Indonesia: A country must know itself to grow

June 28, 2011

  • The key lesson from new structural lesson is, for an industrial policy to be successful it should target sectors that conform to the economy’s comparative advantage
  • Despite Indonesia’s good performance compared to other developing countries there is still room for improvement, and the government’s master plan can help Indonesia to be among future growth poles

Jakarta, June 28, 2011 – “Know thyself” may be an age-old maxim but it also holds true for a country’s economic development, as mentioned by Dr. Justin Lin, the World Bank Lead Economist while visiting Indonesia. He explained in his theory of new structural economics, it is important for a country to know which industries where it has comparative advantages as a smart development strategy.

New structural economics theory
Dr. Lin presented his theory on new structural economics during his public lecture at the Habibie Center in Jakarta. The key lesson from his theory is that for an industrial policy to be successful, it should target sectors that conform to the economy’s comparative advantage. He explained that once sectors with comparative advantages had been identified, the government should help facilitate to maximize potential. He added that Indonesia should also take advantage as a “latecomer”, taking in opportunities by targeting industries that have been left behind by more advanced countries’ but with similar endowments.

There have been many successful examples of Dr. Lin’s theory. He cited a few, such as Britain targeting the Netherlands’ industries in the 16th and 17th century. Then in turn Britain’s industries were targeted by Germany, USA, and France during the late 19th century. A more recent and closer example for Indonesia is how Korea, Hong Kong, Taiwan, and Singapore all grew rapidly during 1960-1980s by targeting Japan’s industries which had similar conditions.

To apply his theory, Dr. Lin gave an elaboration on the growth identification and facilitation approach which can be used to design industrial policies to support the development of new industries with latent comparative advantage.

Indonesia’s Master Plan
During the public lecture, Dr. Lin also touched on Indonesia’s Master Plan 2011-2025 recently launched by the government and commented that Indonesia could even surpass targets placed in the master plan. He used China as an example where in the 1980s the country planned to quadruple its economy in 20 years. This would require a consistent annual growth of 7.2% for 20 years, which is similar to Indonesia’s Master Plan. In reality, China managed to achieve an annual growth rate of 9.9% continuously for 30 years.

He added that politics can be a barrier for the economic growth of a country. To overcome this, a social consensus is needed, and the Indonesian master plan can be just that. Despite Indonesia’s good performance compared to other developing countries, Dr. Lin reminded that there is still room for improvement. However, he is optimistic that the master plan can help guide Indonesia to be among the major growth poles by 2025.

Growth identification and facilitation approach: 

  • Step 1: Find fast growing countries with similar endowments and with about 100% higher per capita income. Identify dynamically growing tradable industries that have grown well in those countries for the last 20 years.
  • Step 2: See if some private domestic firms are already in those industries. Identify constraints to quality upgrading or further firm entry then take action to remove constraints.
  • Step 3: In industries where no domestic firms are currently present, seek foreign direct investment from countries examined in Step 1 or organize new firm incubation programs.
  • Step 4: The government should also pay attention to spontaneous self discovery by private enterprises and give support to scale up the successful private innovations in new industries.
  • Step 5: In countries with poor infrastructure and bad business environment, special economic zones or industrial parks may be used to overcome these barriers.
  • Step 6: The government may compensate pioneer firms in the identified industries with tax incentives for a limited period, direct credits for investments, access to foreign exchanges.