Don't Ignore the Economic Complexity Ranking

Rahmanda Muhammad Tariq *)

Since the competitiveness index was introduced by the World Economic Forum in 2008, Indonesia has managed to show significant progress. How come? In its first year, Indonesia was ranked 58th in the world and is now in the 36th position.

But wait, behind the success of improving the competitiveness ranking, Indonesia's economic complexity rating is actually declining. In 2008 Indonesia's economic complexity ranking was ranked 64th in the world (with an index of -0,302), but now Indonesia is ranked 71st in the world (with an index of -0,306).

It didn't stop there, when Indonesia's economic complexity rating was declining, neighboring countries actually showed improvement. In 2008 Malaysia was ranked 30th, Thailand 36th, Philippines 54, and Vietnam 73. Now Malaysia is ranked 29th, Thailand 32th, Philippines 41st, and even Vietnam has succeeded in overtaking Indonesia by being ranked 69th.

While the competitiveness indicator focuses on institutional and policy factors, the economic complexity indicator emphasizes the importance of the collective level of knowledge in society which is reflected in the products that can be produced.

The indicators found by Ricardo Hausman, an economist from Harvard University, show the fact that countries with higher levels of economic complexity enjoy higher per capita incomes.

A country is said to have a more complex economy if the structure of its export products or industry is more sophisticated and diversified. More sophisticated means that fewer countries can create and more diversification if there is more variety.

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Indeed, compared to indicators of competitiveness, indicators of economic complexity are less popular. However, recently many economists and policy makers in many countries have begun to show concern for the importance of this indicator. Because in the current era of global competition, the progress of a country is largely determined by the level of economic complexity.

The progress of countries such as Switzerland, the United States, Germany, South Korea, and Japan is not only due to good institutional factors and policies, but also due to the good industrial capability in producing increasingly complex products.

Just look at Swiss watches, United States military weapons, South Korean electronics, and Japanese automotives. The products from each of these countries are the most complex of their kind.

The decline in Indonesia's ranking from 64 to 71 in the world indicates that Indonesia's industrial capabilities in creating increasingly sophisticated and diversified products are experiencing a decline. In other words, the development of national industry so far has been too oriented towards product quantity (along with employment) and has neglected to increase its capabilities.

Perhaps most of us do not believe the news of the downgrade of Indonesia's economic complexity rating. Moreover, juxtaposing it with Indonesia's investment realization indicators which in recent years have shown green report cards.

The latest annual publication from the Investment Coordinating Board (BKPM) shows that during 2012-2016 investment realization has increased from Rp313,2 trillion to Rp612,8 trillion or almost 100%. In fact, in 2017 it was reported that it reached Rp. 692 trillion. Both foreign and domestic investment trends are always positive.

If examined more deeply, in 2012 for the first time the realization of investment for new projects exceeded project expansion with a portion of 51%. From time to time the trend is getting bigger until in 2016 the portion of new projects has reached 75% with a value of Rp462 trillion of the total investment realization.

Moreover, most of the realization of investment always goes to the secondary sector which incidentally has a high value added compared to the primary sector. In 2012 the realization of secondary sector investment was Rp. 155,8 trillion and in 2016 it increased to Rp. 335,8 trillion.

At first glance nothing seems wrong, right? This problem apparently stems from these indicators even though they show a green report card, they still cannot monitor the use of investment. As a result, without realizing it, the use of investment so far tends to be used to increase the quantity of similar products that have been produced by Indonesia before, rather than creating new products that are increasingly sophisticated and diversified.

And now the government's investment policy breakthrough through deregulation and acceleration of the licensing process does not necessarily improve the ranking of economic complexity. Because the policy breakthrough will only improve the competitiveness rating. Although investment will increase due to the policy breakthrough, there is no guarantee that the incoming investment funds will be used to complex products.

The relatively poor ranking of Indonesia's economic complexity should be an 'alarm' for the government to start intervening in the use of investment. It is proven that without any intervention in the use of investment so far, investment has only led to an increase in quantity rather than an increase in production capability.

The government needs to immediately include the economic complexity index following the competitiveness index as part of the work target. If not, it is not impossible that in the next economic complexity index report, Indonesia's ranking will not improve.

Do not let Indonesia regret in the future if neighboring countries enter the category of developed countries earlier than Indonesia.

*) Rahmanda Muhammad Tariq, Economic Researcher at the Society Prakarsa | This article appeared in the daily Indonesian Business 09 May 2018.

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