Kiki Verico: Strategies to Pursue Economic Progress
All countries want to be developed countries with high per capita income, but not all countries are able to achieve it. Many countries are stuck in the middle-income category with a long range of income per capita, which is US $ 3,996-12,375. Then how can you graduate from the middle-income country category? There is an ideal strategy but it is difficult and takes more than 20 years. There are also practical strategies, not easier, but more realistic. What is that?
The difficult strategy is to develop the manufacturing sector as a source of economic growth and the country’s foreign exchange. Building manufacturing requires the stability of the local currency exchange rate against the US dollar. Japan and South Korea feel the acceleration of local manufacturing development when the world exchange rate is still fixed (fixed exchange rate), while China accelerates manufacturing development when the world exchange rate is already floating (flexible exchange rate), but the exchange rate of yuan to the US dollar tends to be fixed.
Aside from exchange rate stability, manufacturing acceleration is determined by the strength of industrial research and the ability to process raw materials into finished or semi-finished goods. A product, say a car, consists of more than 4,000 components and involves at least 25 countries to make it.
So what makes a country can be said as a national car manufacturer? The answer consists of three elements: the state produces the most expensive part, enjoys the highest added value, and becomes the biggest investor in the production process. The biggest investment allocation is research and development. A country is said to master the manufacturing of certain products if it masters the highest research and technology of the product technology chain. Of course this is not easy because it is very expensive and takes a long time.
The practical strategy is to develop the agricultural sector and the agricultural industry as a source of foreign exchange and the service sector as a source of economic growth. These two things are separated because making the service sector as a source of foreign exchange is as difficult as controlling world manufacturing. The data shows, over time, the Indonesian service sector has a deficit because the main source of foreign exchange earnings from foreign tourists is unable to cover the deficit of international transportation, communication and financial services.
For foreign exchange resources, it is easier for Indonesia to develop the competitiveness of agriculture, fisheries, plantations and its derivative industries, such as food and beverages. Because, several types of food, spices, and beverage packaging Indonesia has mastered the world market. As for sources of growth, because 59 percent of Indonesia’s economy is consumption, Indonesia can optimize the role of the trade and transportation services sector through the touch of digital technology in trade (e-commerce), online transportation, and finance (fintech).
Regarding human resources, what is needed by digital platforms is the availability of information technology experts and artificial intelligence. The availability of experts in this field deserves to be one focus of HR development in Indonesia.
The world is witnessing a phenomenon of countries with economic growth above 10 percent and an average inflation rate of around 7 percent because it controls world manufacturing, such as Japan, South Korea, and China. On the other hand, the world is also witnessing a country that grows in the range of 5-7 percent with an inflation rate of 3-5 percent but can still be a high-income country through the primary and service sectors, such as Australia and New Zealand.
To achieve the category of high-income countries, the problem does not depend on the economic sector, but rather indicators of human resources or the Human Development Index (HDI) and the quality of institutions (good governance) in the country. HDI 2018 data shows that Australia, New Zealand, Japan and South Korea are in the category of Very High Human Capital Development with Australia and New Zealand ranking above Japan and South Korea. China is in the High category, while Indonesia is Medium. From the Ease of Doing Business (EODB) ranking, as a proxy for institutional quality, it also appears that, for example, New Zealand relies on the non-manufacturing economic sector but ranks first in the world EODB, even in three consecutive years.
In the end, progress – economic growth and per capita income – is not only about the economic sector, but rather about the quality of human resources and institutions.
Kiki Verico
Deputy Head of the University of Indonesia Institute for Economic and Community Research
Source: Tempo.co