PROSPECTS FOR SKILLS-BASED EXPORT GROWTH IN A LABOUR-ABUNDANT, RESOURCE-RICH DEVELOPING ECONOMY

Abstract

In an integrated global economy, specialisation in trade is an increasingly prominent strategy. A labour-abundant, resource-rich economy like Indonesia faces stiff competition in labour-intensive manufactures; meanwhile, rapid growth in demand for resources from China and India exposes it to the ‘curse’ of resource wealth. This diminishes prospects for more diversified growth based on renewable resources like human capital. Using an international panel data set we explore the influence of resource wealth, foreign direct investment and human capital on the share of skill-intensive products in exports. FDI and human capital increase this share; resource wealth diminishes it. We use the results to compare Indonesia with Thailand and Malaysia. Indonesia's reliance on skill-intensive exports would have been greater had it achieved higher levels of FDI and skills. Its performance in accumulating these endowments, and its relative resource abundance, impede diversification in production and trade. We present policy options flowing from these findings.