Experts agree that the next big thing in technological innovation is artificial intelligence, which will translate into productivity gains on a scale not seen since the Industrial Revolution. (Antara Photo/Ari Bowo Sucipto)

Commentary: Indonesia’s Catch-Up Growth and the Next Great Leveler

BY : ARISTO PURBOADJI

FEBRUARY 04, 2019

When the economies of developing nations grow faster than those of developed nations, it is very understandable in this era of globalization. 

Stunted children could have a period of rapid growth through better nutrition, up to a certain age, thus overcoming their previous accumulated height deficits.

Fortunately, unlike biological catch-up growth in stunted children, economic catch-up growth is more merciful. Theoretically, for a developing country, there is no age limit after which it is too late to grow.

What makes growth so wonderful, is its compounding-effect miracle over the long term. Take President Joko "Jokowi" Widodo's ambitious target of 7 percent growth when taking office in 2014 and the realization of that hovering at around 5 percent.

The 2 percent difference seems insignificant if viewed in a single year, but over the long term it is a big difference. An economy with an annual growth rate of 7 percent will double every 10 years, while an economy growing at 5 percent would do so in 15 years.

A growth rate of 7 percent will see an economy triple in 15 years, while at 5 percent, it will take 23 years. Indeed, every percentage point in growth really counts, especially in the longer term. Professor Tyler Cowen of George Mason University in Virginia once calculated that if the US economy had grown one percentage point less each year between 1870 and 1990, the United States of 1990 would have been no richer than Mexico of 1990. When viewed in terms of centuries, the difference between higher and lower growth is heaven and earth.

For Indonesia ($1 trillion economy and 5 percent growth) to catch up with the United States ($19 trillion economy growing and 2 percent growth) under the silly assumption of constant growth, it would take 100 years. This is discouraging, but if history is any guide, we should not be. In 1700, the world's biggest economy was India, followed by China.

Then came the Industrial Revolution – a combination of fossil fuels and powerful machines to build modern technologies – that altered the world's pecking order. But it's interesting to note that in 1820, as the Industrial Revolution in Britain was in its infancy, the two Asian behemoths still accounted for half the world's gross domestic product. By 1870, per-capita income in Britain was six times larger than India or China, marking the beginning of Western dominance for two centuries. The Industrial Revolution had become the great leveler for the West, rendering technology superior to demography.

At the beginning of World War I, America had overtaken Britain in terms of income per capita, and became the world's biggest economy, until it was overtaken by China in 2016 (adjusted for purchasing power parity, not nominal terms).

No doubt, China is the superstar among the catch-up champions, as its per-capita income was just 5 percent of America's in 1976, due to Mao Zedong's extreme industrial and social policies. But 1976 is also the year of Mao's death, which marked the turn of China's fortunes. In 1978, Deng Xiaoping implemented economic reforms that liberalized China to foreign trade, investment and even technology.

The catching-up pace is accelerating. It took 32 years for Britain to double its economy from 1830, 17 years for the United States since the 1870s and just 10 years for China and India since their liberalization.

Experts agree that the next big thing in technological innovation is artificial intelligence, which will translate into productivity gains on a scale not seen since the Industrial Revolution. PricewaterhouseCoopers estimates that AI will add $15.7 trillion to global GDP by 2030, of which China takes home $7 trillion, compared with America's $3.7 trillion.

I believe AI is the next great leveler – one that will tilt the global economic balance of power in the winner's favor. And many experts believe, including Kai-Fu Lee's "AI Superpower," that that winner is China, which will match or even overtake America in developing and deploying AI.

In the era of new technological frontiers, sometimes the laggard could have an advantage. A country that lacks modern banking infrastructure could be the one best suited to adopt blockchain and cryptocurrency technology as seen in Georgia and Estonia.

Or one that lacks road infrastructure, the most ready to adopt hyperloop technology, for it does not need to tear down existing infrastructure, which often entails daunting political complications. To be smart in this catch-up game, the Indonesian government must be more aggressive in locking in this new wave of AI, and hopefully more than just survive in the new global economic order. If there is one thing we can learn from China, it is this: Catch-up growth needs heavy government involvement and support, as exemplified in Deng Xiaoping's economic reforms of 1978 and Premier Li Keqiang's "mass entrepreneurship and mass innovation" of 2014.

I argue that in the cutting-edge growth experienced by developed nations, the free market could be left alone, but in emerging nations' catch-up growth, proactive and strong government leadership is still required.

Aristo Purboadji is a doctoral candidate of business management at the Bogor Agricultural University (IPB).

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