Indonesia turns to the manufacturing sector to build an upper-middle-income economy

The current structure of the Indonesian economy will not deliver 7% annual economic growth. Will the government’s new focus on developing its manufacturing sector, pave the way to success?

Editorial

Indonesia is again embarking on an ambitious mission to propel the country among the top ten biggest economies in the world. This time, the focus lies on boosting its manufacturing sectors. The new direction was launched as a result of a joint publication released on February 9, 2019, called “Policies to Support the Development of Indonesia’s Manufacturing Sector” which analyzes the country’s economic growth prospect for the year 2020-2024 and ways how the country could attain the desired goal of 7% growth.

According to the head of the National Development Planning Agency (BAPPENAS), Bambang Brodjonegoro, the government is committed to the development of the country’s manufacturing sector to increase Indonesia’s GDP, as well as maintain growth in the long run. This new focus is believed to be the new main engine of economic growth for Indonesia and its ultimate goal to become an upper-middle-income economy in the next 15 years.

The new manufacturing strategy will focus on increasing high-value exports

The new plan involves increasing employment in the manufacturing sector to 20% of the nation’s workforce by 2024, with a stress on expanding the value-added manufacturing industry.

The diversification of export products and development of a sophisticated manufacturing sector is crucial for the development of the economy. The country’s current main exports are raw commodities, agriculture, and simple manufacturing products. According to BAPPENAS data, 30% of the country’s exports in 2018 came from raw commodities such as coal, natural gas, vegetable oils, and its derivatives.

Indonesia would like to follow other developed nations and export high-value, complex manufacturing products such as electronics, machinery, and chemical products.  It also aims to strengthen its strategic position in the global chain.

The new manufacturing strategy goes hand in hand with the government’s ambitious roadmap, “Making Indonesia 4.0,” which would see Indonesia develop and export new technologies and products in the artificial intelligence, sensor technology, human-machine interface, and 3D printing sectors. The new initiative has ambitions of catapulting Indonesia among the top ten largest global economies by 2030.

 The government needs to work closely with the private sectors to achieve its aims

According to the Asian Development Bank’s (ADB’s) director general of Southeast Asia, Ramesh Subramaniam, “the collaboration between the government and the private sectors was vital in determining the directions that the country must take to develop its economy.” The new partnership must be maintained and increased to facilitate the new initiative. ADB’s advisor, Jesus Felipe stressed that “cooperation between the two can help the country in discovering new and sophisticated products that the country could tap into. “

The country has allocated vast funds to tackling fundamental problems such as the infrastructure gap, which has limited Indonesia’s manufacturing capabilities. But the government’s limited budget means that private investment, both domestic and international, will play a crucial role. Investment in the manufacturing sector began to trickle in, but the country needs to attract far more.  

Former Tokyo Metro 6000 series EMU set 6115 at Gambir Station in Jakarta, Indonesia, on a KRL Jabotabek commuter service
Former Tokyo Metro 6000 series EMU set 6115 at Gambir Station in Jakarta, Indonesia, on a KRL Jabotabek commuter service. Photo courtesy DAJF

There are, of course, challenges ahead

Shifting Indonesia’s export focus from commodities to manufacturing will insulate the economy from any dips in the price of commodities.  The building of new factories in the processing and smelting industries will reduce the problem of import dependency. The country’s move to developing its manufacturing industry is a good next step, but hard work still lies ahead.

The government needs to effectively balance national and foreign investor interests. While some of Jokowi’s protectionist policies, including limiting foreign involvement in small to medium enterprises, support the growth of domestic companies, he must also create a favorable business climate to attract new foreign investments in the manufacturing sectors.

The country needs to harness foreign companies’ finances and technology to provide a jump-start to the sophisticated manufacturing industry. Training the country’s human resources to be better equipped for the modern manufacturing industry is crucial in unlocking Indonesia’s growth.

If Indonesia wants to stand among global giants, it must develop a manufacturing industry worthy of an upper-middle-income economy. Only then can it achieve what it seeks: a growth rate of 7%.