Lili Yan Ing and Chatib Basri,
Jakarta | Sun, 01/29/2012 12:07 PM
The Indonesian
economy has shown its resilience in
the face of consecutive global
crises since 2008 by maintaining
growth at an average of 6 percent
from 2008 to 2011. Even though the
global economic outlook continues to
deteriorate and financial markets
continue to be volatile, Indonesia
is not highly integrated into the
world market and the real economy
remains little affected. It is even
expected to record growth of around
6 percent in 2012, but will it be
sustained? Please keep in mind that,
firstly, the Indonesian economy is
still heavily reliant on the
domestic market and less on exports
and investment, with around 60
percent of GDP attributable to
domestic consumption. Secondly,
Indonesia’s exports have been
largely dominated by natural
resource-intensive commodities. In
fact, the contribution of such
exports (agricultural commodities
and mining and minerals) to total
export value has increased from 18
percent in 2000 to 42 percent in
2010, while that of exports of
manufactured goods has decreased
from 35 percent to 20 percent over
the same period.
Why could relying heavily on natural
resources be a problem for sustained
development even though Indonesia
has a comparative advantage in those
products? First, relying on natural
resource-intensive exports could
lead to volatile growth as prices
and production of these commodities
are relatively volatile. Second,
natural resources do not generate
much employment, unlike
manufacturing industries and related
services. Even though these enclave
sectors typically operate at very
high productivity, they cannot
absorb the surplus labor from
agriculture. Moreover, compared to
these sectors, the agriculture and
mining sectors offer relatively
lower wages for secondary school
graduates who make up the bulk of
Indonesia’s labor force (World Bank
Economic Quarterly, December 2011).
Last, there is little transfer of
technology in resource-intensive
sectors. Economies with a revealed
comparative advantage in primary
products have less of an advantage
in the sense that development in the
natural-resource sector brings less
structural transformation compared
to manufacturing industries. The
larger the proportion of natural
resources in exports, the smaller
the scope of productivity-enhancing
structural change (McMillan and
Rodrik (2011).
Considering these reasons, it is
time for Indonesia to revive its
manufacturing sector as it cannot
always rely on its abundant natural
resources. Indonesia should put more
effort into developing its
high-value added and
employment-generation sectors such
as the manufacturing sector and
leave other businesses to go on as
usual. A decade of slow growth which
was just 4.5 percent from 2000 to
2010 down from 12.8 percent in the
decade prior to the Asian Crisis
deserves special attention from both
the Indonesian government and the
private sector to work together to
ensure manufacturing regains its
growth and development.
Manufacturing is the key sector in
creating high-value jobs as well as
technology transformation. This year
is actually a good moment for
Indonesia to regain its
competitiveness in the manufacturing
sector. The Indonesian economy is
not only a growing market but also
an attractive investment
destination. This allows firms to
operate at economies of scale and
thus improve competitiveness.
Indonesia is not only a growing
market but also one of the most
promising investment destinations in
the coming decades. Indonesia has a
growing domestic market with an
annual income per capita of US$3,000
in 2011 and a rising middle class.
This is coupled with the fact that
65 percent of the 237 million
population constitute a labor force
with unit labor costs lower than
that of China and Vietnam,
particularly since 2008 and 2011. On
top of that, Indonesia has recently
attained an investment grade of BBB-
from Fitch Ratings.
While there are opportunities, there
must be challenges. While we could
name from A to Z challenges and
things that should be fixed to
increase investment in the
manufacturing sector and improve
manufacturing competitiveness,
Indonesia could start the reform
with easy and zero-cost steps.
First, simplify business
registration. Second, speed up full
implementation of electronic tax
filing and payment systems. Third,
incentivize labor training. Fourth,
improve efficiency at the ports
including customs and payment
systems. This is the time for
Indonesia to articulate a master
plan for developing the
manufacturing corridor with real
action, don’t let Indonesia just be
a plan master.
The writers are
lecturers at the Faculty of
Economics, University of Indonesia.
The views expressed are personal