A One Time Window of Opportunity

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A. A One Time Window of Opportunity

ndonesia aspires to close the gap with high-income countries, boost prosperity, and avoid the middle- income trap. These are ambitious but achievable goals, especially if we put historical perspective into the context. Indonesia started at the comparable income level with Thailand, Taiwan and South Korea back at the 1950; China was even way poorer than Indonesia at that time¹. What happen is that Taiwan and South Korea–focusing on massive investment in human capital, manufacturing and technology–experienced a very rapid income growth since the second half of 1960s thus leaving Indonesia well behind while they become solid high-income countries in 1990s. This is also true for Thailand in late 80s where it outperformed Indonesia and positioned well above Indonesia in the 90s thus better af irming its position as an upper-middle income countries and further setting the right track on becoming high income countries in the future. China, though started signi icantly poorer than Indonesia, were able to grow very robust over time and inally managed to record double digit income growth during the 2000s making it leapfrogged Indonesia in term of GDP per capita; thanks for its heavy investment in infrastructure and high productivity in low-skilled manufacturing sectors. Indonesia, on the other hand, only recorded modest income growth and never touched the rapid growth rate experienced by those countries that overtook its position see Figure 1 The period of 2000s is a very crucial period. This is the period where Chinas income inally leapfrogged Indonesias. It should be of note that before Asian Financial Crisis AFC, Indonesias income was still well above China and it had arguably set the right track to becoming upper-middle and even high-income countries by having a robust manufacturing base. However, after recovering from the AFC Indonesia was kind of losing grasp to make it back on track. At a relatively stable period, 2003-2011, Indonesia was very much into commodity export, driven by global commodity boom during that period. As opposed to strong manufacturing production and export in China, Indonesias manufacturing competitiveness in 2000s was in the decline, moreover considering the strategy of Bank of Indonesia to keep Rupiah strong at that time. I 1 Income level is measured by GPD per Capita in constant 1990 USD converted at Geary Khamis PPPs STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA FIGURE 1. Income Growth Path in Selected Asian Countries, 1950-2013 Note: The igure on GDP per capita uses constant 1990 USD value converted using Geary Khamis PPPs. The growth path is indexed using 1950s value as a benchmark Source: The Conference Board, Total Economy Database January 2014 Even worse, the policy makers tend to marginalize investment in infrastructure and connectivity, which is very essential for manufacturing competitiveness, and prefer to spur money on highly inef icient petrol subsidy instead. As a result, Indonesia becomes too dependent on oil import, external balance tended to be more vulnerable to shock, and investors begin to l o s e c o n i d e n c e w i t h I n d o n e s i a s fundamental. What happen in the following years was that investors tended to opt out, making Indonesias Rupiah depreciated signi icantly, current account de icit widen at a rate never seen before in the last decade, and eventually all contractionary policy necessary to tame those negative trend resulted to a slower economic growth rate. In this decade, Indonesia lost the m o m e n t u m o f r a p i d g l o b a l manufacturing growth, while China took the advantage and dominate global manufacturing production, especially the low-skilled manufactured goods. This is why China could boost its income so rapidly, while Indonesias stayed modest at the 2000s. The diverging income growth path between those countries is best explained by two factors: the difference in their labor productivity level and share of the 3 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 30 25 20 15 10 5 China Indonesia South Korea Taiwan Thailand GDP per capita of Selected Asia Countries 1950 = 1 Based on GDP per capita decomposition as follows: GDPpopulation = GDPworkers workerspopulation. The irst right-hand side term refers to the aggregate labor productivity, while the second refers to the proportion of total population employed 2 population employed². Latest research show that 92 percent of the differences in GDP per capita across countries are explained by differences in labor productivity IMF 2013. Thereby, for Indonesia to have a rapid income growth in order to close the gap with other high-income countries and avoid middle-income trap, it needs to develop a solid productivity-driven growth strategy. The central piece on the productivity-driven growth is that Indonesia should revitalize its manufacturing export and Foreign Direct Investment FDI performance, especially FDI that focus more on export market, instead of only domestic market. To do so, it requires signi icant improvement in the business competitiveness, so that export-oriented irms are attracted to invest and produce in Indonesia. Even more important, Indonesia needs a much stronger business competitiveness environment than its competitors, especially other developing Asia countries. Indonesia cant afford to stay too long as a lower-middle income country. It needs to raise the income of its people and especially of the poorer 40 of the population. It has to also ensure more and better employment creation to feed the young-new workforce entrants. Indonesia only has this one time window of opportunity. Demographic bonus, the era where we can easily ind abundant source of productive workers, will b e s t o p p e d b y 2 0 3 0 . T h e g l o b a l competitiveness map is changing right now, as China becomes a more expensive production location following its rapid wage rise. It presents Indonesia with a potential to regain competitiveness in labor-intensive manufacturing exports. If Indonesia manages to make the most of this opportunity by having right policies, Indonesia is predicted to be able to capture 10 of Chinas 2012 market for labor intensive manufactures Papanek, et.al. 2014. In reverse, if Indonesia fails, it would be there for other competitors, like Vietnam, Bangladesh, and other less-developed countries, to tap into this golden opportunity and using it to leapfrog Indonesia sometime in the near future. As depressing as it sounds, Indonesia then might well get trapped in the lower-middle income status for quite a time. Given limited resources to deal with these global challenges and opportunities, it is indeed a tough task for policymakers to make the right decision on how to s t r e n g t h e n I n d o n e s i a s b u s i n e s s competitiveness in order to boost countrys productivity. APINDOs Survey on Business Competitiveness seeks to dig deeper on the obstacles that have long stalled business advancement in Indonesia so that policymakers and businesses can have a more complete and deeper view regarding what aspects that should be improved to better compete in a more globalized world economy. This study tries to complement other existing index and ranking available publicly with a closer look on what matter the most for Indonesian businesses, especially the aspects central to business competitiveness such as logistics, infrastructure, and employment regulation in Indonesia. This s t u d y a l s o p r o v i d e s p r a c t i c a l recommendation to move Indonesian economy forwards, strengthen business competitiveness, and stimulate con idence among Indonesian businesses to better compete in the international market. 4 STRENGTHENING BUSINESS COMPETITIVENESS FOR A PROSPEROUS INDONESIA

B. About the APINDOs Business Competitiveness