LPEM Public Lecture: Industrial policies to escape the middle-income trap: a new structural economics approach for Indonesia by Professor Justin Yifu Lin (Peking University)
Hana Fajria – Public Relations of FEB UI
Jakarta – (13-11-2020)
The Economic Research Institute (LPEM) FEB UI in collaboration with the ANU (Australian National University) Indonesia Project held a Public Lecture entitled “Industrial policies to escape the middle-income trap: a new structural economics approach for Indonesia”. This event is an annual Sadli Lecture series honoring the late Prof. Mohammad Sadli, one of the economic architects of the New Order and collaborating with FEB UGM to hold the Mubyarto Public Policy Forum, an annual event to honor the late Prof. Mubyarto from UGM who is an expert in agricultural and rural economics.
This event presented several speakers including Prof. Justin Yifu Lin from Peking University, Dr. Kiki Verico, Lecturer and Deputy Head of LPEM FEB UI and Dr. Muhammad Edhie Purnawan from Gadjah Mada University.
According to Prof. Justin Yifu Lin, Indonesia has been trapped in the middle income level since the 1960s. Indonesia’s GDP per capita in the early 1960s was more like the lower middle class, but gradually increased until in the 1990s it reached 80% to 100% of the average GDP per capita of middle-income countries. Even in 1997-1998 (before the Asian Financial Crisis) Indonesia’s GDP per capita was slightly higher (above 100%) than the average middle class country. However, since then Indonesia has been trapped at the lower middle level until today.
Several countries with a similar situation to Indonesia in the early 1960s, such as China, Korea, Malaysia, and Singapore, have managed to break out of the middle class. Prof. Lin, who was the Chief Economist at the World Bank in 2008-2012, offered a “new structural economy” approach. Given the title “new” to distinguish it from the “old” structural approach adopted after World War II, namely developing capital and technology to increase worker productivity. The efforts of the late Prof. BJ Habibie can be said to be an old structural approach, namely by designing technological leaps through the aviation industry. Other efforts such as import substitution (developing domestic industries to replace imported products) are another effort. However, this approach is fraught with problems of corruption, collusion and economic distortion which ultimately lead to state bankruptcy and economic recession.
He said that the new structural economics approach, developed by Justin Yifu Lin, is more realistic. Prof. Lin said that no country has managed to break out of middle income status without strong industrial policies. One of the keys is to target industrial policies in sectors where the country has abundant resources. In the case of Indonesia, two abundant resources are natural resources and human labor.
Dimas Muhamad (Committee for Handling Covid-19 and National Economic Recovery / KPC-PEN) said that many parties in Indonesia were ‘traumatized’ by industrialization policies given the bitter experiences with the national aircraft industry and the national car industry. However, according to Justin Lin, this failure was due to Indonesia targeting industrial sectors where Indonesia did not have sufficient resources, such as the aviation industry which required highly skilled human resources which Indonesia did not at that time.
There are six practical steps proposed by prof. Justin Lin, one of President Xi Jinping’s top economic advisers. One of them is strengthening industrial zones or industrial parks. Another step is to provide incentives in the form of subsidies, tax and credit facilities, as well as facilities for obtaining salty currency for pioneer companies.
According to Dr. Kiki Verico (from LPEM FEB UI). One of the problems in Indonesia’s industrialization program is low human resources so that the government faces a dilemma, which one needs to come first, improvement of human resources or industrial development and investment? Meanwhile, Dr. M. Edhie Purnawan (FEB UGM) said that the problems of economic stability and political stability are factors that need to be considered so that industrialization policies in Indonesia can be successful.
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