I am personally quite surprised that economic transformation is included in President Jokowi’s prioritized programs for his second term in office. I think this is a good sign that the government understands the importance of promoting the manufacturing industry.

Hopefully, the government will make greater efforts to transform the country from a primary-based economy into an industry-based economy.

In literature, economic transformation refers to the process of resource allocation — both labor and capital — from low productivity sectors such as agriculture to higher productivity sectors, such as the manufacturing industry.

This transformation is usually followed by an increase of labor productivity, implying a higher income for employees and a higher capital-labor ratio. At the same time, the quality of labor should be improved to absorb more capital.

Therefore, economic transformation simply means promoting the manufacturing industry in Indonesia’s economy. We once used the share of manufacturing to GDP to measure how large the role of the manufacturing sector is in the economy.

Unfortunately, the role of manufacturing in the GDP has been decreasing since 2002, when Indonesia’s manufacturing industry made the highest contribution to the GDP with 29.1 percent.

In the first half of 2019, the share of manufacturing to GDP was only 19.6 percent and its growth was only 3.85 percent, much lower than the overall economic growth rate of 5.04 percent. Accordingly, its contribution continued to decline because its growth has always been lower than that of the overall economy.

Promoting the manufacturing industry is anything but easy as it involves strategizing and depends on labor, infrastructure, bureaucratic quality, regulatory quality, productivity, logistic costs and so on.

I think that the key issue relates to the investment climate of the country, which would subsequently be able to attract more investments, in particular foreign direct investment. Foreign direct investment is important to spur industrialization because this investment usually comes to a country in the form of capital and also technology, modern managerial approaches and global marketing networks.

The debate over the right strategy to accelerate industrialization was very vigorous in the 1980s to the 1990s, let’s call it the classic view, ranging from export promotions to the import substitution approach.

Each strategy may apply different policies, such as trade and investment policies, in which export promotions are likely to have a more market mechanism approach and import substitutions are more inclined toward protectionism. The industry that is promoted could be different, too: export promotions aim at boosting industries with comparative advantages, while import substitutions are for boosting high technology and heavy industries.

Looking at the latest national and global markets, I think we should just promote all manufacturing products that can compete both in the global and local market. Naturally, these manufacturing products should be based on the comparative advantages Indonesia has, such as mining products (nickel, bauxite and cooper), plantation products (crude palm oil and rubber) and labor intensive products (footwear and textile).

In addition, some other sectors have the potential to grow, including those with more advanced technology such as electronics, pharmaceutical and automotive. I have no preference for which industries should be promoted, but the businesses and markets should make their own decision. The government’s role here is to provide the ease of doing business and a beneficial investment climate, supported by good infrastructure and institutional qualities.

However, I think the current condition of the global economy is very different from that in the 1980s and 1990s, which implies that the approach of promoting industrialization would be more beneficial.

Nowadays, the global economy is almost unconstrained by geographical distances affecting the smooth and affordable flow of goods and people from one region to another.

Consequently, every country should integrate its national economy to the global economy in order to reap the benefits from the global economy’s advancement. Otherwise, the country will see its economy slip into a state of autarky without any possibilities of having progress accelerated by external factors.

Therefore, I think the key strategy to accelerate industrialization is to improve the investment climate to make the country more attractive to both foreign and domestic direct investments.

Note that we also have to compete with our neighboring countries, such as Malaysia and Thailand, in attracting foreign direct investment. To date, Indonesia is already behind those countries in terms of competiveness and attractiveness for investments.

The latest anecdotal example is that 33 companies are relocating from China to foreign countries, but none have come to Indonesia. This fact clearly shows that Indonesia should do more work to improve its investment climate.

I believe we all already know very well what elements should be improved, such as regulatory quality, bureaucracy, governance, labor, infrastructure and so on. However, we should be aware about these issues and realize that all these things should be fixed soon. Otherwise, we will have stagnant investment, economic transformation and economic growth.

I should highlight that there is nothing new in our efforts to create a better investment climate, attract more investment and accelerate the manufacturing industry. We already know what should be done to improve the investment climate, but the main problem is whether all parties in Indonesia are aware of the issues.

It involves not only bureaucracy in the central government but also in local governments. It also covers cross-sectoral government ministries, from home affairs, industry and trade, to agriculture, mining and foreign affairs.

It’s now or never! We must take the opportunity to transform into a more industrialized economy by attracting more foreign direct investments. Otherwise, we may always be late because our population is starting to age. Note that we should benefit from the current demographic bonus, with a large proportion of young and productive people.

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