Technological Development and Economic Growth in Indonesia and Thailand since 1950

Abstract

I. Introduction Can technological progress explain differences in growth rates? Interest in technological progress has been revived in recent years by the so-called new growth theory (Fagerberg 1994). This contribution compares long-run economic growth in Indonesia and Thailand in relation to technological progress. It is argued that technological progress as shaped by official policies and the institutional framework of absorption provides an explanation why outcomes have differed so much despite apparently similar conditions under which economic growth took place. Or, more generally formulated, macroeconomic policies need to pay explicit attention to the acquisition of modern technologies in order for rapid economic growth to be sustained (Pack 1992, p. 300). Our comparison between Indonesia and Thailand is based on number of similarities and differences in initial conditions and subsequent performance. In the early 1990s, Thailand and Indonesia were both included in the World Bank's category of so-called Highly Performing Asian Economies (HPAEs) characterized by what then appeared to be sustainable path of steeply increasing levels of GDP per capita underpinned by rapid capital accumulation and spectacular enlargement of exports (World Bank 1993, p. 12). The point of departure in both countries in the 1950s was also similar, in particular with regard to per capita levels of GDP and economic structure. In both countries, nearly four-fifths of the labour force found employment in agriculture whereas the share of manufacturing in GDP amounted to mere 10 per cent (ILO 1996, pp. 214-16; U.N. 1965, pp. 396, 729). The endowment of natural resources was, and still is, considerably richer in Indonesia than in Thailand, which obviously does not explain why Indonesia should lag behind. The chief difference between the two countries lies in the speed and stability of economic growth. Factor accumulation was rapid in both countries but Thailand has apparently been capable of putting resources to use in more efficient and productive way. There are two likely explanations for this difference. The first one is technical efficiency, i.e., the rate of technological development optimizing output under given input constraints. The second one, institutional efficiency, refers to the development of institutions that may reduce transaction costs and facilitate economic change. These two types of efficiency are complements rather than substitutes of each other. Our aim is to gain an insight into major differences in technical and institutional efficiency between Indonesia and Thailand. Technology is conventionally defined as a collection of physical processes that transform inputs into outputs and knowledge and skills that structure the activities involved in carrying out these transformations (Kim 1997, p. 4). Several factors determine the rate at which technological progress occurs: the openness of the economy as reflected by foreign trade and investment, human capital development, infrastructure and business institutions, competitive environment and institutionalization of national research and development (R&D) efforts (Hill 2004b, pp. 356-57). Some of these receive ample attention below, in particular, manifestations of the economy's openness, the institutional environment, and national R&D policies. The structure of the paper is as follows. Section II analyses long-run economic development in growth accounting framework, whereas in section III changes in economic structure are related to technological upgrading. Sections IV and V are devoted to foreign imports of capital goods and FDI respectively. In section VI we turn to the organization of domestic R&D, and in section VII institutions and national policies vis-a-vis technology are reviewed. Section VIII offers summary and conclusions. II. Factor Accumulation and Factor Productivity Long-run paths of economic development may be compared using the ratio between GDP per capita in Indonesia and Thailand. …