Ari Kuncoro: 75 Years of Republik Indonesia, A Perspective of Three Countries
Nino Eka Putra ~ PR of FEB UI
DEPOK – Saturday (22/8/2020), Professor Ari Kuncoro, Rector of Universitas Indonesia, released his article published by Kompas Daily, an Opinion rubric, entitled “75 Years of Republik Indonesia, A Perspective of Three Countries”. The following is the article .
“75 Years of RI, Perspective of Three Countries”
In early July 2020, ahead of the 75th anniversary of Indonesia’s independence, the World Bank announced the raise in Indonesia’s status to an upper middle-income country with a gross national income (GNI) per capita of US $ 3,927.
This is a gift for the anniversary of Indonesian independence as well as a new challenge and homework. This is because this figure is only slightly above from the lower limit of the upper middle-income country category, which is 3,896 to 12,055 US dollars.
The good news is, with a population of around 270 million of which 141 million are middle class, Indonesia is a world economic power to be reckoned with. This increase in income levels creates new demand for goods and services including leisure consumption. This potential is a new source of growth for the domestic economy which, if not provided by the domestic industry, will only be utilized by other countries.
A tale of three countries
How Indonesia arrived at this position is interesting to examine by comparing it with countries that had the same initial GNI conditions at the end of the 1960s, namely Nigeria and South Korea (South Korea). Nigeria, a former British colony, was under Japanese rule from 1905-1945 before being split into two, northern and southern, and experiencing civil war. Indonesia was once colonized by the Dutch. Nigeria and Indonesia are endowed with natural resources (SDA) that are not renewable, petroleum and others, with Nigeria’s stock bigger than Indonesia’s. Indonesia has the advantage of fertile land resources, an archipelago whose seas are rich in biological resources and beautiful tourism objects. South Korea is poor in natural resources because the mining part is in North Korea. However, South Korea has fertile soil and ancient traditions that have the potential for tourism.
In the late 1970s, Indonesia started with a gross domestic income (GDP) per capita of around US $ 80, below Nigeria and South Korea, which had reached US $ 224 and US $ 279. Over time, these countries have experienced different growth trajectories. In 1986, Indonesia’s GDP per capita was around US $ 420. Nigeria and South Korea 629 US dollars and 2,835 US dollars. 2004 was a turning point because Indonesia had already caught up with Nigeria with a GDP per capita of 1,150 US dollars vs 1,008 US dollars. South Korea has stepped on the gas, without the possibility of being surpassed, with a GDP per capita of 16,496 US dollars.
Indonesia surpassing Nigeria in 2004 cannot be separated from Indonesia’s development strategy. In the mid-1970s, Indonesia invested part of its oil livelihood to improve the rural sector, from irrigation, village roads, extension services, markets, and others. Indonesia also deregulated the economy in 1986 which allowed a labor-intensive export industry to develop. As a result, the number of people below the poverty line fell from 21.2 percent in 1984 to 13.8 percent in 1993 (Booth [1999]). The multiplier effect flows upward by creating demand for the manufacturing, trade and service sectors. In contrast to Nigeria, which rotates to increase consumption of urban communities by increasing remuneration for its bureaucracy. The reforms carried out there also failed to shape the manufacturing industry into export-oriented (Kuncoro and Resosudarmo [2008] and Fuady [2015 [).
South Korea’s ability to become a high-income developed country is the result of a strategy that combines industrial policy interventions including selective protection policies for a limited time, tax incentives, subsidized credit and the commitment of industry players to finally be willing to compete in international markets. Many of these instruments are no longer in accordance with the provisions of the World Trade Organization (WTO).
However, therein lies South Korea’s ingenuity, a national selective industrial policy carried out very early before international habitats no longer allow it. In facing the WTO, in order to continue to improve competitiveness, industrial policy has shifted towards strengthening the business environment such as an efficient bureaucracy, infrastructure, and research and development (R&D) activities through higher education. With this strategy, South Korea is one of the most successful export-oriented economies in the world (Wheeler [1990]).
