Finance and Competitiveness in Developing Countries

By José María Fanelli; Rohinton Medhora | Go to book overview

sectors. The influx of capital inflows is also responsible for the expansion of the non-tradable sector during the 1991-5 period. As activities in non-tradables continued to expand, high growth was maintained until 1996, although the current account deficit continued to soar. This eventually triggered a reversal in expectations.


Notes
1
In terms of development strategy, the oil boom also produced a shift in the strategy of economic development. The availability of money and the expansion of domestic aggregate demand persuaded the government to pursue an import substitution policy. Many ambitious infrastructure and industrial projects were launched. The shift towards more inward-looking policies was also reflected through more protectionist industrial and trade policies.
2
See Section 2 on contribution to the trade balance and sectoral competitiveness.
3
Some (e.g. Iqbal 1995) argued that the reason behind the economic slowdown was a slowdown in pace of deregulation. For example, although the nominal tariff showed a decreasing trend in the pre-1991, it hardly changed during the 1991-4 period. The same pattern could also be observed for products subject to import licensing.
4
Although some argued that the dismal performance of several economic indicators was caused by the slowdown in the pace of economic deregulation, others suggested that this downward trend was part of a global phenomenon. This latter argument was based on the observation that other Asian tigers like Malaysia, Thailand and South Korea were also exhibiting a similar trend. Another reason behind the slowdown of manufactured exports was the nature of the products produced - basically destined for low end consumption and relying on low-cost labor. With the successive increases of national minimum wages, the competitiveness of Indonesian labor-intensive exports seemed to erode.
5
Unlike the previous investment boom in 1988-92 where textiles, garments and footwear made the bulk of total investments, the second investment boom was more diversified, ranging from electronic components, automotive parts, chemicals, to food and beverages. Also, most of the projects in the latter boom were destined for the Indonesian domestic market.
6
The reason for this is that an overvalued rupiah and high domestic interest rates made borrowing from abroad cheaper.
7
It is worthwhile to highlight the Indonesian electronics industry since it might become the great foreign exchange earner for the country in the future provided that the government alters the structure of protection. At present, the electronic industry has not moved much beyond assembly operations.
8
There are several explanations regarding Indonesia's loss of competitiveness in its main manufacturing exports. One explanation is that the competitiveness of Indonesia's labor-intensive industries had been eroded by the successive increases of minimum wages. Other factors, such as the boom in the domestic market, might have played a role as well. Finally, Indonesian producers also recently faced stiff competition from several emerging markets such as China, Vietnam and India that produce products of comparable quality at competitive prices.
9
A study by the World Bank (1996) found that productivity growth in Indonesia kept pace with the large increases in minimum wages untill 1993. Thereafter, the minimum wage became more binding.
10
Winners and losers have been defined from the point of view of international trade. Based on the previous analyses, winner industries include garments, footwear and wood products. All of these industries are characterized by a huge contribution to the balance of trade. Meanwhile, loser industries include industrial chemicals and transportation equipment.

-153-

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