The fourth Strategic Asia Policy Interchange held on Thursday, 10^th September 2009 on “Competitiveness and Productivity in Indonesia” featured Mr. Prabowo (Director Programme of Strategic Asia Indonesia), Mr. Arief Daryanto (Director of Graduate Program of Management and Business IPB), and Mr. Luki Eko (Chairman of Investment Planning National Board). The discussion was moderated by Mr. Satish Mishra, Managing Director of Strategic Asia Indonesia.

The first speaker, Mr. Prabowo highlighted the following points:

• The euphoria of growth and development is over by the early mid of 1990’s which can be seen from the end of Green Revolution era, followed by the period of deregulation and also period of getting to the right price.
• TFP (Total Factor Productivity) as one of the most common indicators of productivity can simply shows the economy wide productivity and efficiency. Indonesia has negative TFP growth and TFP contribution to GDP growth, which means that growth is constructed by increase of total capital accumulation which already reach its diminishing return point rather than increase of efficiency.
• Otherwise, labor productivity in agriculture and manufacturing sector can further shows about low efficiency in Indonesia’s economy. Rice agriculture productivity also reaches its peak and starts to impose law of diminishing return. Systemic structural problems related to the decrease of efficiency, begin with unfinished transformation from peasant agriculture to farming, the miss link between farm technology and post harvest technology and logistics (include poor rice technology, storage, infrastructure, weak SME development, R&D, market development, and lack of credit in post of farm activities). These obstacles caused by the fairytale ending about agriculture which is still fragmented across institutions in Indonesia.
• Manufacturing growth is always higher than GDP growth before 1998 crisis, more or less same after the crisis, and below the GDP growth for the past three years. This sign of premature deindustrialization in Indonesia. It was consistent with the negative TFP in Indonesia. After the year of 2000, the average growth of export from both labor intensive product (i.e. textile and garment) and high technology content product (i.e. machinery with transport equipment) is lower than the average growth of previous period. It also means the decreasing competitiveness in Indonesia.

 Meanwhile, Mr. Arief Daryanto made the following observations:

• The rule of agriculture has multidimensional aspects and has multiplier effects between each other. Indonesia has too much dependent on primary production rather than the process which proved there is no linkage between agriculture and agro industry. These value added were created in agro industry and agro services.
• Indonesia is still a net exporter for cash crops, but already a net importer for food crops, horticulture and livestock. But, for the whole agriculture we are still a net exporter (surplus 12.4 billion US$ in 2008). Meanwhile, Indonesia’s high competitive products (i.e. furniture, forest product, apparel, agricultural product, textile, tobacco, metal, mining product, etc ) is still resource based.
• These are current issues in agriculture: overproduction in short term, yet food insecurity for a large population; stagnation or declining in productivity; diversification; input use efficiencies, narrow genetic base; quality and quantity of water resources; increasing cost and deceleration in TFP growth; and under investment and miss investment.
• Land and labor productivity growth rates decrease significantly in developed countries, developing countries without China, and world without China recent years. Meanwhile, global average yield and crop yield growth also decline recent years (i.e. for 1961-1989 period compared to 1990-2007 period). These declines because of the declining investment in agriculture especially for public R&D expenditures. Return to investment in agricultural public goods might be allocated on research, irrigation, roads, electricity, respectively.

 Last speaker, Mr. Luki Eko expressed these ideas:

• Indonesia main position still not moves from factor-driven to efficiency-driven because there is lack of quality on its factor-driven components (i.e. institution; infrastructure; macroeconomic stability; and health and primary education).
• According to World Bank’s “Doing Business Survey”, some of the most problematic constraints in Indonesia are inefficiency of government bureaucracy, inadequacy of infrastructure supply, corruption, etc respectively.
• Regional economic and infrastructure disparity (i.e. between Java and outer Java) become one of the most factors which contribute investment climate significantly. Economic centripetal force into Java is larger than centrifugal force to outer Java islands.

Highlights of the Discussion

The discussion centered for both the following key issues: (i) Identify factors which hold stagnancy productivity of agriculture and manufacturing sector; (ii) Stages of entering globalized world in term of sustain competitiveness. The following summarizes the key issues raised during the discussions:

1. From Government point of view, productivity issue is more on encouraging environment (i.e. society) rather than creating it. Business environment has to be redeveloped in order to catch more opportunities. Business and market information are necessary to build competitiveness 
2. The virtual absence of Medium Enterprises is critical for productivity and equity matters in Indonesia; therefore Government needs to put more attention on it. This missing middle of Government imbalance structure can lead to more dynamic domestic linkages in term of production.
3. From rational point of view; if we look our competitiveness commodity, many investment should be come, but why this not happen so far? It might be influenced by large barrier or local distortion (i.e. such as market monopoly and monopolistic) in Indonesia.
4. Role of Medium Enterprises has to be nurtured in order to develop the linkages between small and macro enterprises. On the other hand, the role of State Owned Enterprises must be to revised or to revitalized, in the context of develop national productivity and competitive strategy.
5. Multimedia and e-government considered as a policy in the long term plan, but in the short run it wouldn’t achieved productivity as long as the fundamental development of the economic efficiency still yet to come.
6. Natural resources disparity and inter region variation of local business environment in Indonesia might be two significant factor which trigger the economic and infrastructure disparity inter region.
7. The idea of agriculture revitalization has been set as medium long term plan, but the government not yet defined the targets, the lead agency, detail on stages, and agreements among the stakeholders.

Conclusion and recommendations

• Holistic, comprehensive, and integrated policy needs to be developed in order to efficient the productivity of agriculture. By using clustering method we can coordinate each institution to specialize its task, therefore efficiency can be achieved. Agricultural performance can be improved through 6-I (incentive, investment, infrastructure, institution, industry, innovation). Maximizing value added for local commodity might be the most priority focus policy to make industry more efficient and competitive which can be started from implement clustering method or SEZ (Special Economic Zone).
• National agreement about main goal of agricultural revitalization has to be created and implemented better in the upcoming years. This project can convergence every aspects which have inter linkages. In the other hand, bureaucracy and regulation needs to be redeveloped in order to synergy the business environment.
• The characteristic different between agriculture and manufacturing sectors leads to the needs of dualistic policy which represent each sectors better. For the private sector, Government only needs to get the market perform as business as usual, but for the SME (i.e. farmer) Government should protect them and implement deregulate policy. Cross sector competitiveness strategy needs to be created to linkage agriculture and manufacturing more systematically.