter still higher than China and India
 Higher than Vietnam from 1996 to 2006, except 2004
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Inflation, consumer prices
Annual percent change
Country China India Indonesia Vietnam
1980 6.0 11.4 18.0 25.2
1981 2.4 13.1 12.2 69.6
1982 1.9 7.9 9.5 95.4
1983 1.5 11.9 11.8 49.5
1984 2.8 8.3 10.5 64.9
1985 9.3 5.6 4.7 91.6
1986 6.5 8.7 5.8 453.5
1987 7.3 8.8 9.3 360.4
1988 18.8 9.4 8.0 374.4
1989 18.0 6.2 6.4 95.8
1990 3.1 9.0 7.8 36.0
1991 3.4 13.9 9.4 81.8
1992 6.4 11.8 7.5 37.7
1993 14.7 6.4 9.7 8.4
1994 24.1 10.2 8.5 9.5
1995 17.1 10.2 9.4 16.9
1996 8.3 9.0 7.0 5.6
1997 2.8 7.2 6.2 3.1
1998 -0.8 13.2 58.0 7.9
1999 -1.4 4.7 20.7 4.1
2000 0.4 4.0 3.8 -1.6
2001 0.7 3.8 11.5 -0.4
2002 -0.8 4.3 11.8 4.0
2003 1.2 3.8 6.8 3.2
2004 3.9 3.8 6.1 7.7
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2005
Source: International Monetary Fund, World Economic Outlook Database, April 1.8 4.2 10.5 8.3
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competitiveness
Competitiveness in Institutional Environment
 The Ease of Doing Business database by World Bank provides objective

measures of business regulations and their effects on businesses since
2004
 Document the degree of regulation, gauge regulatory outcomes, measure
extent of legal protections of property, measure the flexibility of
employment regulation and document tax burden on businesses.
 The Ease of Doing Business ranking is computed based on the following
ten factors and sub-measures:
o Ease of starting a business
o Ease of dealing with licenses
o Ease of employing workers
o Ease of registering property
o Ease of getting credit
o Ease of protecting investors
o Ease of paying taxes
o Ease of trading across borders
o Ease of enforcing contracts
o Ease of closing a business
o Recovery rate (cents on the dollar)
 Coverage increased from 130 economies in 2004 to 175 in 2007

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47
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Notes:
Note: Positive numbers indicate an increase in ranking from Total numbers of countries ranked are 155 (2006) and
2006 to 2007 whereas negative numbers indicate a decrease 175 (2007);
in ranking and zero indicates no change Selected countries are ordered by their 2007 Ease of
48
Doing Business ranking.
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competitiveness
Notes:
49
Total numbers of countries ranked are 155 (2006) and 175 (2007); Selected countries are ordered by the year’s Ease of Doing
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competitiveness
 Indonesia is one of the five countries that suffered a drop in

ranking in the 2007 Ease of Doing Business Ranking. These other
countries are Vietnam, Philippines, Taiwan and Cambodia.
 Comparing the 2006 and 2005 data, the top three factors that
caused the biggest drop in Indonesia’s rankings are ease of
closing a business, ease of getting credit, and ease of trading
across borders.
 Indonesia maintained at 161 in starting a business, dropped 2
places to 131 in dealing with licenses, improved by one place to
140 in employing workers, dropping 2 places to 120 in
registering property, dropping 7 places to 83 in getting credit,
dropping 2 places to 60 in protecting investors, dropped 4 places
to 133 in paying taxes, dropped 5 places to 60 in trading across
borders, dropped 1 place to 145 in enforcing contracts, dropped
10 places to 136 in closing a business.
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competitiveness
 Among the four countries of Indonesia, China, Vietnam and

India, Indonesia has the lowest Ease of Doing Business
ranking in 2007, overtaken by India which occupied the last
spot among the four in 2006.
 Among the four countries in 2007’s ranking, Indonesia has
competitive strengths in protecting investors, trading
across borders, and to a certain extent getting credit.
However, it has competitive disadvantage in starting a
business, employing workers, registering property, and
closing business.
 Comparing the rankings for the 10 factors between the two
years, Indonesia have slipped in 8 of them while
maintaining status quo for one of them and increased by
one rank for employing workers.

