Finance and Competitiveness in Developing Countries

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

5

International trade, productivityand competitiveness

The case of the Indonesian manufacturing sector

Ari Kuncoro


1.Introduction: Competitiveness, macroeconomicand financial problems

The growth path of the Indonesian economy from the late 1960s to the early 1990s was not always smooth. Indonesia experienced several economic crises, usually dictated by the development of external events, which resulted in the deterioration of the current account. The problem stemmed from the fact that throughout the 1970s, Indonesian exports depended heavily on oil, gas and primary products. From 1973 to 1980, the value of Indonesian exports was dominated by oil, gas and timber, which made up approximately 60 per cent of the total exports. As more and more processing plants developed domestically, the share of semi-processed goods in total exports rose steadily, and from the mid-1980s to the early 1990s became one of the most important foreign exchange earners.

According to Haque (1995), competitiveness is defined as an economy's ability to grow and to raise the general living standard of its population without being constrained by balance-of-payment difficulties. In other words, competitiveness is defined as the capacity to increase productivity without generating a balance-of-payment crisis. We use this definition of competitiveness to examine the evolution of economic growth and current account sustainability in Indonesia.

The structure of Indonesian exports (heavily dependent on oil and gas and natural resource products) made the current account very vulnerable to international price fluctuations. The increase in oil prices in 1973 helped the government finance its economic development plan. 1 On the negative side, the heavy dependence of the government on oil export revenues made the economy very vulnerable to the fluctuations in oil and other primary commodity prices on the international market. It is not too surprising that in an economy where government expenditures constitute most of the domestic purchasing power, any balance-of-payment crisis immediately translates into low or even negative economic growth. In the 1982-3 period, Indonesia was hit by the economic crisis that resulted from the drop in oil prices. The crisis worsened because of the fall in primary commodity prices in international markets as industrialized countries entered economic recession. The current account deficit suddenly soared from a mere 0.67 per cent of GDP in 1980 to 6.2 per cent of GDP in 1982 and 8.1 per cent of GDP in 1983.

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