Indonesia\'s Horizon 2019-2024
President Joko Widodo\'s speech on 14 July 2019 reminded us of the period of attending a postgraduate economic education in the early 1990s in Providence, Rhode Island, United States.
At that time, ahead of the technological development which is now called Industry 4.0, modern planning concepts, which were forward looking, were introduced. The rational expectation hypothesis (Lucas, 1972), which later won the Nobel in 1995, changed the assumptions of economic actors who were passive to active economic actors whose mindset and behavior could influence whether a government policy was successful or not.
The perfect foresight hypothesis which is a variant of the rational expectation hypothesis inspires that future success depends on whether the agent has the belief that what he is doing will be successful. Therefore, positive thinking is an important requirement for future success.
There are five work programs/priority targets in the speech of the President of the Republic of Indonesia, namely accelerating and continuing infrastructure development, building human resources (HR), inviting investment as wide as possible to create jobs, executing structural and mindset reforms, and using the State Budget (APBN) that is focused and on target. And, as its main prerequisite is the firmness and robustness that includes the Pancasila ideology, national integration and unity, and Bhinneka Tunggal Ika (Unity in Diversity).
The first four targets are related to the endogenous growth concept that was initiated by Romer (1989) who later won the 2018 Nobel prize. This model is a modification of the Solow model (1956). The word endogen here means that factors that influence development can be controlled or can be made a policy, contrary to external words that have implications beyond the control of the maker to the policy.
New physical investment is paying off in the long run so that the future economic prospects are the main consideration.
The Solow model in accordance with the times concludes that physical capital stock per capita explains why there are prosperous countries and poor countries. For Indonesia, the 2014-2019 term is a period for strengthening the physical capital of domestic infrastructure to improve competitiveness. In addition to increasing national productivity, the goal of enriching physical infrastructure capital is to improve investors\' perceptions on the position of competitiveness among countries in the world. New physical investment is paying off in the long run so that the future economic prospects are the main consideration.
Future infrastructure projects are emphasized to create interconnectivity with backbone infrastructure which has been completed. Connecting several economic agglomerations to create inclusive growth. Interconnectivity creates a network effect, namely the synergy of economy of scale outside the business unit for people\'s production businesses in the fields of small industries, tourism, rice fields, plantations, fish farming, and special economics.
Searching for new sources of growth
HR development is a further development of the Solow model into an endogenous growth model. Vocational education requires a curriculum that provides skills and adaptability to technological changes. Here, the concept of graduates who are prepared to work has shifted to being ready to adapt.
For universities, what is needed is a curriculum that generates open thinking skills, that include creative thinking, critical thinking, and empirical thinking. Creative thinking is to find new solutions. Critical thinking is to choose the most relevant alternative solutions. Empirical thinking is implementing the design of these solutions.
Data from the 2019 Global Talent Index shows that of the 59 countries surveyed, Indonesia is ranked the 54th for business skills that include accounting, communication, finance, management, marketing and sales capabilities. This ranking is below neighboring countries in ASEAN, such as Vietnam (41), Thailand (43), Philippines (44), and Malaysia (46). For technology, which consists of computer networks, databases, interactions between humans and computers (HCI), operating systems, network security engineering and software engineering, Indonesia occupies the 54th place, slightly below Vietnam (52) and still above the Philippines (55).
This ranking is consistent with PISA (elementary school ability survey) in which Indonesia ranks the 62nd for reading, mathematics and science from 69 countries being surveyed. Weaknesses from basic education seem to be continued to a higher level until finally entering employment. There needs to be comprehensive improvement for the curriculum from the elementary, secondary, to higher education, including vocational education.
At present, academic achievement figures give higher indication on the ability to memorize the material being given compared to analytical skills and solving problems.
Learning activities give more emphasis on individual skills rather than cooperation and coordination in groups. Especially for vocational education, the curriculum composition of 75 for general subjects compared to 25 for productive subjects needs to be reversed to 25 versus 75.
In the context of endogenous growth, the economy is divided into two sectors. The first, producing conventional goods and services. However, in order to look for new sources of growth, a research and development sector (R&D) is needed, including to produce innovation for intangible products. Innovation will produce a steady growth if the nature of R&D is to produce decreasing returns to scale, which relies on the shifting of consumer tastes and demographic bonuses.
Examples of new growth sources of this type of innovation are architecture, design, visual arts (film and others), marketing of organic agricultural products through market places, tourism, music, culinary, fashion, and digital media. These fields can be found in the agricultural, manufacturing, or public service sectors which, according to conservative estimates, are around 19 percent of GDP. These fields have consistently grown above the national average growth rate of 1 to 2 percent per year. Until now Indonesia seems to be still in this stage.
Increased growth will occur if R&D produces results with increasing multiples according to increasing returns to scale. This characteristics occurs in the fields of Industry 4.5 and 5.0, such as artificial intelligence (AI), robotic technology, gene therapy, big data analysis, and remote health care systems.
Towards Bureaucracy 5.0
Government bureaucracy is a central part of efforts to look for new sources of growth by optimizing the APBN allocation. Ideally the bureaucracy as a development agent is the facilitator of the process. However, bureaucracy more frequently becomes a regulatory factory so that the economy becomes over-regulated.
The problem is complex, more than just rent-seeking motives (Glaeser et al. 2004), Acemoglu et al. 2005, and d’Agostino et al. (2016). Here, it also includes sectoral egos to demonstrate existence so as to produce regulations that are overcompliance and too complicated compared to similar processes in other countries that are also the competitors.
This rating increase was driven by the infrastructure index which increased 9.5 percent from 2.65 to 2.90.
The Logistics Performance Index (LPI) data among the countries can be used as a proxy for the regulatory burden. In general, the LPI ranking for Indonesia increased from the 63rd position in 2016 to the 45th position in 2018. That means, compared to other countries, this leap in the ranking was quite impressive. This rating increase was driven by the infrastructure index which increased 9.5 percent from 2.65 to 2.90.
Improvement on the infrastructure quality explains why the timeliness rating also rose sharply from the 51st position to 39th.
What remains a problem is the fact that custom represents the regulatory burden. The index figure does not move much, it even drops slightly from 2.69 in 2016 to 2.67 in 2018. Interestingly, in the same time the custom rating in Indonesia has increased from the 69th to 62nd. This means that there are other countries that are worse off compared to Indonesia.
Some lessons from other countries show how bureaucracy is used as a facilitator to increase exports. In the Indonesian context, this can help the country to solve the problem of deficit in the trade balance and the current account balance that has been going on for years.
Australia, for example, uses the name DFAT for its foreign ministry. DFA stands for department of foreign affairs. The letter T behind is trade. Australia uses its foreign ministry to open roads and provide information on export opportunities in other countries. Moreover, lobbying is carried out so that entrepreneurs can participate in international supply chains.
Still within the framework of Bureaucracy 5.0, other information also shows that the use of the database from satellite senses on the intensity of light at night from the lights has been used to monitor economic activities in their own countries and trading partner countries [Henderson et al (2012)].
Several countries also use satellite data to observe crude oil or palm oil tankers which are anchored in front of the ports, but do not dock to unload the cargoes, as a predictor for the development of future commodity prices. The change in mindset towards Bureaucracy 5.0 is absolutely necessary for Indonesia because in addition to being a necessity to face an ever-changing external environment, it is also to increase national dignity in the eyes of the world.
Ari Kuncoro, Professor and Dean, Economics and Business School, University of Indonesia