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competitiveness
 The Worldwide Governance Indicators by World Bank reports aggregate and

individual governance indicators for 212 countries and territories over the
period 1996–2006, for six dimensions of governance: Voice and
Accountability, Political Stability and Absence of Violence, Government
Effectiveness, Regulatory Quality , Rule of Law, and Control of Corruption.
The details are:
o Voice and Accountability – the extent to which a country’s citizens are able to
participate in selecting their government, as well as freedom of expression,
freedom of association, and a free media.
o Political Stability and Absence of Violence – perceptions of the likelihood
that the government will be destabilized or overthrown by unconstitutional or
violent means, including domestic violence and terrorism.
o Government Effectiveness – the quality of public services, the quality of the
civil service and the degree of its independence from political pressures, the
quality of policy formulation and implementation, and the credibility of the
government’s commitment to such policies.
o Regulatory Quality – the ability of the government to formulate and implement
sound policies and regulations that permit and promote private sector
development.
o Rule of Law – the extent to which agents have confidence in and abide by the
rules of society, and in particular the quality of contract enforcement, the police,
and the courts, as well as the likelihood of crime and violence.
o Control of Corruption – the extent to which public power is exercised for private
gain, including both petty and grand forms of corruption, as well as “capture” of
the state by elites and private interests.
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 The chart below shows the percentile rank of the country on each governance indicator.
Percentile rank indicates the percentage of countries worldwide that rate below the selected
country. Higher values indicate better governance ratings. Percentile ranks have been
adjusted to account for changes over time in the set of countries covered by the
governance indicators.
53
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competitiveness
Note: The six governance indicators are measured in units ranging from
about -2.5 to 2.5, with 54
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55
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56
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competitiveness
 The Worldwide Governance Indicators from 1996-2006

show that Indonesia seems to have arrested the downward
trends since 2003. Show signs of improvement in
governance from 2003 to 2006
 Prior to that, sharp drop in scores for government
effectiveness, political stability and regulatory quality
 Comparing Indonesia with China, India and Vietnam based
on 2006 data, Indonesia has competitive strengths in
regulatory quality, but has competitive weaknesses in
political stability, rule of law, control of corruption, voice
and accountability and government effectiveness.
 Based on the 2006 percentile rank, Indonesia is performing
below regional average (East Asia) in political stability, rule
of law and control of corruption. The same can be said for
comparison with Vietnam, India and China.
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Selected Determinants of Industrial

Competitiveness for Indonesia
Determinants and measures of industrial
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competitiveness
Export Competitiveness
 The following charts:

o Exports Portfolio by Cluster, 1997-2005* (top 20 by export value)
o Exports Portfolio by Cluster, 1997-2005* (top 20 by world export market
share)
o Exports Portfolio by Cluster, 1997-2005* (top 20 by change in world export
market share)
o Exports Portfolio by Service Cluster, 1997-2004
 plots Indonesia’s share of world export and export values by cluster in

2005 against the changes in exports share by cluster (1997-2005)
 Singapore’s exports portfolio by cluster are also included for comparison
* Note: services exports started from 2002.

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness,
Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics
Database and the IMF BOP statistics
59
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60
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61
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62
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63
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Cluster Export Value (in USD Share Share

'000), 2005 Change
Oil and Gas Products $19,489,343.80 1.80% -1.49%
Indonesia’s Exports Portfolio

Metal Mining and Manufacturing $8,172,304.67 1.18% 0.35% by Cluster, 1997-2005* (in
descending order of Export
Agricultural Products $7,253,417.42 1.57% 0.26% Value)
Note: services exports started
from 2002.
Apparel $5,170,168.98 1.98% 0.32%
Hospitality and Tourism $4,371,160.00 0.64% -0.87%
Coal and Briquettes

Cluster $4,354,121.70
Export Value (in 9.50%
Share 2.37%
Share
USD '000), 2005 Change
Plastics $4,126,373.24 1.28% 0.05%
Coal and Briquettes $4,354,121.70 9.50% 2.37%
Information Technology $3,688,152.06 0.53% 0.27% Indonesia’s Exports Portfolio
Fishing and Fishing Products $1,832,250.59 2.74% -0.81% by Cluster, 1997-2005* (in
Footwear $1,428,517.57 2.48% -1.44% descending order of Share)
Textiles
Furniture $3,504,635.44
$2,824,965.30 1.69%
2.18% 0.33%
0.28% Note: services exports started
from 2002.
Forest Products $3,033,962.55 2.00% 0.89%
Forest
ApparelProducts $3,033,962.55
$5,170,168.98 2.00%
1.98% 0.89%
0.32%
Building Fixtures and Equipment $2,843,124.68 1.93% -3.34%
Oil and Gas Products $19,489,343.80 1.80% -1.49%
Textiles $3,504,635.44 1.69% 0.33% 64
Agricultural Products $7,253,417.42 1.57% 0.26%
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Cluster Export Value (in Share Share

