O

ver the past two years Indonesia has been reviving its economy by advancing infrastructure projects and implementing bureaucracy reforms at different government levels. President Joko “Jokowi” Widodo is focusing on policies to eliminate tariff and non-tariff barriers in order to lure foreign companies to invest in Indonesia.

Investment is truly crucial for our economy but in order to really achieve long-term economic success, we first need to evaluate the outlook of current economic trends, especially our export of goods.

Statistically speaking, in the past four years ASEAN countries and other emerging markets have been struggling to sustain their exports. Malaysia’s exports reached US$199.87 billion in 2015, a decline from $228.09 billion in 2011.

India has also experienced a similar downtrend. Its exports totaled only $267.15 billion in 2015 after reaching $302.91 billion in 2011.

Both countries lost approximately 12 percent of their exports in four years. But during the same period, Indonesia’s exports projected a different outlook. In sharp contrast, Indonesia’s exports fell by 26.2 percent.

In 2011, Indonesia’s exports totaled $203.5 billion. Then in 2015, the number fell sharply to $150.25 billion. These numbers are profoundly alarming and we are heading into a critical phase. It is crucial to review the focus of our economy, and to learn from the success of our neighboring ASEAN country: Vietnam.

In the past five years, Vietnam’s exports grew consistently from $72.24 billion in 2010 to $162.11 billion in 2015. The exports doubled in five years.

In 2005, Intel Corporation expanded its global operation and considered different locations for a new assembly and test (AT) plant that would become the biggest facility in the world, at an estimated cost of $1 billion.

Intel listed many possible locations and each place was evaluated based on strict requirements including geographic profile, the availability of water and power, environmental safety, supply chain and logistics, efficiency of the workforce, bureaucracy and political risks, level of corruption (government) and the protection of intellectual property (patent laws).

A number of Asian, Latin American and Middle Eastern countries were initially considered but Intel finally narrowed its list to four places: Bangkok, Chennai in India, Dalian in China and Ho Chi Minh City in Vietnam.

The decision was very important because the new AT plant would play an important role in the production of Intel’s latest products and also a new generation chip in the future. In January 2006, Intel announced it would build the new AT facility in Vietnam.

The construction of the AT facility began in 2007 and was finally completed in 2010. Other corporations such as Samsung, LG, Panasonic and Microsoft later followed and expanded their factories in Vietnam. In 2013, Intel expanded its factory to include a new plant for microchip production.

Although the global economy is experiencing a major slowdown, Vietnam has been exceptionally successful in sustaining its growth at an unprecedented rate.

Industrial transformation is a large part of its success but the key factor in the milestone was technological progress. From 2002 to 2005, the expansion of innovation and technology created a new Vietnam, a transformational phase of both infrastructure and resources.

But the transformational period did not take place exclusively in Vietnam. All of ASEAN is also transforming, especially in governance and leadership. ASEAN society today is more democratic than at any other time in history.

People in Myanmar have elected their leaders in a peaceful and transparent process. In countries such as Indonesia, Singapore and the Philippines, huge support from the people has elected strong figures to lead the countries.

The entire region is rising and the business sector is projecting a very positive outlook. ASEAN’s 625 million people are now more globally connected than ever before.

And in this globally connected market, ASEAN members are also competing with one another. The expansion of Intel’s AT plant in 2005 has proved that ASEAN countries are fully capable of partnering with large foreign corporations.

But in this case, unfortunately Indonesia failed to compete and lost a major opportunity in the industrial sector.

However, Indonesia still holds great potential for the next expansion in the future. Of 625 million ASEAN people, a large part (45 percent) of the population is Indonesian. But before we participate in the next industrial expansion, we must catch up on our potential, referring to the parameters used by Intel: supply chain and logistics, efficiency of the workforce, bureaucracy and political risks, the level of corruption and patent laws.

Indonesia is ranked 88th in the world based on a 2015 Corruption Perception Index (CPI) report, far inferior to neighboring countries Malaysia (54th) and Singapore (eighth).

The ideal ranking should be among the top 30, placing Indonesia equal with other Asian partners such as Taiwan, Hong Kong and Japan. A higher CPI rank will certainly distinguish Indonesia among ASEAN countries.

In March 2016, the Asian Development Bank (ADB) reported that 52 percent of the Indonesian workforce was under-qualified. It means half of our production is supported by profession mismatches. This number also indicates that once we achieve the ideal standard, the entire economy will rise and transform significantly.

Professor Robert Solow, an economist and Nobel Prize winner, mentioned in his economic growth model that investment only determines a steady-state output (per capita), not a steady-state growth rate of output.

According to Solow model, even a rigorous flow of investment will not secure a steady growth rate in the economy. The only way to achieve a steady-state growth rate is through technology and innovation.

The fact that we could not compete with Vietnam and Thailand (on the Intel AT plant) is clearly an indication of our underdeveloped sectors in need of technological progress.

One day, the next $1 billion factory will be waiting at our doorstep and at that point in time, it will require a certain level of technology and skills from our local resources.

Technological progress can be accomplished in various ways but we can start with supporting academic research, providing incentives for entrepreneurs, improving labor efficiency, simplifying regulations and implementing other practical means to cultivate innovation.

Investors come and go, but the focus of our development must not alter. Transforming the country with technology and innovation is the key to creating an economy with a steady-state growth rate. It will help our currently declining exports and, in the long term, secure our economic success.
_______________________________

The writer is a Harvard Business School and University of Maryland, College Park alumni and is currently working in infrastructure development for Bouygues Construction in Singapore. The views expressed are his own.