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The Jakarta Post
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The key transformation of Indonesia'€™s economy and industry

  • Muhammad Shodiq

    The Jakarta Post

Jakarta | Wed, February 3 2016 | 04:45 pm

Industrial production was transformed by steam power in the nineteenth century, electricity in the early twentieth century and automation in the 1970s. These waves of technological advancement did not reduce overall employment, however. Although the number of manufacturing jobs decreased, new jobs emerged, and demand for new skills grew. Today, another workforce transformation is on the horizon as manufacturing experiences a fourth wave of technological advancement: the rise of digital industrial technologies that are collectively known as Industry 4.0.

The industrial transformation will create a critical juncture affecting almost every country. Countries that allow and incentivize their citizens to invest in new technologies could grow rapidly. Indonesia is still at a relatively early stage of economic development. Its markets have progressively opened, and a lot of basic infrastructure has been put in place, but its business environment is still raw and volatile.

The government'€™s Master Plan for the Acceleration and Expansion of Indonesia'€™s Economic Development (MP3EI) 2011'€“2025 seeks to address challenges that persist due to Indonesia'€™s geographical spread and rapid urbanization. Its main goal is to ensure sustainable development of resources and labor, aiming to grow per-capita income to US$15,000. This goal calls for an average economic growth rate of 8-9 percent from 2015 to 2025 while seeking to rein in inflation of 5-6 percent currently to an average 3 percent in the next decade.

The government recently restated the importance of reorienting future economic development from a consumption-led economy to one driven more by production. That message recognizes that the industrial sector'€™s contribution to gross domestic product (GDP) has been declining over the past 20 years. Indonesia needs to actively encourage e-commerce, industrialization and entrepreneurship.

Inclusive economic institutions will enforce economic dynamism and culminate in the industrial transformation. Without changes to the development strategy, there will be little chance for Indonesia to benefit from Industry 4.0 innovation and new technologies. There are at least three challenges to Indonesia'€™s Industrial transformation: human capital development, financial inclusion as well as political inclusion and bureaucracy reforms.

The Indonesian school system is immense and diverse. With more than 50 million students and 2.6 million teachers in more than 250,000 schools, it is the third-largest education system in the Asian region and the fourth-largest in the world.

Indonesia has made impressive progress on many fronts in the education sector since the 1997-1998 Asian crisis, such as coverage of basic education.

Many challenges remain, including expanding enrolment in secondary and tertiary education, increasing the quality and relevance of subjects taught and making governance and finance more responsive.

In order to achieve its goal of becoming a developed economy, Indonesia must be an innovation power. While the government commits 20 percent of state budget funds to education, the quality of teachers, the standard of educational facilities and the quality of research and development remains a problem. The ratio of engineers in the population is low compared to other ASEAN countries at only 2,671 per 1 million inhabitants. Neighboring countries have achieved ratios of 3,337 engineers per one million. The Central Bureau of Statistics reports that only 2 percent of business operators in the industrial sector are graduates of higher education, a large group has only junior to high school education, and the largest portion only graduated from elementary school.

This suggests that the capacity of business people to absorb new science and technology to drive their companies forward is very limited. Only with reliable education and good training can good industrial development be achieved.

The level of financial inclusion in Indonesia is at a critical level. Fifty-three percent of the Indonesian people are excluded from banking deposit products and 83 percent are excluded from financing products. Micro, small-and medium-sized enterprises (MSMEs) dominate business units with up to 99.9 percent of total business units and employ around 97.7 percent of the total labor force.

Unfortunately, the contribution of MSMEs to GDP is still relatively low, at only about 57.8 percent. Meanwhile, large enterprises, which account for only 0.01 percent of the total number of enterprises, contribute 42.2 percent to GDP and receive loans of more than Rp 3.2 quadrillion (US$230 billion) or 82 percent of total bank loans.

Moreover, MSMEs still get a small portion of bank financing. Based on Bank Indonesia data, outstanding loans of MSMEs total Rp 716.37 billion or 18 percent of total outstanding bank financing. Medium-scale enterprise loans dominate MSME credit with a share of 49.51 percent of total MSME loans. Micro enterprises, which account for 98 percent of all business units, take a share of just 3.8 percent of total bank loans, equivalent to Rp 153 trillion.

Inclusive economic institutions foster economic activity, productivity growth and economic prosperity. Inclusive economic institutions create inclusive markets, which not only give people the freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so. Those with good ideas will be able to start businesses, workers will tend to go to activities where their productivity is greater, and more efficient firms can replace less efficient ones.

Indonesia adopts an economic planning approach under the purview of several competing agencies, notably the National Development Planning Agency and the Office of the Coordinating Economic Minister. Interdepartmental communication has been growing in recent years, allowing for the formulation of coherent long-term planning that takes into account the broad scope of Indonesia'€™s national economy. However, problems central to economic policymaking remain: a lack of civil service reform, a lack of strong oversight in the planning process, a high incidence of corruption and difficulty in coordinating between the regions and the center.

The key leadership skill today is the ability to identify long-term, large-scale opportunities and build the capabilities to turn them into reality. Countries differ in their economic success because of different institutions, different rules influencing how the economy works and the different incentives that motivate people.

The critical juncture of Industry 4.0 has very different effects in different parts of the world. Societies that have already taken steps toward political and economic institutions have taken advantage of these new economic opportunities and started a process of rapid economic growth.
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The writer is vice president of CIMB Niaga'€™s Shariah& MSME Academy and a University of Indonesia (UI) Master Graduate in Manufacturing System Engineering. The views expressed are his own.

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