USD '000), 2005 Change
Coal and Briquettes $4,354,121.70 9.50% 2.37% Indonesia’s Exports

Portfolio by Cluster, 1997-
Construction Services $463,010.00 0.99% 0.99% 2005* (in descending order
Forest Products $3,033,962.55 2.00% 0.89% of Share Change)
Communications Services $1,599,530.00 1.12% 0.88% Note: services exports started
Business Services $2,881,210.00 0.50% 0.50% from 2002.
Tobacco $323,742.30 1.39% 0.38%
Metal Mining and Manufacturing $8,172,304.67 1.18% 0.35%
Textiles $3,504,635.44 1.69% 0.33%
Lighting and Electrical Equipment $1,082,947.53 0.69% 0.33%
Apparel Cluster $5,170,168.98
Export Value (in 1.98%
Share 0.32%
Share
USD '000) Change
Hospitality and Tourism $4,371,160.00 0.64% -0.87%
Business Services $2,881,210.00 0.50% 0.50% Indonesia’s Exports Portfolio
Transportation and Logistics $2,796,930.00 0.53% 0.18% by Service Cluster, 2002-2005
Communications Services $1,599,530.00 1.12% 0.88%

Construction Services $463,010.00 0.99% 0.99%
Financial Services $421,880.00 0.22% 0.21%
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competitiveness
 Based on the 2005 export values, share of world exports, and the
change in world export share from 1997-2005, Indonesia is
competitive in the export of coal and briquettes, fishing products,
footwear, furniture and forest products, and oil and gas products,
although there is a decrease in world export share in oil and gas
products, fishing products and footwear.
 Indonesia has the largest increase in the world export share in
the export of coal and briquettes
 In terms of services, hospitality and tourism has the largest
export value but suffers from a decline in world export share.
 Based on Indonesia’s goods export values and share for 2005,
the top 5 leading trading partners are Japan, USA, Singapore,
South Korea, and China. However, the exports shares to Japan,
USA and Singapore have decreased.
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Competitiveness of Manufacturing Sector
 Industry level manufacturing data was reclassified based on standard industry aggregation by
technology level. Source is OECD Science, Technology and Industry Outlook 2006
Standard Industry Aggregation by Technology Level
(based on ISIC Revision 3)
The high-technology industries (HT) are defined as the sum of:
● Pharmaceuticals (2423),
● Office and computing machinery (30),
● Radio, TV and communication equipment (32),
● Medical, precision and optical equipment (33),
● Aircraft and spacecraft (353).
The medium-high-technology industries (MHT) are defined as the sum of:
● Chemicals excluding pharmaceuticals (24 excl. 2423),
● Machinery and equipment (29),
● Electrical machinery and apparatus (31),
● Motor vehicles and trailers (34),
● Railroad and transport equipment (352+359).
The medium-low-technology industries (MLT) are defined as the sum of:
● Coke, refined petroleum products and nuclear fuel (23),
● Rubber and plastic products (25),
● Other non-metallic mineral products (26),
● Basic metals (27),
● Fabricated metal products except machinery and equipment (28),
● Building and repairing of ships and boats (351).
The low-technology industries (LT) are defined as the sum of:
● Food products, beverages and tobacco (15-16),
● Textiles, textile products, leather and footwear (17-19),
● Wood, pulp, paper, paper products, printing and publishing (20-22),
● Manufacturing n.e.c. and recycling (36-37). 68
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Snapshot of Indonesia’s Manufacturing Sector in 2003 (latest available data)
Key Manufacturing Gross fixed capital Number of Number Output in Value added in Wages and
Statistics for 2003 formation-Total employees of producers’ prices factor values (at salaries of
(US$) based on 4- (at 2000 prices) establish (at 2000 prices) 2000 prices) employees (at
digit ISIC Rev 3 ments 2000 prices)
codes
(1) Total High 1,199,246,710 171,527 424 5,318,607,670 2,296,442,935 267,658,411
Technology
manufacturing
(2) Total Medium 5,402,944,625 361,383 1,625 12,539,469,831 5,808,524,390 658,957,106
High Technology
manufacturing
(3) Total Medium 9,447,538,840 526,939 2,572 10,520,194,561 3,128,813,195 1,250,918,261
Low Technology
manufacturing
(4) Total Low 39,135,040,632 2,817,428 12,988 37,163,553,178 14,652,966,857 2,325,341,272
Technology
manufacturing
Total manufacturing 55,184,770,806 3,877,277 17,609 65,541,825,240 25,886,747,377 4,502,875,048
(1+2+3+4)
Scope: Large
Total establishments124,928,869,979
manufacturing (with 100 or more 4,273,880
persons engaged)
20,324and 76,596,550,267
medium scale establishments (with 20
29,840,720,475 to 99 persons
5,303,875,202
engaged).
(as reported by
Notes: Discrepancies occurred for Indonesia's data from 1998 to 2003 on the sums of the individual 4-digit
UNIDO)
codes and the total manufacturing figures reported by UNIDO.
Source: UNIDO Industrial Statistics Database at the 3- and 4-digit level of ISIC Code (Revision 3), INDSTAT4 2007 ISIC Rev.3
The series Gross Fixed Capital Formation, Output and Value Added are deflated by Gross domestic product, deflator
(2000=100) and the series Wages and salaries of employees are deflated by Inflation, consumer prices (2000=100) 69
Source: IMF World Economic Outlook Database, April 2007
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Summary of Growth in Manufacturing Sector
Compound Annual Gross fixed Number of Number of Output in Value added in Wages and
Growth Rate capital employees establishme producers’ factor values (at salaries of
(CAGR) (1998- formation-Total nts prices (at 2000 prices) employees (at
2003) (at 2000 prices) 2000 prices) 2000 prices)
Total High -9.67% -2.57% -4.36% 6.25% 13.84% 5.55%

