Knowledge-Based Transformation of the Indonesian Economy

The following article was translated using both Microsoft Azure Open AI and Google Translation AI. The original article can be found in Transformasi Ekonomi Indonesia Berbasis Pengetahuan

Before the 100th anniversary of Indonesia's independence is commemorated in 2045, the country is targeted to have risen out of the middle-income group of countries. It aims to become a high-income advanced country with an average annual growth rate of 6-7 percent.

This becomes one of the main substance in the technocratic blueprint of the National Long-Term Development Plan 2025-2045 that is being prepared by the Ministry of National Development Planning/Bappenas.

Efforts to achieve this target require economic transformation. A transformation that is able to change Indonesia's economic structure from a resource-based economy to a knowledge-based economy. In other words, relying on high added value industrial sectors with the support of knowledge, technology and innovation so that the economy becomes more productive, efficient and highly competitive.

The medium to high-tech export value indicator (medium to high-tech export) is often used to determine the influence of the spread of knowledge, technology and innovation in a country's production system.

Based on the Statistics of Indonesia's Foreign Trade by ISIC Code for the years 2021-2022, released by the Central Statistics Agency (BPS), and on the Science and Technology Indicators, Research, and Innovation report released by the National Agency for Research and Innovation (BRIN) in 2023, the export of low-tech industrial manufactured goods in 2022 reached 93.5 billion US dollars. Meanwhile, imports reached 33.7 billion US dollars, resulting in a surplus of approximately 59.8 billion US dollars.

Export value of technology products reached a high of 112.6 billion US dollars in the same year, while imports amounted to 170.2 billion US dollars, resulting in a deficit of approximately 57.6 billion US dollars. These statistics indicate that the influence of knowledge, technology, and innovation on Indonesia's industrial sector is still limited to low-tech industrial products.

This statistical figure depicts that the influence of knowledge, technology, and innovation on the industrial sector of Indonesia is still restricted to low technology industrial products.

The low performance of the knowledge-based economy in Indonesia is also in line with the innovation ranking, scientific work citations, US Patent acquisition, as well as Indonesia's economic complexity index which is ranked at the bottom in ASEAN-6 (Singapore , Malaysia, Thailand, Philippines, Vietnam and Indonesia).

Mark Zachary Taylor in his book, The Politics of Innovation, suggests that a nation's level of innovation is, among other things, determined by market failure factors. Market failure occurs when the market does not allocate resources or does not encourage research and development and innovation activities.

This is evident from the low expenditure for research and development in 2022, which only reached 0.1 percent of GDP (below Singapore, Malaysia, Thailand, and Vietnam). Of that 0.1 percent of GDP, government and university research and development expenditures reached 0.08 percent of GDP. This resulted in publications with low citations and patents that mostly did not lead to innovation. Meanwhile, research and development expenditures by the industrial sector only reached 0.02 percent of GDP.

The low research and development (R&D) expenditure in the industrial sector has resulted in the unavailability of job opportunities for STEM (science, technology, engineering and mathematics) graduates. In turn, this results in low interest in studying STEM fields. This can be seen in data from the Institute of International Education (IIE) that the number of Indonesian students per million population studying STEM in the US is the lowest among ASEAN-6.

There are several factors that cause market failure. The first factor is barriers to entry/exit. Innovation markets have high barriers to entry because R&D costs are high, intellectual property protection is weak, and venture capitalists are also weak. In addition, skilled labor is unavailable or scarce, especially in STEM fields.

Meanwhile, unproductive companies are reluctant to exit (exit), resulting in economic inefficiency. This barrier to entry is demonstrated by Indonesia's new business density rate, namely the number of newly registered businesses per 1,000 people of working age, the lowest in ASEAN-6. The presence of new business entrepreneurs has an important role in carrying out breakthrough innovations because established companies are only interested in carrying out innovations gradually.

The second factor is monopoly/oligopoly and rent seeking. Large companies with monopoly/oligopoly power have fewer incentives to innovate. This is because they can maintain profits without the need for innovation. This can be seen in the low expenditure of companies in research and development.

As a result, the market stagnates and overall innovation in the industry, which is dominated by a few strong players, decreases. Furthermore, rent-seeking practices such as tariff protection, import quotas, and subsidies lead to market distortions. Investments in productive sectors are also hindered, while unproductive industries persist.

The low expenditure on research and development (R&D) in the industrial sector has resulted in the unavailability of job opportunities for STEM (science, technology, engineering and mathematics) graduates.

The third factor is the strong attraction of the extractive sector which results in inefficient allocation of resources (human resources, financial, and infrastructure). This is caused by resources being channeled disproportionately to that sector at the expense of other sectors, including manufacturing industry.

The fourth factor is corruption. Corruption impedes innovation and entrepreneurship. The reason being that an environment is formed where business success is achieved through connections and corrupt practices, rather than innovation and business competitiveness.

The transformation towards a knowledge-based economy will occur if market failures can be overcome. This starts with efforts to build a competitive industrial or business ecosystem. This is done by reducing opportunities for rent-seeking and corruption, creating a level playing field for all business actors through preventing unfair business competition practices (monopoly/oligopoly).

Apart from that, efforts must be made to facilitate entry (entry) for new productive businesses and encourage the exit of unproductive businesses. In line with this, industrial diversification is also encouraged in addition to the development of the extractive economy.

Without the presence of a competitive industry/business ecosystem, the innovation ecosystem cannot be built. This situation will result in a misallocation of resources, ultimately causing Indonesia's economy to remain dependent on extractive industries.

If that happens, the effort to achieve Indonesia's Golden 2045 vision will only remain a dream. The future generation of Indonesia will continue to be trapped in the middle-income state trap.

Also read: Post-Pandemic Economic Transformation

Chairil AbdiniSecretary General of the Indonesian Academy of Sciences (AIPI)