Innovation at the Frontier

A Reflection on a Decade of Economic Crisis :

Asian economic crisis started in the last quarter of 1997 has proven Krugman's insights (1994) that high economic growth of Asian tigers such as Korea, Thailand and Indonesia fueled mostly by capital investment would be vulnerable in the long run.

On a paper called 'The Myth of Asia's Miracles', Krugman was questioning the validity of such economic miracles really happened in Asian Tiger Countries. His doubt was principally based on the concept of Total Factor Productivity, in which the growth of output is the result of growth of input (labor and capital) and growth of output per input (productivity). Some studies had shown, that Asian Tigers economic growth was mostly input-driven oriented rather than productivity increase-driven resulted from innovation, technological advances, education, economies of scale or any means that keep optimizing the use of input factors more efficiently over time.

Paul Krugman, a noted economist now teaching in Princeton, consistently provoked the idea of driving the economic growth only through 'perspiration', he took example of Soviet Union era which had successfully droved economy through labor mobilization but failed to sustain it because of lack of factors in stimulating 'inspiration' in driving the economy more productively and efficiently. It is interesting enough if we remember Soviet Union was home to brilliant scientists and engineer. Soviet's case was because invention and innovation was not rewarded properly as there was no free market and business competition; practically there were no incentives to develop technology for better lives as all the efforts were oriented to serve military purposes.

While in South East Asian countries' cases, the environment was the opposite to Soviet Union because free market and business competition were present. However as capital input had been continuously injected without developing 'means' to utilize it efficiently, the law of diminishing return to capital applied where additional output rate became slower compared to given additional input rate. In this case we saw many Asian countries were void of such innovation and R&D centers, more miserably we even had seen much of the capital input poured into, not only non-productive but also, speculative sectors such as property though most of the capital was from the borrowings with high interest rates.

Now, exactly 10 years after such blowing economic crisis, ironically Indonesia has not taken serious steps in spurring economic growth through fostering a culture of innovative society. Global Competitiveness Report 2007-2008 finds out Indonesia's ranking in innovation is at 41st out of 131 countries. Comparing with the nearest neighbors, Indonesia's performance is very poor. Malaysia is ranked at 21^st, Singapore is ranked at 11^th. Even compared to Indonesia's competitors in export-oriented labor-intensive sectors, Indonesia's performance is still weak, such as India is ranked at 28th and China, is currently ranked at 38^th.

Though the wound has been healed, the pain is not gone yet. Unemployment is still very high and people under poverty line increasing day by day, signaling current economic growth at 5.5-6.5% is just not enough. Indonesia needs to be back on track of previous 7.5-8.5% economic growth. If productivity increase factors may include technological advance project, in fact we had had some state-funded high tech projects such as aircraft industry development. Unfortunately it was unable to become the motor to stabilize and maintain high economic growth. Some reasons may explain this such as project was owned and run by the Government for political purpose, which made it not possible to be run efficiently and profitably.

The so called strategic industry become meaningless if it was not a waste and Indonesia might benefited much more if invested heavily in oil-refinery industry to avoid today's big import of refined-oil or even better in developing alternative energy sources that would help businesses having decent options during today's skyrocketing oil prices.

For comparison, India performs better after a decade focusing in software engineering and development, while Singapore is approaching a developed-nation status after focusing in biotechnological R&D and in medical services. After aircraft industry failure, Indonesia needs to re-focus in an innovation area to achieve high economic growth, and sustain it, in the future.

The problem now is besides no strategic innovation focus of current economic development; Indonesia also lacks enthusiasm in bolstering spirit of the youngsters, academicians, researchers and businesses to induce innovation out of their mind.

We see Annual Indonesian Film Festival, strangely enough; we have not seen Annual Indonesian Innovation Competition. We ever had Visit Indonesia Year, surprisingly; we never had Innovate Indonesia Year.

If the atmosphere itself is not ready to support innovation, then it is just a dream to have economic growth driven by productivity increase, without this, we should pay attention on what Krugman explained," Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its living standards over time depends almost entirely on its ability to raise its output per worker." (The Age of Diminishing Expectations, MIT Press, Cambridge, Mass, 1990)

Written by Hery Kameswara, Grant Technical Advisor at SENADA Indonesia Competitiveness Program. This is personal opinion.