Technology
manufacturing
Total Medium High 7.94% -0.06% -2.10% 3.74% 7.17% 10.40%
Technology
manufacturing
Total Medium Low 13.74% 2.88% -0.26% 6.29% 8.45% 25.55%
Technology
manufacturing
Total Low 21.81% -0.70% -2.12% 4.83% 7.39% 3.25%
Note: Total manufacturing
Technology as reported by UNIDO
Scope: Large establishments (with 100 or more persons engaged) and medium scale establishments (with 20 to 99 persons
manufacturing
engaged).
Total 26.00% 0.80% -1.05% 7.54% 10.22% 11.26%
Source: UNIDO
manufacturingIndustrial Statistics Database at the 3- and 4-digit level of ISIC Code (Revision 3), INDSTAT4 2007 ISIC Rev.3
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Contribution of Manufacturing sub-sectors by Technology Level Aggregation
Average Share of Gross fixed Number of Number of Output in Value added in Wages and
Total capital employees establishm producers’ factor values salaries of
manufacturing formation-Total ents prices (at (at 2000 prices) employees (at
(1998-2003) (at 2000 prices) 2000 prices) 2000 prices)
Total High 3.5% 4.3% 2.2% 7.0% 7.5% 6.3%

Technology
manufacturing
Total Medium 10.3% 8.7% 8.5% 19.6% 22.1% 14.3%
High Technology
manufacturing
Total Medium Low 22.4% 11.8% 12.5% 15.1% 11.3% 15.6%
Technology
manufacturing
Total Low 43.5% 69.2% 66.4% 51.4% 51.3% 53.6%
Note:Technology
Total manufacturing as reported by UNIDO
manufacturing
Scope: Large establishments (with 100 or more persons engaged) and medium scale establishments (with 20 to 99 persons
engaged).
Source: UNIDO Industrial Statistics Database at the 3- and 4-digit level of ISIC Code (Revision 3), INDSTAT4 2007 ISIC Rev.3
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 Industry level manufacturing data was reclassified based on
standard industry aggregation by technology level. Source is
OECD Science, Technology and Industry Outlook 2006
 In terms of average share of total manufacturing, the largest
share for VA is low tech manufacturing, followed by medium
high tech, medium low tech and high tech manufacturing.
share for GFCF is low tech manufacturing, followed by
medium low tech, medium high tech and high tech
manufacturing. Same for wages and salaries of employees,
number of establishments, number of employees.
 In terms of CAGR, the largest growth for VA from 1998-2003 is
high tech manufacturing, followed by medium low tech, low
tech and medium high tech manufacturing.
 In terms of CAGR, the largest growth for GFCF from 1998-2003
is low tech manufacturing, followed by medium low tech,
medium high tech. High tech manufacturing shows a decline.
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Top Industry Sector (1998-2003) by Share within industry based on technology classification
Gross fixed capital formation- Number of employees Number of establishments

Total (at 2000 prices)
Total High • Pharmaceuticals, medicinal • Pharmaceuticals, • Pharmaceuticals,

