Indonesia Warned of Weak Human Capital

Indonesia Warned of Weak Human Capital

By Anushka Shahjahan on 9:11 am September 19, 2013.
The vision of an integrated regional economic community by 2015 is aimed at liberalizing trade among the 10-member Association of Southeast Asian Nations, but questions remain over whether the countries are ready for it and how Indonesia will benefit from the integration. A press statement released after the ninth Asean Economic Community council meeting said that 77.5 percent of the regulatory and economic measures under the blueprint had already been implemented.However, analysts have expressed doubt about whether full implementation by the December 2015 deadline is viable, saying most Asean countries are far from ready for the changes. They argue that economic and developmental disparities between member states will create challenges in the integration process.

“Some Asean countries, such as Singapore, will be better equipped during the integration process to benefit than the less developed countries, which could challenge the process,” Aldian Taloputra, an economist at Mandiri Sekuritas, told the Jakarta Globe on Wednesday.

Some countries stand to benefit more from the economic integration than others, he added, which may lead to potential instability within the region.

Indonesian preparedness

In 2007, the Asean leaders formally adopted the Asean Economic Blueprint leading to the expected establishment of the AEC in 2015, with the goal of a single market and production base, fully integrated into the global economy.

After Asean nearly doubled its GDP per capita from $2,882 in 2000 to $5,581 in 2011, economic integration was a natural next step for the bloc.

However, according to analysts, although a presidential green light backs the integration process, Indonesia needs to strengthen its infrastructure and human capital in order to be ready by 2015.

“Indonesia needs to focus more on the quality of its human capital and infrastructure in preparing from 2015, not simply rely on political rhetoric,’’ said Eric Sugandi, an economist at Standard Chartered.

“Indonesia will lose its competitiveness if it can only attract high-skilled labor and not send quality workers overseas,” said Purbaya Yudhi Sadewa, an analyst at Danareksa, adding that Indonesia needed to improve the quality of its human capital in order to benefit more from integration.

While certain sectors may require more preparation, Indonesia is competitive in areas such as banking, according to Aldian. “We have great capital and good-quality assets, which can compete regionally.”

However, he agreed that human capital and infrastructure remained structurally weak sectors going into 2015.

The government is currently implementing a developmental strategy, the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), to prepare Indonesia to enter the AEC.

“This master plan has already improved our competitiveness” said Purbaya, expressing hope that continued implementation of the program could potentially expand the Indonesian economy.

“However, expansion needs to happen because at the current pace continues, Indonesia will not be ready by 2015.”

Competitiveness is not the only issue Indonesia needs to be prepared for. It also has to be ready to protect and support its markets against external shocks after integration has taken place, analysts say.

“The government needs to realize it is not only about preparing markets for integration, but also the side effects. Indonesian industries will become more vulnerable to external shock, and can only benefit if they are ready to face such challenges,” Eric said.

He stressed that for Indonesia, the benefits of the economic integration would depend entirely on the preparation it put in ahead of the move.

Asean’s preparedness

A major challenge facing the Asean member states is the economic disparity between them, and whether that will strengthen or weaken the economic community as a whole and its ability to profit on a global scale.

Analysts stand divided over whether the developmental disparities will serve to benefit or be detrimental to the entire integration process.

“Theoretically, integration will benefit all consumers,” Eric said.

“But local producers who can’t compete with their international counterparts will suffer,” he added.

While each nation can specialize and benefit from free trade within the region, disparities may also hinder some sectors of the economy that are not as well equipped to compete on a more international scale.

“From Indonesia’s point of view, the disparities will be beneficial, because integration will help equalize our GDP per capita, if we can trade freely with higher-income countries such as Singapore and Malaysia,” Purbaya said.

However, Asean remains distinctly split between two groups: the so-called Asean 6, comprising Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, and the CLMV, which consists of Cambodia, Laos, Myanmar and Vietnam.

While the CLMV is still regarded as the underdog in Asean, it has rapidly narrowed the gap on its Asean 6 brothers as signified by the drop in the percentage of the population living in less than $1.25 per day.

This percentage decreased from 45 to 16 percent between 2000 and 2010 for the CLMV, while the Asean 6 saw a decline from 29 to 15 percent in the same period, according to the Asean Secretariat.

Highlighting the Indonesian example of a rapidly widening income gap, Eric noted that vast income gaps often accompanied rapid economic development.

Some of the CLMV nations currently also face political instability, and a widening income gap may fuel the fire, according to Eric.

Therefore, although economic integration may lead to prosperity, each nation needs to implement it at its own pace in order to ease the transition.

The economic disparity also plays a key role in terms of attracting foreign direct investment, Eric said.

According to the Asean Secretariat, investment flows into the Asean bloc increased fourfold from $21.81 billion in 2000 to $114.08 billion in 2011, with Singapore, Indonesia and Malaysia receiving the largest shares.

However, these dynamics in attracting foreign investment may change drastically once the AEC integration process has taken place.

On the one hand, the CLMV nations can attract more regional and international investment after the integration, but on the other, only Myanmar may stand to benefit from this, according to analysts.

“Among the CLMV countries, Myanmar is the most attractive, investment-wise,” Eric said.

“The others will suffer as a result of the integration and lose out on FDI,” which will create tensions within the region.

After decades of isolation under a military junta, Myanmar has been slowly liberalizing its economy, and coming after years of economic neglect there is large scope for rapid growth.

However, Indonesia’s chances of attracting more FDI will also increase after the integration, Eric said.

“Indonesia will attract more investment after integration as it will encourage more regional investment alongside its inflow of current international investment,” he said.