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Time for bold policy changes to revitalize Indonesia’s manufacturing sector
Poor governance, bad choices of strategic industrial policies, low productivity and a failure to adapt to changing global dynamics have all played a role in the country’s inability to maintain its industrial momentum.
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Boxes of battery cells are stored for shipment at the battery manufacturing plant at PT HLI Green Power, Indonesia's first electric vehicle battery cell manufacturer, in Karawang, West Java, on August 28.
(AFP/Yasuyoshi Chiba)
I
ndonesia, once predicted to be the new industrial giant in Southeast Asia, has unfortunately failed to fulfill the promise. While the country made significant strides in the 1980s and 1990s, it has since lost momentum, primarily due to the devastating effects of the 1997-1998 Asian Financial Crisis, exacerbated by the recent COVID-19 pandemic.
But let’s admit it: this stagnation is not solely due to external factors. Poor governance, bad choices of strategic industrial policies, low productivity and a failure to adapt to changing global dynamics have all played a role in the country’s inability to maintain its industrial momentum. While other nations in East Asia and Southeast Asia have surged ahead, we have been shackled by indecision. The manufacturing share of gross domestic product (GDP) has plummeted to less than 19 percent. Insufficient investments and a lack of focus on labor upskilling have prevented the abundant labor to move to high productivity and value-added sectors and have instead been siphoned into low productivity sectors like retail and construction.
Revitalizing the manufacturing sector should be top in our agenda to escape the middle-income trap. Manufacturing is the sector that gives value to our primary sectors and natural resources, while providing the backbone and markets for our services sector. Pursuing 7 percent economic growth without strong manufacturing is impossible.
But the global economic landscape has changed drastically. The dominance of China and the rapid technological advancements of the 21st century mean that the old industrial playbook, which led to East Asia’s meteoric rise, simply will not work for us anymore. The only viable path forward is to leapfrog into more complex, high-value and sustainable manufacturing. Hence the goal should be clear: we must foster tighter integration with international markets, but this can only happen if we break free from the old industrial models and embrace new ones. And we are running out of time.
One of the most glaring weaknesses of Indonesia’s current industrial strategy is the lack of a coherent vision for the manufacturing sector. Should we focus on becoming an export-driven powerhouse, or is our destiny tied to supplying and dominating the domestic market? Should we open to more imports to the benefit of domestic consumers and industrial users or should we protect local producers at all costs? Should we locally process our natural resources from downstream to the last mile or should we join the global production networks and focus on several segments of the production chain to get the most added value?
These questions have plagued policymakers for too long and the indecision is holding us back. An example is one of the government’s favorite talking points: downstream processing of minerals or hilirisasi. We have been told about the alleged success of the bauxite and nickel export ban. Sure, banning raw exports sounds patriotic and forward-thinking. Yes, the export value of nickel soared from US$2 billion in 2017 to $84 billion in 2021.
But let’s be honest, this is not a universally positive story and certainly not without cost. The sheer capital and technological requirements to sustain such policies are astronomical, and we lack the domestic capacity to keep up. This is affecting the competitiveness of our products. If our downstream industries can’t compete globally, we’re only creating new problems including domestic oversupply and plummeting mineral prices. The government should be far more strategic. Instead of rigid export bans, we can leverage our positions to negotiate deals that allow larger foreign direct investment (FDI) inflow to ensure that we integrate more gainfully in the global production networks.
