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View all search resultsIndonesia and India: The need to develop the manufacturing sector
With its rapid growth, contribution to global recovery following the global financial crisis in 2008 China is center stage
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W
ith its rapid growth, contribution to global recovery following the global financial crisis in 2008 China is center stage. Little attention has been paid to Asia's two other giants 'Indonesia and India. Although less noticed than China, the two countries were also resilient during the crisis and show promising futures.
India and Indonesia have more similarities than one could imagine. They stand among the most populated countries in the world, with India being the second and Indonesia the fourth.
Together they are home to more Muslims than the Middle East, North Africa, Europe and the Americas combined. The two countries are also among the world's three largest democracies.
Moreover, the countries' first leaders, in some sense, shared identical characteristics. Both Nehru and Soekarno were nationalists in their political outlook and at the same time, socialists in their approach to development.
Although their paths in early development policies and outcomes were parallel, they diverged as Indonesia began to initiate reforms in 1967 with its new leader, Soeharto. Indonesian strategies to restore macroeconomic stability worked and succeeded to bring the country into the group of lower-middle income economies by the early 1990s.
In contrast, it was not until the late 1980s that India began to introduce liberalization measures. In fact, India's dirigisme had been so firm that in the first four decades after independence, the economy only grew at a slow pace of 3 percent (Thee, 2012).
In the last decade (2001-2011) average real growth stood at 7.7 percent for India and 5.5 percent for Indonesia. In the same decade, Indian and Indonesian exports increased by 15.1 percent and 7.8 percent on average, whereas in 2005-2010 poverty rates declined by 9 percent and 3.4 percent, respectively.
Following stellar growth, performance of social indicators also increased. In the last 20 years (1980-2010), life expectancy in both countries increased, infant mortality rates decreased and the percentage of the population with access to improved drinking water also increased by more than onefold in India and more than twofold in Indonesia.
To date, both countries are Asia's third and fifth largest economies (Thee, 2012) and are members of the G20. However, the current situation in both countries remains challenging.
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Reality shows that infrastructure development in both countries has consistently fallen short of plans.
Despite the outstanding economic performances, the share of manufacturing in GDP and exports in India and Indonesia declined in recent years. In India, growth was driven by services and in Indonesia, by rising commodity price ' leaving manufacturing as no driver in either case.
In the seventh Sadli lecture co-presented by Australian National University's (ANU) Indonesia Project and LPEM FEUI in Jakarta a few weeks ago, Vikram Nehru argued that both India and Indonesia had the potential to become more
productive in the future.
To become so, however, he suggests both countries undertake structural reform and develop the labor-intensive manufacturing sector. Nehru contends that manufacturing is important due to two main reasons.
First, labor productivity in manufacturing exhibits unconditional convergence. With unconditional convergence, a country's productivity tends to catch up with technology frontier irrespective of country-specific characteristics.
Moreover, industries that start at a lower level of labor productivity experience more rapid growth
(Rodrik, 2012).
Second, Nehru highlights the populations of both countries, which show growing labor forces in the coming decade ' India by 130 million and Indonesia by 20 million. None of the countries demonstrate markers of being near the peak of labor's glut before eventually declining ' known theoretically as the Lewis turning point.
Nehru, furthermore, compares the performance of the two countries in four policy areas, all of which are necessary for sustainable growth in manufacturing: trade, investment, and macroeconomic framework; infrastructure development and the primacy of healthy urban areas; human-capital development; and flexibility in factor markets.
In each area, he recognizes similarities and differences and identifies what each country could learn from one another.
In the area of trade and foreign investment policies, for instance, Nehru posits that India could learn from Indonesia in liberalizing its trade regime by studying whether the Indonesian examples could be applied in India.
While both countries have reduced the level of protection by lowering at-the-border and behind-the-border trade barriers, protection in Indonesia is lower than India; as suggested by the rank of the Overall Trade Restrictiveness Index (OTRI) and the effective rate of protection (ERP).
Although lower, Indonesia also applies non-tariff measures such as import license plus pre-shipment inspection (200 iron and steel products) and restriction of public procurement to domestic products (558 sub-sectors).
Likewise, Indonesia could learn from India in the area of infrastructure policies. To boost growth, infrastructure bottlenecks, especially in manufacturing, must be reduced.
Although both countries have increased commitment to procure infrastructure; Indonesia through the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (2011-2025) and India through the Approach Paper to the Twelfth Five Year Plan (2012-2017); reality shows that infrastructure development in both countries has consistently fallen short of plans.
Nehru examines that there are at least three barriers in infrastructure development: financial shortage, land acquisition problem, and capacity and skills shortage ' notably in designing and managing Public Private Partnership (PPP) projects. Despite the barriers, India has secured a large pipeline of PPP projects.
Moreover, its growing experience has enabled India to reduce delays in design and implementation. In recent years (2010-2011), India has implemented 95 PPP projects, worth US$72 billion as opposed to Indonesia with only two projects, worth $3.4 billion.
In the final part, Nehru discusses the conditions under which manufacturing itself is organized: the political economy of policy making. One final emphasis he provides is also worth to note as a lesson for Indonesia.
He highlights the complex political structures in both countries, such as fragile coalitions, as an impediment in reaching consensus and decision-making process. On top of India's and Indonesia's huge commitment to democracy and decentralization, he recognizes that political and democratic system must at the same time evolve.
Furthermore, the evolution must be in ways that balance freedoms and rights of individual and the ability of society and government to act on behalf of national interest.
The writer is a research associate at University of Indonesia's Institute for Economic and Social Research (LPEM FEUI) and a contributor to the Indonesia Project at the Australian National University (ANU).
