Newsgroups: bit.listserv.seasia-l
Date:         Fri, 10 Apr 1992 10:39:44 PDT
From:         "Indonesia Publications/Task Force" <apakabar@IGC.ORG>
Subject:      Low-Tech/No-Tech Tech Transfer?
X-To:         seasia-l@msu.edu

Forwarded from PeaceNet reg.indonesia conference:
Topic 540Low-Tech and Labor Driven
nlutzreg.indonesia12:01 am  Apr  7, 1992

Source: Far Eastern Economic Review    Date: April 2, 1992
Story Type: Analysis                   Original Language: English
Dateline: (Jakarta)                    Byline: Adam Schwarz
Text: Full

                  LOW-TECH AND LABOR DRIVEN

While patterns of Indonesian trade and industrialisation have
changed markedly over the past decade, their future direction
now seems reasonably clear. By offering multiple incentives to
export and letting market signals determine investment flows,
Indonesian policymakers have succeeded in making economic growth
follow from the nation's two key advantages: abundant natural
resources and labor.

"Industrialisation in Indonesia will be a tenuous, gradual,
step-by-step process, always affected by a huge oversupply of
labor," says economist Dorodjatun Kuntjoro-Jakti of the
University of Indonesia. This fact of economic life is
disappointing to some. The influential Minister of Research and
Technology B.J. Habibie has vigorously lobbied over the past 20
years for greater investment in such industries as aircraft
manufacturing and nuclear-power generation. Equally, many
officials in the Ministry of Mines and Energy and the Ministry of
Industry are keen to see more investment in upstream, high
value-added industries.

"We would like to see more [investment] that brings in modern
skills and technologies," says Tungky Ariwibowo, deputy minister
of industry. "[But] our primary competitive advantages are our
natural and human resources. These factors will not change."

Although some investment will take place in higher technology
businesses, most of Indonesia's main growth areas for the
remainder of the century are likely to be in low-technology,
labor-intensive industries. These include garments, textiles,
footwear, plywood and furniture, fisheries and livestock,
minerals, tourism, basic farm equipment and metal tools, toys,
foundry products, canned foods and processed agricultural goods.
Most of these industries will be driven by export sales.

Some of these industries, in the space of three to five years,
Fave grown to become Indonesia's top non-oil exporters.
Footwear exports, for example, rose from U.S. $23 million in
1987 to more than U.S. $900 million in 1991. The head of the
footwear manufacturers' association estimated 1992 exports at
U.S. $1.2 billion.

Textiles and garments are an even bigger success story. Rudy
Lengkong, chairman of the National Agency for Export Development,
said exports of textiles and textile products rose more than
six-fold from U.S. $559 million in 1985 to almost U.S. $3.4
billion in 1991. Textiles and footwear have absorbed billions of
dollars in foreign investment in the past five years.

The structure of Indonesia's economy will ensure that this sort
of industrialisation continues. "Industries are building on the
back of plentiful, unskilled labor and a huge base of natural
resources. We can survive on this for another 20 years,"
Kuntjoro-Jakti says.

There are a number of factors which militate against a push into
higher value-added industries, though demographics is probably
the most important. Some 2.3 million Indonesians enter the
workforce each year, the vast majority of them relatively
unskilled, to join an already underemployed labor pool.
Economists estimate that about 44% of the country's 78 million-
strong labor force works less than 35 hours a week, with 50% of
the underemployed working less than 24 hours a week.

"Why should investors force their way into expensive, high
value-added industries? You have to look at the signals sent by
input costs, in this case by cheap labor. For investors it's just
too tempting to use the big labor market here," Kuntjoro-Jakti
says.

Another factor that discourages more investment in higher
technology industries is the lack of infrastructure like
electricity, water supply and telecommunications. Higher
technology industries are more dependent on these inputs than are
simple technologies.

The regulatory environment, both local and foreign, also tends to
discourage capital-intensive investment, economists say.
"Investors don't think long term here because [the government's]
policies are always changing," says economist Mari Pangestu of
the Center for Stategic and International Studies in Jakarta.

Uncertainty about future policies, she says, not only adds to the
cost of investment but also helps determine what kind of
investments are made. "We get a lot of footloose, low-capital
investments. They can pick up and go when they want."

University of Indonesia academic Iwan Jaya Azis says a rise in
global protectionist sentiment will further encourage Indonesia's
current industrialisation trend. "If the world moves away from
the Gatt multilateral trading system, then each country will have
to focus even more on its own comparative advantages," he says.

Economists, government officials and other analysts say that for
Indonesia to compete internationally, the economy must become
more efficient. "Indonesia's economy is still marked by
inefficiencies and high costs," declared a recent editorial in
Kompas, Indonesia's leading newspaper.

The government hopes the Asean Free Trade Area (Afta) proposal,
agreed at Asean's summit in Singapore during January, will force
Indonesian industries to become more efficient. The Afta
agreement commits Asean members to lower or remove tariffs on
most intra-Asean trade over a 15-year period. In the past,
Indonesia has blocked such initiatives out of fear that its
industries would be devastated by competition from more
competitive Asean members. But a comprehensive program of
economic reform has strengthened Indonesian industry and
lessened, though not eliminated, this fear.

Prior to the Asean summit, Indonesia was expected to resist
including capital goods under the Afta framework. But, to the
surprise of many, Industry Minister Hartarto told his Asean
counterparts at the summit that Indonesia would agree to include
capital goods.

The news came as an unpleasant surprise to some Indonesian
businessmen, notably those active in relatively protected areas.
Herman Latief, who heads the Indonesian Automotive Industry
Association, said car manufacturers were not ready to deal with
regional competitors.

Finance Minister Johannes Sumarlin defends the decision to push
ahead with Indonesian participation in Afta. "We have to face
that [competitive] challenge. We cannot wait," he told the
REVIEW. "If we don't make the economy more competitive, Indonesia
will become just a market for the rest of Asean, the place where
others sell their goods."

Pangestu said Indonesia could potentially gain more from Afta
than the rest of Asean. "Afta should increase intra-Asean trade
and, in the long run, Indonesia will have the largest range of
industries among Asean countries," she says.

By exposing industries to greater competition from Asean members,
Indonesia will also be better prepared to face future competition
from other countries which share Indonesia's labor and resource
profile. Ariwibowo identifies China, Vietnam, Pakistan and
Bangladesh as Indonesia's main long-term competitors in Asia.
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