Trends in the Manufacturing Sector under the Jokowi Presidency: Legacies of Past Administrations.

AuthorKuncoro, Ari
PositionJoko Widodo of Indonesia - Report
  1. Introduction

    Following the introduction of economic reforms in trade and investment in the mid-1980s, manufacturing gradually replaced agriculture as the mainstay of the Indonesian economy. In terms of exports, the sector even edged out oil's monopoly as the top foreign exchange earner. In other words, manufacturing emerged as the driver of development, pushing the country's GDP to grow at an average of about 8 per cent per annum. This trend abruptly ended in 1998 with the onset of the Asian Financial Crisis (AFC). The post-crisis recovery was led by the commodity boom, mainly fuelled by the economic expansion in China. The growth of manufacturing, however, remained sluggish and continues to be so--well into the first term of President Joko "Jokowi" Widodo's administration (2014-9).

    Despite a number of initiatives taken by the government, reviving the manufacturing sector has proven to be a difficult task. The role of manufacturing as the primary growth-driver has not been replicated in the post-AFC era. Even though, for a while, moderate economic growth of 5.5 per cent per annum could be maintained with the help of the commodity boom which boosted aggregate demand (especially consumption), the end of the boom in 2012 brought the growth rate down to a steady state level of 5 per cent per annum. The current government's recent strategy to improve growth and employment figures is articulated in President Jokowi's campaign platform, known as Nawacita (nine priority programmes). One of its main focus areas is the manufacturing sector.

    The purpose of this paper is to assess the performance of the Indonesian manufacturing sector under the Jokowi government. To boost the sector, several policies have been launched by the Ministry of Industry. External factors like infrastructure, government regulations, the structure of effective rate of protection (ERP), and openness are discussed in this article, along with the dynamics of structural change and overall growth in the manufacturing sector. The analysis is based on the data from the Annual Manufacturing Surveys and the Central Bureau of Statistic (BPS).

  2. Policy Overview

  3. / Pre-2000 Manufacturing Policies

    The rise of Indonesian manufacturing can be traced to the introduction of the Investment Law in 1967 and subsequent Law No. 6 concerning Domestic Investment in 1968. One important question that arises is whether Indonesia has (ever) seriously pursued industrial policies. The answer, however, remains unclear. According to Hill (1996), although many planning documents suggest the intention to pursue sector-specific policies, pragmatism eventually prevailed when it faced new realities as Indonesia reverted to pursue broad-based policies.

    The most clear broad-based economic reform measures were introduced between 1967 and the mid-1980s, when protectionism and government intervention were pervasive. The priorities of the manufacturing sector were set by the Ministry of Industry, based on strategic importance of individual industries. These included base metals, petrochemicals, and the automotive (local parts) industries. The objective was to use the petrodollar to develop upstream industries in which state-owned enterprises (SOEs) played a major role.

    However, when the results proved to be disappointing, the government was forced to introduce policy changes. While the original strategy always hovered between nationalism and pragmatism, the fall in oil prices in 1982 provided sufficient impetus for policymakers to change their approach and move towards a more open, outward-looking economy.

    The watershed moment came in 1986 when the government launched a set of unprecedented, across-the-board reforms, starting with the liberalization of the banking sector in 1983, followed by trade and other regulatory reforms. In all, they encompassed four broad categories related to: exchange rate management; monetary and financial policies; fiscal policy; and trade policy and other regulatory reforms. (1)

    The second set of economic reforms was introduced between 1991 and 1995. These were mainly related to investment and trade policies, including: abolishing limitations on foreign ownership; reducing trade barriers in the form of tariff cuts; and opening up previously closed sectors to foreign investment. Under the new investment rule, foreign investors were allowed to either form a joint venture with 95 per cent majority equity ownership without any further divestment obligation, or have full ownership (100 per cent stake) of a business entity in Indonesia with the provision that within ten years some unspecified divestment to locals would take place. Another aspect of the deregulation process was the opening up of nine sectors previously closed to foreign investment, including: sea ports; production, transmission and distribution of electricity; telecommunications; shipping; civil aviation; drinking water; railways; nuclear power generation; and mass media. (2)

    The completion of the reform sequence with a significant reduction in tariffs took place in 1995. Among the reforms was the introduction of a simpler industrial permit to replace the permanent business permit. Another development was in the area of customs procedures, with the waiving of pre-shipment inspection of imported goods transported by air as well as custom inspection of export goods that moved between bonded zones and entry ports. Duty-free treatment was also extended to capital goods and other imported inputs used in production, provided that at least 30 per cent was used for restructuring or capacity expansion.

    Table 1 outlines two key performance indicators--growth and GDP share--of Indonesian manufacturing over three decades, starting from 1983 until 2000-03. During this span, the Indonesian economy evolved from an agriculture dependent country into a manufacturing-dominated economy. One major implication of this transition is that the country's growth dynamic depends on the vitality of manufacturing. In fact, the subdued growth in manufacturing post-2000 provides some explanation about the modest growth of GDP since then.

    The striking feature of manufacturing growth over the 1983-2003 period is its inverted U-shaped pattern. The peak was reached in 1994-96, after which the slowdown began. During this time, the non-tradable sectors (such as utilities, construction, communication and finance) witnessed rapid expansion. However, the encouraging growth performance abruptly ended in 1998 when the Asian Financial Crisis struck (Figure 1).

    In the post-AFC period, manufacturing, given its large share in the economy, has been dragging down the country's GDP growth (Tables 1 and 2). (3) This can be attributed to several factors including: deterioration of business climate; labour market rigidity; and competition from low-cost producers such as China. The exchange rate increase due to the commodity boom between 2005 and 2012 may have also played a role.

    2.2 Post-2000 Manufacturing Performance

    The pre-2000 period was marked by comprehensive and across-the-board deregulation that led to rapid expansion of the manufacturing sector. The scale and the pace of deregulation has, however, not been replicated in the post-2000 period.

    During the Abdurrahman Wahid (Gus Dur) presidency, manufacturing enjoyed a short burst of recovery from 2000 to 2002. The impeachment of Gus Dur brought Megawati to power in 2001, and manufacturing, once again, experienced a rather big resurgence from 2003 to mid-2004. This was, unfortunately, followed by a downward trend (Figure...

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