Technology chemicals, etc.; medicinal chemicals, etc.; medicinal chemicals, etc.;
manufacturing • Electronic valves, tubes, etc.; • Electronic valves, tubes, • Electronic valves, tubes,
• TV and radio receivers and etc.; etc.;
associated goods. • TV and radio receivers • TV and radio receivers
• Aircraft and spacecraft (1998- and associated goods. and associated goods.
1999);
• Optical instruments &
photographic equipment
(2001).
Output in producers’ prices Value added in factor Wages and salaries of

(at 2000 prices) values (at 2000 prices) employees (at 2000
prices)
Total High • Pharmaceuticals, medicinal • Pharmaceuticals, • Pharmaceuticals,
Technology chemicals, etc.; medicinal chemicals, etc.; medicinal chemicals, etc.;
manufacturing • Electronic valves, tubes, etc.; • Electronic valves, tubes, • Electronic valves, tubes,
• TV and radio receivers and etc.; etc.;
associated goods. • TV and radio receivers • TV and radio receivers
and associated goods. and associated goods.
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Gross fixed capital Number of employees Number of

formation-Total (at 2000 establishments
prices)
Total Medium • Basic chemicals, except • Basic chemicals, except • Basic chemicals, except
High fertilizers; fertilizers; fertilizers;
Technology • Fertilizers and nitrogen • Soap, cleaning & • Soap, cleaning &
manufacturing compounds (1998-2002); cosmetic preparations; cosmetic preparations;
• Domestic appliances n.e.c. • Other chemical • Paints, varnishes,
(2001-2003); products n.e.c. (1998- printing ink and mastics
• Man-made fibres (1998, 2000); (1998-2000, 2002-
2001, 2003); • Domestic appliances 2003);
• Parts/accessories for n.e.c. (2001-2003); • Other chemical
automobiles (1998-2001, • Parts/accessories for products n.e.c. (1998-
2003); automobiles; 2001, 2003);
• Motor vehicles (2000, • Motorcycles (1999- • Domestic appliances
2003). 2003). n.e.c. (2001-2002);
• Parts/accessories for
automobiles.
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prices)
Total Medium • Basic chemicals, except • Basic chemicals, except • Basic chemicals, except
High fertilizers; fertilizers; fertilizers (1998-2002);
Technology • Fertilizers and nitrogen • Fertilizers and nitrogen • Fertilizers and nitrogen
manufacturing compounds (1998-1999, compounds (1998, compounds;
2001); 2001-2002); • Soap, cleaning &
• Soap, cleaning & cosmetic • Soap, cleaning & cosmetic preparations
preparations (1998-1999); cosmetic preparations (1998-2000);
• Man-made fibres (1998, (1998-1999, 2002); • Domestic appliances
2003); • Man-made fibres (1998, n.e.c. (2001-2002);
• Motor vehicles (2000- 2003); • Man-made fibres (1998,
2003); • Motor vehicles (2000- 2003);
• Parts/accessories for 2003); • Motor vehicles (2000-
automobiles (2000-2003); • Parts/accessories for 2003);
• Motocycles; automobiles (1999- • Parts/accessories for
• Accumulators, primary 2000, 2003); automobiles (1999-
cells and batteries (1999- • Motocycles; 2000, 2002-2003).
2000). • Accumulators, primary
cells and batteries
(1999-2000).
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competitiveness

