Technology And Indonesia’s Industrial Competitiveness

During the first half of the 1990s (1990-96) the Indonesian economy grew rapidly at an average annual rate of 7.7 per cent. This rapid growth depended to a significant degree on the rapid growth of the manufacturing sector, which was growing at an average annual rate of 11.1 per cent. Following the end of the oil boom era in 1982, the manufacturing sector, specifically the non-oil and gas manufacturing industries, had gradually replaced the oil sector as the major engine of growth and the major source of export revenues. In turn, the rapid growth of the manufacturing sector was driven by an even more rapid growth of manufactured exports. This surge of manufactured exports was the result of a belated shift in industrial policy from import-substitution during the oil boom era of the 1970s to export promotion after the oil boom era had ended as a result of a steep drop in the price of oil because of the weakening world oil market. However, the manufactured export surge lasted only a few years, as since 1993 the growth of manufactured exports slowed down, raising concern among Indonesia’s policy-makers that Indonesia’s comparative advantage in labour-intensive and resource-intensive manufactured exports was eroding because of the competition of lower-wage developing countries in the region. As rapid economic growth since the late 1980s depended to a large extent on sustained manufactured export growth, the challenge of raising Indonesia’s apparent weak industrial competitiveness became pressing Before the Indonesian government could deal with this challenge, the country was severely hit by the Asian financial and economic crisis in 1997. The crisis had a devastating effect on the Indonesian economy, which contracted by –13.1 per cent in 1998, while the manufacturing sector contracted by almost –11.4 per cent. The political turmoil and economic downturn led to a worsening investment climate and a sharp decline in fixed investment from around 30 per cent of GDP to 20 per cent after the crisis. During the first half of 2005 the investment rate rose to 22 per cent which, however, is still much lower than during the boom years of the early 1990s.After the Asian economic crisis, the challenge of raising Indonesia’s industrial competitiveness has become even more pressing than it was before the crisis, as Indonesia was losing its market share in no less than 30 products to other developing countries, particularly to the People’s Republic of China (PRC) and Viet Nam. Moreover, the volume of Indonesia’s non-oil exports, particularly its manufactured exports, in 2002 was not higher than its level in 1995-6, while its world market share remained at a miniscule 0.8 per cent (Pangestu 2005 , p. 5-6.).This paper will discuss the major factors which affect Indonesia’s industrial competitiveness, specifically the determinants of its industrial technology development, which is crucial to raising Indonesia’s industrial competitiveness. After a brief overview of Indonesia’s industrial development before and after the Asian economic crisis, the paper will discuss some recent assessments on Indonesia’s industrial competitiveness. The paper will then discuss the determinants of Indonesia’s industrial technological development, including the policies which the government should pursue to encourage this development, particularly by strengthening those determinants through judicious intervention or by removing constraints hindering the effectiveness of these determinants.