Despite Indonesia’s vast potential to become a global industrial powerhouse the country’s industrialization efforts are being stymied by unhelpful policies and an unfavorable business climate, a senior economist has warned.

World Bank Indonesia lead economist Ndiame Diop said the declining contribution of manufacturing industry to the nation’s GDP had been caused by a combination of dependency on commodities and unconducive policies.

“For the sake of jobs, GDP growth, and reducing poverty, reviving manufacturing growth is important,” Diop told a media roundtable on Thursday, urging the government to abolish regulations and practices that increase logistics and doing-business costs, to nurture Indonesian manufacturing, which has the potential to become a global powerhouse.

Prior to the government’s economic stimulus packages that have been rolled out since 2015, Indonesia had more than 150 restrictive measures on trade and investments, according to data from Global Trade Alert. President Joko “Jokowi” Widodo’s administration has announced 12 policy packages to cut red tape, spur investment and stoke manufacturing industry since September last year.

The contribution of local manufacturing industry, a sector that contributes most to the country’s economy, has declined to 20.48 percent of GDP recently from 30 percent in 2009 and 23.7 percent when Jokowi took office at the end of 2014.

The problems lie largely in infrastructure bottlenecks that make it expensive to produce locally and tariffs that discourage manufacturers from producing more for export, industry players say.

In the automotive industry, expansion has been restricted by the high luxury tax for SUVs and sedans, making Indonesia uncompetitive compared with other countries, Association of Indonesian Automotive Manufacturers (Gaikindo) co-chairman Jongkie Sugiarto said.

For example, automotive firms invest in Indonesia for MPV cars — models which have limited global demand — but run to Thailand to produce SUVs, sedans and pick-up trucks, which are more commonly used globally. As a result, Indonesia is a production base for local demand, while Thailand enjoys a more global market.

“Foreign automotive firms prefer investing in Thailand because Indonesia’s luxury tax on SUVs and sedans are high. Of course, firms look at local demand before exporting, and local demand for such models isn’t favorable due to the high tax,” Jongkie said over the phone on Thursday.

Meanwhile, the Indonesian Shoe Manufacturing Association (Aprisindo) said the local footwear industry, despite having the competitive edge of low labor costs and a plentiful workforce compared with the rest of the world, faced difficulties in terms of infrastructure bottlenecks and long customs clearance, which added to high logistics costs.

Indonesia’s high logistics costs are considered a major impediment to the nation’s competitiveness and economic growth, accounting for 26 percent of GDP, double those of Singapore and Malaysia.

Despite unfavorable conditions, Diop said many industries still performed quite well, such as footwear, vehicle tires, cars and pharmaceuticals.

He suggested several key reforms that Indonesia should pay attention to in order to create a friendly business climate for manufacturing: First, keep inflation lower than in trading partners. Second, reduce logistics costs, and improve inefficient port operations, ease entry barriers and port-to-factory linkage as well as traffic congestion.

The government, with the help of the National Economic and Industry Committee (KEIN), is currently designing an industrial road map which seeks to end reliance on imports and give a boost to the local manufacturing industry.

Indonesia’s economy is more than 50 percent driven by consumer spending, a hefty proportion of which is supplied by imported goods.

Industry Minister Airlangga Hartarto promised that his office would encourage existing businesses to expand and benefit from the country’s vast market, while thoroughly examining the industry’s value chain structure to find and eliminate problems together with the Investment Coordinating Board (BKPM).

“We will boost upstream, intermediary and downstream industries,” he said. “We are assessing incentives, such as tax allowances, required by the intermediary industry.”

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