prices)
Total Medium • Rubber tyres and tubes; • Rubber tyres and tubes; • Rubber tyres and tubes;
Low • Plastic products; • Other rubber products • Plastic products;
Technology • Basic iron and steel; (1998, 2001-2003); • Structural metal
manufacturing • Basic precious and non- • Plastic products; products (1998-2002);
ferrous metals (1998- • Basic iron and steel; • Cutlery, hand tools and
2002); • Other fabricated metal general hardware;
• Other fabricated metal products n.e.c. • Other fabricated metal
products n.e.c. (1998-2001, products n.e.c.
2003);
Output
• in producers’
Building prices
and repairing of Value added in factor Wages and salaries of
(at(2003).
ships 2000 prices) values (at 2000 prices) employees (at 2000
prices)
Total Medium • Rubber tyres and tubes; • Rubber tyres and tubes; • Rubber tyres and tubes;
Low • Plastic products; • Plastic products; • Plastic products;
Technology • Basic iron and steel; • Basic iron and steel; • Basic iron and steel;
manufacturing • Basic precious and non- • Basic precious and non- • Basic precious and non-
ferrous metals; ferrous metals; ferrous metals (1998,
• Other fabricated metal • Other fabricated metal 2000);
products n.e.c. products n.e.c. • Other fabricated metal
products n.e.c.
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prices)
Total Low • Vegetable and animal oils • Tobacco products; • Other food products
Technology and fats (1999-2000, 2002- • Textile fibre n.e.c.;
manufacturing 2003); preparation; textile • Tobacco products;
• Other food products n.e.c. weaving; • Textile fibre
(1998, 2000, 2003); • Wearing apparel, except preparation; textile
• Textile fibre preparation; fur apparel; weaving (1998-2000,
textile weaving (1998- • Footwear; 2003);
2002); • Veneer sheets, plywood, • Wearing apparel, except
• Wearing apparel, except fur particle board, etc. fur apparel;
apparel (2001-2002); • Sawmilling and planing
• Veneer sheets, plywood, of wood (2001-2002);
particle board, etc. (1998- • Furniture.
1999, 2001-2003);
• Pulp, paper and paperboard
(1998-2002)
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prices)
Total Low • Vegetable and animal oils • Vegetable and animal • Tobacco products
Technology and fats; oils and fats (1999, (1998-2000, 2002-
manufacturing • Tobacco products; 2001-2003); 2003);
• Textile fibre preparation; • Tobacco products; • Textile fibre
textile weaving ; • Textile fibre preparation; textile
• Wearing apparel, except fur preparation; textile weaving (1999-2002);
apparel (1998-1999, 2001- weaving ; • Wearing apparel, except
2003); • Wearing apparel, except fur apparel;
• Veneer sheets, plywood, fur apparel (1998-2000, • Footwear (1998-2000,
particle board, etc. (1998- 2002-2003); 2002-2003);
2000); • Veneer sheets, plywood, • Veneer sheets, plywood,
• Pulp, paper and paperboard particle board, etc. particle board, etc.
(2000-2003). (1998-2001); (1999-2003).
• Pulp, paper and
paperboard (2000-
2003).
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Industry productivity and growth based on selected technology classification
High Technology manufacturing Value Added (at 2000 prices) per Compound
employee in USD Annual
Isic Code Isic Description 1998 1999 2000 2001 2002 2003 Growth Rate
(CAGR)
(1998-2003)
2423Pharmaceuticals, medicinal chemicals, 5,517 9,823 10,379 12,875 16,011 18,877 27.9%
etc.
3000Office, accounting and computing 6,219 18,720 3,080 1,148 1,344 1,477 -25.0%
machinery
3210Electronic valves, tubes, etc. 6,498 7,460 15,614 11,115 18,918 10,993 11.1%
3220TV/radio transmitters; line comm. 14,513 4,328 9,115 1,593 2,475 7,852 -11.6%
apparatus
3230TV and radio receivers and associated 7,021 8,228 6,489 9,345 12,813 14,614 15.8%
goods
331 Medical, measuring, testing appliances, 3,429 4,889 5,279 5,057 1,883 2,050 -9.8%
etc.
3311Medical, surgical and orthopaedic 3,953 7,247 8,899 5,426 1,243 2,177 -11.2%
equipment
3312Measuring/testing/navigating 2,531 2,111 1,645 2,575 5,326 7,679 24.9%
appliances,etc. 79
3313Industrial process control equipment 1,756 1,089
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Manufacturing Value Added and Gross Fixed Capital Formation
Comparison across Asian Countries
Latest year Value Added in Gross Fixed Capital GDP in USD
of data for USD Formation in USD
VA and
GFCF
Cambodia 2000 1,397,590,835 175,358,459 3,606,186,552

India 2003 51,912,337,683 12,073,704,525 594,802,340,259
Indonesia 2003 38,099,438,274 159,504,184,034 208,308,642,359
Japan 2002 777,021,868,121 75,971,265,193 3,970,848,278,081
Korea 2002 193,670,909,367 32,064,461,390 546,934,577,495
Lao P.D.R. 1999 65,935,185 11,352,826 1,603,258,067
Malaysia 2003 (VA), 32,076,578,947 48,121,013,684 95,164,210,526 (2002),
2002 103,736,842,105 (2003)
(GFCF)
Philippines 2003 13,414,041,212 1,890,899,632 79,329,659,923

