To become a developed country, Indonesia needs to increase its economic complexity index to at least become the world's top 10 in the next 10 years. A detailed derivative strategy is needed.
By
A Prasetyantoko
·5 minutes read
SALOMO TOBING
A Prasetyantoko
As reported by The Economist (29/3/2023), Indonesia and India are competing to become the country with the fastest economic growth in the Group of 20. Interestingly, this dynamic occurs amid changes in the global economic constellation as part of the impact of the implication of geopolitical fragmentation.
Inflation tends to be high as production and logistics costs are getting more expensive. Meanwhile investment decisions and capital flows no longer prioritize efficiency, but focus more on resilience.
The April 2023 issue of the World Economic Outlook, published by the International Monetary Fund highlights the implications of geopolitical fragmentation on the relocation of foreign investment in many developing countries. Geopolitical tensions push companies and policy makers to be more defensive by moving their investment portfolios back to their home countries or to safer partner countries. The off-shoring strategy turns into friend-shoring.
In April 2022, the United States Secretary of Treasury encouraged US companies to move their industry to partner countries. The European Commission proposed the Net Zero Industry Act in response to the US’ subsidies package under the Inflation Reduction Act. As a response to the US’ Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS Act), China is working hard to develop its own technology, such as semiconductors, which have so far been imported.
Amidst this situation, Indonesia and India are looking for higher growth opportunities by accepting more foreign investment relocations and entering further into the global supply chain.
In Indonesia, the sustainability of the downstream program is of key importance. Do not let the change of political regime in the 2024 general election hinder the process of transforming into a developed country.
Complexity
Ricardo Hausmann from Harvard University and Cesar Hidalgo from the Massachusetts Institute of Technology (MIT) developed a methodology for measuring economic complexity as an indicator of a nation's progress. Simply, economic complexity is measured by the variety of export products produced by a country (diversity) and how unique it is (uniquity). The higher the variety and uniqueness of export products, the higher the economic complexity index (ECI).
According to Hausmann and Hidalgo, compared with other indices, such as the competitiveness index and human development index, the ECI is better at describing the level of prosperity and social inequality of a country. Encouraging industrialization to produce export products that are more varied and competitive is a key strategy for developing countries to become developed countries.
Referring to the latest data (2021) of the Observatory of Economic Complexity (OEC) developed by the MIT Media Lab, the top three rankings of the economic complexity index are occupied by Japan, Switzerland and Taiwan. In the last 10 years, Singapore and South Korea have shown a remarkable increase. In 2011, Singapore was ranked 9th and in 2021 it moved up to 6th. During the same period, South Korea jumped from 10th to 4th.
What about India and Indonesia? In 2021, India was in the 41st position, or up by 10 levels from the 51st position in 2011. Meanwhile, Indonesia ranked 61st in 2021, or experienced a drastic increase from 78th position in 2011.
There is a large amount of homework for us to continue to improve the economic complexity rating. The Atlas of Economic Complexity data developed by the Harvard University Growth Lab shows that our exports are still dominated by commodity goods. In 2020, our total exports were worth US$177 billion and were dominated by palm oil (9.19 percent), coal (8.19 percent) and technology and information technology products (4.74 percent).
Meanwhile India’s exports, which reached $475 billion, were dominated by technology and information technology products (33.8 percent), refined oil (5.4 percent) and diamonds (3.14 percent). During that period, Indonesia's current account balance recorded a surplus of $3.3 billion, as compared with India’s $32.7 billion.
The main destinations for Indonesia's exports were China (19.32 percent), the US (10.57 percent) and Japan (8.22 percent). Meanwhile, India’s exports were mostly to the US (17.03 percent), China (6.99 percent) and the United Arab Emirates (UAE) (6.59 percent).
The downstream policy needs to be continued with the vision of 2045 as a developed country with a strong industrial base, one of which is as a major producer of electric car batteries that puts forward the principle of sustainability. The government has announced that by 2030 it will produce 140 gigawatt hours of battery electricity and become the fourth largest country in the world as a producer of clean energy.
To become a developed country, Indonesia needs to increase its economic complexity index to at least become the world's top 10 in the next 10 years.
The next 10 years will be the most decisive transitional phase, whether or not Indonesia will succeed in becoming a developed country. One of the measurements is whether during this period we managed to build a strong domestic industrial base. For this reason, more systematic and organized efforts are needed to build a varied and competitive industrial chain ecosystem.
To become a developed country, Indonesia needs to increase its economic complexity index to at least become the world's top 10 in the next 10 years. A detailed derivative strategy is needed regarding the supporting industrial ecosystem, funding and supporting regulations.
This road map needs to be carried out by whoever the next president-elect will be.
A Prasetyantoko, Rector of Atma Jaya Catholic University.
This article was translated by Hendarsyah Tarmizi.
