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Jakarta Post

Reforming inefficient economy

  • Editorial Board

    The Jakarta Post

Jakarta   /   Tue, August 13, 2019   /   08:50 am
Reforming inefficient economy Traders at Sindang Market, Koja, North Jakarta, on Wednesday. (JP/Dhoni Setiawan)

President Joko “Jokowi” Widodo strategically placed improving physical infrastructure and institutional capacity-building to develop a clean, efficient and competent system of governance and business licensing, as well as a better-targeted vocational training system, at the top of his priority working program right from the outset of his administration in October 2014.

Yet these factors apparently remain the main constraints on Indonesia’s growth. This means the magnitude of the problems has become so large that the pace of reform, though considered the fastest the country has ever seen over the past decade, seems utterly inadequate.

Coordinating Economic Minister Darmin Nasution and Finance Minister Sri Mulyani Indrawati conceded at a meeting last week that Indonesia’s economy was still largely inefficient and consequently uncompetitive, as evidenced by its incremental capital-output ratio (ICOR), the ratio of investment to growth, which stands at 6.6 percent, compared to Vietnam’s 4.6 percent.

The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. This level of inefficiency is also reflected in the World Economic Forum’s 2018 Global Competitiveness Report on 140 countries, which last year ranked Indonesia 45th, below Malaysia, 25th and Thailand, 38th. Most multilateral development agencies have concluded that Indonesia’s potential growth has been stuck at 6 percent at the most because of these challenges. This means any attempt to raise growth beyond 6 percent will overheat the engine of the economy.

Jokowi’s top priorities have by and large addressed the main factors that globally are considered the main determinant of long-term growth: institutions, infrastructure, technological readiness, macroeconomic context, health, education and skills, product and labor market, financial system, market size, business dynamism and innovation.

The government recently even decided to speed up the development of skilled labor by providing double tax deductions for companies conducting vocational training and providing internships, and even triple tax deduction for expenditure on research and development. This should boost the innovation process.

Jokowi has also pledged to step up the reform of labor rules, considered one of the world’s toughest on severance allowances, and the energy industry by continuing to phase out subsidy spending on fossil fuels and enhancing the harnessing of renewable energy.

But the government should also realize that the changing nature of economic competitiveness in the world has become increasingly transformed by new digital technologies that are creating a new set of challenges for governments and businesses.

Another crucial factor is openness to the outside world to strengthen competitiveness. The countries at the top ranks of the competitiveness index have economies that promote openness through low tariff and nontariff barriers, and ease of hiring foreign labor. It is critical, therefore, that these policies be put in place to improve the conditions of those adversely affected by globalization.