Indonesian Competitiveness

KOMPAS/PRIYOMBODO

The second expansion phase for the Cilacap steam power plant is trialed on 16 Sept. 2019 in Karangkandri village of Kesugihan district, Cilacap regency, Central Java. The second phase of the power plant’s expansion, which has an installed capacity of 1,000 megawatts, is expected to start commercial operations to supply the Java-Bali electricity network in October, faster than August 2020 as initially scheduled.

Indonesia’s ranking on the World Economic Forum’s global competitiveness index dropped five places in 2019 to 50th place from 45th in the previous year. Although the country’s ranking is still higher than those of the Philippines (64), Vietnam (67), India (68) and Laos (113), it is below those of Malaysia (27) and Thailand (40).

If studied further, the causes of the decline are quite complex. A number of indicators show improvement but others show stagnation. The improvement in the ranking of other countries also influences Indonesia\'s position, which ranked 50th with a total score of 65 out of 100 in competitiveness performance, a decline of 0.3 points from the previous year.

On the positive side, perhaps other countries find it difficult to match the size of Indonesia\'s domestic market, which ranked 7th. However, the most interesting thing is that inflation, which is considered in determining macro stability, occupied 1st place.

KOMPAS/BAHANA PATRIA GUPTA

Job seekers flock the Job Market Fair and Entrepreneurship Exhibition on 11 Sept. 2019 at JX International in Surabaya, East Java.

The third pillar, namely transportation infrastructure, boosted Indonesia\'s position to 28th place. This pillar includes land connectivity (improved from 2018 but still ranked 72nd), road quality (48th), railroad density (39th) and airport connectivity (5th with a perfect score of 100).

Sea shipping connectivity is quite good (ranked 25th) although port efficiency is not very encouraging (61st). However, an improvement in transportation infrastructure ranking does not include infrastructure related to electricity, gas, drinking water and sanitation, which ranked 103rd, while access to electricity (score 87.5) and quality of electricity (85.8), ranked 105th and 108th, respectively. To be able to improve its ranking, Indonesia must get perfect scores for utilities.

Among aspects that caused a decline in Indonesia’s ranking is the stagnation and decline in indicators concerning the quality of human resources (HR). Overall, the health pillar ranked 96th out of 141 countries, with life expectancy ranked at 95th.

A crane lifts a train car to the Greater Jakarta Light Rail Transit (LRT) track at Harjamukti Terminal in Cibubur, East Jakarta, Sunday (13/10/2019). The first phase of the Greater Jakarta transportation project was 66.13 percent complete on 4 Oct. 2019.The education level of the workforce, which mostly comprises elementary school graduates, puts Indonesia in 92nd place for duration of education. This was compensated in part by the skills of the workforce, which ranked 36th, although the scores tended to decline, mainly because of low digital capability.

The labor market got a low score because it is too rigid and only ranked 119th. Another weakness is the ability of innovation, which ranked 74th, plus research and development (83rd). Luckily, entrepreneurial culture was in better position at 26th place.

Implications

Weaknesses in HR quality and innovation explain why Indonesia\'s export base is so narrow and overly dependent on commodities, because only a few manufactured products are exported. Without human resources of international standard, and innovation, it remains difficult to penetrate the international supply chain. This condition can lead to Indonesia remaining a producer of unprocessed goods with low added value.

As a result, Indonesia continues to suffer a current account deficit. At the same time, the country’s macroeconomic stability attracts an inflow of short-term funds, which helps cover the deficit. An interesting illustration is that from April to August 2019, Indonesia not only suffered a current account deficit but also a trade balance deficit.

KOMPAS/PRIYOMBODO

A rice trader measures rice on Sunday (13/10/2019) at Kebayoran Market, South Jakarta. The market price of rice is relatively stable, although the harvest season has ended in several rice production centers and others are experiencing drought.

The rupiah exchange rate can be still maintained at about Rp 14,000 per US dollar as short-term funds have continued to enter Indonesia since September 2018, thanks to the country’s macroeconomic stability and better economic growth prospects compared to other emerging markets.

The equilibrium, which is a combination of macroeconomic stability and current account deficit, which is still covered by short-term portfolio investments, is a convenient model, but it can also become a trap that keeps Indonesia in its comfort zone without structural transformation. This has been happening for years in Indonesia, even before the 1997-1998 monetary crisis.

KOMPAS/PRIYOMBODO

Customers browse the fresh fruit section at a supermarket on Jl. Jend. Sudirman, Central Jakarta, 12 Sept. 2019. Statistics Indonesia (BPS) records show that household consumption grew 5.01 percent year-on-year in the first quarter of 2019. Household consumption contributes 56.82 percent to gross domestic product and has a large impact on economic growth.

Complicated licensing procedures are reflected in the time it takes to start a business, which was in 103rd position, while the cost of starting a business ranked 67th. Both have improved from the 2018 rankings. However, this also explains why the commodity bonanza was mostly used to fund property projects, such as malls and apartments, in cities rather than factories that produce intermediate and final products for the downstream industry, domestic consumers and export markets.

During 2002-2012, quarterly growth in the construction sector reached 7.3 percent on an annual basis, far above the growth of gross domestic product (5.7 percent on an annual basis).

The trade, hotel and restaurant sector received a spillover with an annual growth of 6.9 percent. Perhaps due to the tax amnesty, many funds are still circulating in financial investment, although some have entered non-liquid investment such as property and services.

KOMPAS/HENDRA A SETYAWAN

Patients wait for their turn on Friday (9/8/2019) at the Pavilion B general ward of Siloam Hospitals Lippo Village in Karawaci district of Tangerang, Banten. Nearly 90 percent of Pavilion B patients are insured through the Health Care and Social Security Agency (BPJS Kesehatan).

Indonesia\'s decades-old development model is quite unique because it involves macroeconomic stability, minimal increase in productivity and a large population. Although Indonesia can rise from being a low-income country to a lower-middle income one, it should strive toward being a high-income developed country.

The latest competitiveness indicators from the World Economic Forum show that improvements in transportation infrastructure have contributed to Indonesia\'s competitiveness, but further improvement is needed, especially in roads, railways and secondary infrastructure that supports transportation.

The next step is to encourage the improvement of utility infrastructure (electricity, gas, drinking water and sanitation), which can improve basic health. To compete with other countries and change the equilibrium to become a more developed economy, human resources of better quality are needed for innovation and participation in international supply chains. For this reason, it is necessary to increase basic literacy (reading, mathematics and science) and technological literacy, while in the digital age like today, there should also be improvement in data literacy, as well as humanitarian literacy.

Ari Kuncoro, Rector, University of Indonesia