Singapore 2003 21,271,034,566 3,902,520,979 92,368,924,051
Note:Viet
VA atNam
Producers' Prices
2000 - Cambodia,
(VA), India, Korea, Laos, Malaysia,
4,378,617,630 Philippines, Vietnam, Thailand
16,668,760,062 31,172,627,976 (2000),
VA at Factor Values - Indonesia
2004
VA unspecified - Japan, Singapore 45,818,995,366 (2004)
Source of manufacturing value(GFCF)
added and gross fixed capital formation are from UNIDO Industrial Statistics Database,
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Manufacturing Value Added and Gross Fixed Capital Formation
Comparison across Asian Countries
Value Added as %of GDP GFCF as %of GDP

Cambodia 38.8% 4.9%
India 8.7% 2.0%
Indonesia 18.3% 76.6%
Japan 19.6% 1.9%
Korea, Republicof 35.4% 5.9%
Lao P.D.R. 4.1% 0.7%
Malaysia 30.9% 50.6%
Philippines 16.9% 2.4%
Singapore 23.0% 4.2%
Viet Nam 14.0% 36.4%
Thailand 15.5% 3.4%
Note: VA at Producers' Prices - Cambodia, India, Korea, Laos, Malaysia, Philippines, Vietnam, Thailand
VA at Factor Values - Indonesia
VA unspecified - Japan, Singapore
Source of manufacturing value added and gross fixed capital formation are from UNIDO Industrial Statistics Database,
2007 81
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Employment Structure of Indonesia, 1980-2005
te: Industry classification is by ISIC Rev 2

82
Source: International Labour Organisation LABORSTA database, 2007
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Conclusions
Conclusions (Competitiveness ASIA COMPETITIVENESS
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Performance)
Standard of Living
 GDP per capita growth lagging behind Asian NIEs average, and
emerging economies such as Vietnam, China and India for all
periods.
 Level of GDP per capita behind ASEAN-4 average (lowest among
ASEAN-4) & Asian NIEs, but above CLMV average for all periods.
Economic Performance
 Real GDP growth lagged behind ASEAN-4 average and India after
Asian Financial Crisis and behind China and Vietnam for all
periods
 Indonesia has the largest share among the ASEAN-4 in terms of
Share of World GDP (PPP terms), doubled CLMV total for 2006
 However, share quite stagnant since 1990
 Unemployment rising despite labour productivity trending
upwards after Asian Financial Crisis
84
INSTITUTE
Determinants)
 From BCI, it seems that there was a great improvement in

the national business environment for Indonesia for the year
2006 which led to an improvement in the BCI score and
ranking.
 However, need to address quality of infrastructure and
university-industry research collaboration issues
Human Capital

 Based on HDR, comparing Indonesia with countries similarly
classified as having a medium level of human development
but ranked higher, it has competitive weaknesses in life
expectancy, adult literacy rate, lower combined gross
enrolment ratio for primary, secondary and tertiary schools
and GDP per capita but generally speaking, the extent of
the weaknesses is greater for life expectancy and
gross enrolment ratio.
85
INSTITUTE
Determinants)
Trade Competitiveness
 Although trade volume increases over the years, share

of world trade remained constant since 1980
Competitiveness in Foreign Direct Investment
 Indonesia’s share of the world’s inward FDI flows

remained fairly constant in 1980-2005 but share of
inward FDI stock declined (0.8% in 1980 vs 0.2% in
2005)
 Inward FDI stock as percentage of GDP among lowest
in selected Asian countries (ASEAN10+3+1+Taiwan)
86
INSTITUTE
competitiveness
 Indonesia suffered a drop in ranking in the 2007

Ease of Doing Business Ranking together with
Vietnam, Philippines, Taiwan and Cambodia.
 Comparing the 2006 and 2005 data, the top three
factors that caused the biggest drop in Indonesia’s
rankings are ease of closing a business, ease of
getting credit, and ease of trading across borders.
87
INSTITUTE
competitiveness
 Among the four countries of Indonesia, China, Vietnam and

India, Indonesia has the lowest Ease of Doing Business ranking
in 2007, overtaken by India which occupied the last spot
among the four in 2006.
 Among the four countries in 2007’s ranking, Indonesia has
competitive strengths in protecting investors, trading across
borders, and to a certain extent getting credit. However, it
has competitive disadvantage in starting a business,
employing workers, registering property, and closing business.
 Comparing the rankings for the 10 factors between the two
years, Indonesia have slipped in 8 of them while maintaining
status quo for one of them and increased by one rank for
employing workers.
 On the whole, need to address ease of closing a business,
ease of getting credit, and ease of trading across borders