From 1962 to 1972 the focus of the development strategy was to modernize agriculture, export-oriented labor-intensive industries, and prepare for industrial transitions to face foreign competition. The next stage is the development of upstream industries such as steel, shipping, electronics, petrochemicals and machinery. With wages increasing, since the early 1990s the strategy has focused on high value-added industries with high technology content and finally creative industries such as cultural tourism and culinary such as music and film to promote South Korea.
Indonesia actually has a blueprint for industrialization, however, like Nigeria in a milder portion, Indonesia has also experienced the natural resource curse with a bonanza of commodities such as oil in the mid-1970s and palm oil and mining commodities in 2004-2012. The existence of a bonanza makes economic reforms planned for high-value-added industries less urgent. After economic reforms in 1986, Indonesia’s industrial evolution was locked in low / medium value-added manufactured products (Kuncoro [2018]).
In 2019, manufacturing value added was dominated by the food and beverage industry with a share of around 6.79 percent of GDP or 24.2 percent of the added value of non-oil and gas manufacturing. The next branch of industry, transportation equipment (automotive industry) with a portion of 1.82 percent of GDP or 6.47 percent of non-oil and gas manufacturing. Based on this specialization pattern, our GDP per capita in 2019 is US $ 4,136. Nigeria and South Korea are 2,230 and 31,762 US dollars respectively.
Not just SDA
Finding a scapegoat for t he current position of the three countries may now be possible by using the natural resource curse hypothesis. In fact, many other factors affect the configuration of GDP per capita. As predicted by the 2018 Nobel Prize winner for Economics, Paul Romer, the source of the welfare of nations is human resources and technology and innovation, not commodities and natural resources. HR capabilities can be seen from the ISEAD version of the Global Talent Index. In 2019 South Korea was in the 30th position and in 2020 it rose to 27th. Indonesia, from 67 in 2019, has risen two places to 65th in 2020. Nigeria is in 99th place (2019), slipped to 112th (2020). There are roughly 30 levels of differences between South Korea and Indonesia, and between Indonesia and Nigeria.
South Korea’s GDP per capita is four times that of Indonesia and 14 times that of Nigeria. Between 2014 and 2020 Indonesia managed to climb 10 levels, but it needs to jump even higher to catch up to half the distance from South Korea. If GDP per capita is considered as an indicator of material welfare this work is not easy because the impact of human resources is exponential (increasing returns to scale) for GDP per capita.
Another indicator, the global competitiveness index issued by the World Economic Forum provides a homework hint that Indonesia must do. The health pillar ranks 96th out of 141 countries mainly because life expectancy is in the 95th position. The educational level of the workforce, most of whom are still at elementary school, ranks Indonesia 92nd for the length of schooling. This is partially compensated for by the proficiency of the workforce, which currently ranks 36th, mainly due to low digital capabilities. The labor market has a low rating because it is too rigid, so it only occupies the 119th position. Another weakness is the ability to innovate which is in the 74th position, plus R&D which is in the 83rd position.
The proverb says that even if it rains stones in your own country while it rains gold in another country, your own country is still better. The reality is that in other countries, it does not always rain gold and in your own country it does not necessarily rain stones.
South Korea is not without its problems. The middle class is increasingly losing hope of becoming rich people because their income is eroded by skyrocketing rental prices. Property prices since 2017 have risen 50 percent. Many parents also lose hope that their children will be able to attain their level of material well-being. The social contract to turn people into the middle class was out of reach. In fact, this middle class is South Korea’s economic engine. The welfare indicators have also begun to shift from simply fulfilling income or GDP per capita. Quality of life, governance, environment is slowly but surely starting to become the criteria for developed countries.
The moral message of the above proverb is to remain optimistic in this pandemic, also in welcoming Indonesia’s 75th Anniversary. (hjtp)
Source: Kompas Daily. Edition: Saturday, 22 August 2020. Opinion Rubric. Page 6.
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