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Innovate or stagnate: The road to Indonesia 4.0

Erry Wahyu Prasetyo (The Jakarta Post)
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Jakarta
Wed, February 27, 2019

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Innovate or stagnate: The road to Indonesia 4.0 Illustration of economic growth (Shutterstock/Number1411)

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n an official report released on Feb. 6, Statistics Indonesia (BPS) revealed that Indonesia’s gross domestic product (GDP) per capita for 2018 reached a record US$3,927. This means that Indonesia has officially graduated from the lower-middle income classification, breaking the $3,896 threshold set by the World Bank for a country to be classified as an upper-middle income country.

This is a cause to celebrate, but that does not mean that the road ahead will be easier for Indonesia. To join the high-income club, Indonesia has to break through $12,055 GDP per capita. That means an average of 5 percent economic growth has to be maintained until 2045. Otherwise, it will join many developing countries in the middle-income trap, where it can no longer compete internationally both in labor-intensive low-value added activities (because wages are too high) as well as in knowledge-intensive high-value added activities (because productivity is too low).

In its China 2030 report, the World Bank highlights that out of the 101 economies classified as middle income in 1960, only 13 (including Singapore and South Korea) joined the high-income club by 2008, while the rest were stuck in the middle-income trap (including Argentina, Brazil and South Africa).

If one wonders what the chances are for Indonesia in facing the middle-income trap, one could calculate Indonesia’s odds by analyzing at least three variables: economic complexity, labor force productivity and innovative capabilities.

For economic complexity, we can use the Economic Complexity Index (ECI) of Harvard’s Center for International Development. The index is a measure of the knowledge and innovation in a society that is translated into the products it makes and exports. Among 127 countries, Indonesia’s rank has improved from 87 in 1995 to 59 in 2016. However, Vietnam performed better, from 114 in 1995 to 56 in 2016. Among other ASEAN economies, Indonesia also lags behind with Thailand, Malaysia and Singapore at 27, 22 and 5 respectively. This shows that Indonesia’s products and exports are more factor driven in contrast to its neighbors with more innovation driven products.

Next, in line with International Labor Organization’s method for computing productivity, we can borrow World Bank data of GDP per person employed as an indicator for labor productivity. For 2018, Indonesia sits behind Singapore, Malaysia and Thailand, but higher than Vietnam. This shows that Vietnam is relatively more competitive in the world economy with its labor force cheaper than Indonesia’s while its ECI ranking is higher than Indonesia.

Regarding innovative capabilities, although there are many important variables such as education and infrastructure, an important variable that Indonesia lags behind most countries is its research and development (R&D) expenditure. The latest data from the World Bank shows that the world’s average for R&D expenditure as a percentage of GDP is 2.3 percent. Indonesia, a member of the G20, only spends 0.08 percent of GDP on R&D. This number is not only way off compared to the world’s average, but is also dwarfed by other neighboring countries such as Vietnam (0.44 percent), Thailand (0.62 percent), Malaysia (1.30 percent) and Singapore (2.18 percent).

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