88
INSTITUTE
Determinants)
 The Worldwide Governance Indicators from 1996-2006 show that

Indonesia seems to have arrested the downward trends since 2003. Show
signs of improvement in governance from 2003 to 2006
 Prior to that, sharp drop in scores for government effectiveness, political
stability and regulatory quality
 Comparing Indonesia with China, India and Vietnam based on 2006 data,
Indonesia has competitive strengths in regulatory quality, but has
competitive weaknesses in political stability, rule of law, control of
corruption, voice and accountability and government effectiveness.
 Based on the 2006 percentile rank, Indonesia is performing below
regional average (East Asia) in political stability, rule of law and control of
corruption. The same can be said for comparison with Vietnam, India and
China.
 Need to address political stability, rule of law and corruption issues
89
INSTITUTE
competitiveness
Export Competitiveness at Industry Level
90
INSTITUTE
competitiveness

 Industry level manufacturing data was reclassified based on
standard industry aggregation by technology level. Source is
OECD Science, Technology and Industry Outlook 2006
share for VA is low tech manufacturing, followed by medium
high tech, medium low tech and high tech manufacturing.
share for GFCF is low tech manufacturing, followed by
medium low tech, medium high tech and high tech
manufacturing. Same for wages and salaries of employees,
number of establishments, number of employees.
 In terms of CAGR, the largest growth for VA from 1998-2003 is
high tech manufacturing, followed by medium low tech, low
tech and medium high tech manufacturing.
 In terms of CAGR, the largest growth for GFCF from 1998-2003
is low tech manufacturing, followed by medium low tech,
medium high tech. High tech manufacturing shows a decline.
91

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ASIA COMPETITIVENESS

 Competitiveness [should] be understood as the ability of

INCENTIVE FACTOR MARKETS

Macro Trade Industri Skills Technolo Supplier

Education & Technology Finance

RESOURCES, CAPABILITIES AND

RESOURCES TECHNOLOGIES ORGANISATIONAL PRODUCT MKT

Source: (Hämäläinen, 2003)

National level output Sectoral level output

 In terms of GDP per capita growth, above ASEAN-4

China 12.2 12.8 8.0 11.0

 Real GDP grew faster than ASEAN-4 average before

China 9.2 11.5 7.8 9.3

GDP per capita can be seen as a product of two

Source: International Monetary Fund, World Economic Outlook Database, April

Source: International Monetary Fund, World Economic

 The World Competitiveness Yearbook (WCY) by the International Institute for

 The 2007 Index of Economic Freedom by the Heritage Foundation

 Economic Freedom of the World Chain-Linked Summary Index

 The Business Competitiveness Index (BCI) by World Economic Forum

 From BCI, it seems that there was a great improvement in the

 However, it should be noted that the following factors shown

 The Human Development Index (HDI) by United Nations Development

Human development classifications

61 Malaysia High 0.805 73.4 88.7 73 10,276 0.81 0.84 0.77

 Although trade volume increases over the years, global ranking

 Indonesia’s share of the world’s inward FDI flows remained fairly

inward FDI stock of Indonesia, 4,680 8,855 24,780 21,118

Source: World Investment 43

 The Ease of Doing Business database by World Bank provides objective

 Coverage increased from 130 economies in 2004 to 175 in 2007

 Indonesia is one of the five countries that suffered a drop in

 Among the four countries of Indonesia, China, Vietnam and

 The Worldwide Governance Indicators by World Bank reports aggregate and

 The Worldwide Governance Indicators from 1996-2006

Selected Determinants of Industrial

 The following charts:

 plots Indonesia’s share of world export and export values by cluster in

* Note: services exports started from 2002.

Cluster Export Value (in USD Share Share

Indonesia’s Exports Portfolio

Hospitality and Tourism $4,371,160.00 0.64% -0.87%

Coal and Briquettes

Cluster Export Value (in Share Share

Coal and Briquettes $4,354,121.70 9.50% 2.37% Indonesia’s Exports

Communications Services $1,599,530.00 1.12% 0.88%

Total High -9.67% -2.57% -4.36% 6.25% 13.84% 5.55%

Total High 3.5% 4.3% 2.2% 7.0% 7.5% 6.3%

Gross fixed capital formation- Number of employees Number of establishments

Total High • Pharmaceuticals, medicinal • Pharmaceuticals, • Pharmaceuticals,

Output in producers’ prices Value added in factor Wages and salaries of

Gross fixed capital Number of employees Number of

Output in producers’ prices Value added in factor Wages and salaries of

Gross fixed capital Number of employees Number of

Gross fixed capital Number of employees Number of

Output in producers’ prices Value added in factor Wages and salaries of

Cambodia 2000 1,397,590,835 175,358,459 3,606,186,552