Rapid Growth with Limited Learning: Industrial Policy and Indonesia's Pulp and Paper Industry

Abstract

This paper contributes to the debate on the role of technical change and industrial policy in Indonesian economic growth using the pulp and paper industry as a case study. The analysis indicates that industry and trade policies had a positive influence on growth and capital accumulation, but gave Indonesian pulp and paper companies few incentives to create or deepen their technological capabilities, resulting in fragmented and limited technology assimilation. The findings also raise questions about common interpretations of total factor productivity growth in Indonesia in terms of inspiration versus perspiration.

Notes

¹ See Amsden (1989), Wade (1990) and Kim (1997) for analyses on these issues in South Korea and Taiwan.

² The main source of the information in this paper is interviews conducted between 2001 and 2003 with several pulp and paper companies in Indonesia and with international companies that supplied equipment and engineering and project management services to the Indonesian industry. Additional information was drawn from a wide number of consultancy reports and items in the international trade and technical press. The supplementary quantitative analysis is based on plant-level data from industry surveys in Indonesia and Finland. Further details are provided in Van Dijk (2005).

³ At the same time, according to Aswicahyono (1998, p. 226), the industry experienced TFP growth of 2.2% per year on average between 1976 and 1993—a substantial positive rate, though slightly less than the average for all manufacturing industries. Aswicahyono also presented aggregate TFP estimates for the pulp and paper industry by sub-period. Strikingly, TFP was only very high and positive in the period 1984–88 (9.1%), while it was moderately negative in the remaining periods.

⁴ As with the disaggregated data in Figure 1 later, these figures for the industry as a whole were derived from the estimation of a stochastic frontier production function.

⁵ The year 1996 was deliberately chosen to avoid the impact of the Indonesian financial crisis on the figures in the subsequent year.

⁶ We do not have information on the state-owned pulp and paper mills.

⁷ We follow the common typology of Dahlman & Westphal (1982) and Amsden (2001).

⁸ Conversely, in Brazil, whose pulp and paper industry development is comparable to that of Indonesia, several locally owned paper machinery manufacturers have begun operations (Scott-Kemmis, 1988).

⁹ See Kim (1997, pp. 172–176) for a similar pattern of technological learning in the Korean pulp and paper industry.

¹⁰ Kim (1997) outlined the relevance of these roles in the case of Korean industrialization between the 1970s and 1990s.

¹¹ IRDCLI is one of the nine industry-specific R&D institutes set up by the Agency for Industrial Research and Development (BPPI).

¹² In contrast, it took Aracruz (Brazil), the only other pulp mill of comparable size in the world, almost 20 years to reach a capacity of 2 million tonnes per year (Kytölä, 2001).

¹³ This is in sharp contrast to Korea, where similar types of subsidies were highly conditional on performance (Pack & Westphal, 1986; Amsden, 1989).

¹⁴ On top op this, the weak regulation of Indonesia's financial system and easy access to foreign capital provided additional incentives for rapid capacity expansion.

Additional information

Notes on contributors

Michiel Van Dijk

The basis of much of the research reported in the paper consists of numerous interviews with company managers, engineers, technology suppliers and engineering consultants in Indonesia and Finland in 2001 and 2003. Their help is gratefully appreciated. We would also like to express our gratitude to the Centre for Strategic and International Studies (CSIS) in Jakarta, Indonesia, for hosting the first author in 2001. Previous versions of this paper were presented at an EADI workshop in Eindhoven and the second Globelics conference in Beijing. Finally, we are indebted to Jeffrey James, Bas Terweel, Morris Teubal, Eddy Szirmai, Judith Sutz and two anonymous referees for useful comments and suggestions. All remaining errors are ours. Most of the writing for this paper was done while the first author was an EU Marie Curie Fellow at SPRU.

Martin Bell

Martin Bell, SPRU, Science and Technology Policy Research, University of Sussex, UK.