Time for bold policy changes to revitalize Indonesia’s manufacturing sector – Academia

But let’s admit: this stagnation is not caused only by external factors. Poor governance, poor strategic industrial policy choices, low productivity and failure to adapt to changing global dynamics have all played a role in the country’s inability to maintain its pace of industrial development. While other countries in East and Southeast Asia rushed forward, we were shackled by indecision. Manufacturing’s share of gross domestic product (GDP) has fallen to less than 19 percent. Insufficient investment and lack of attention to upskilling the workforce has prevented excess labor from moving into high productivity and value added sectors and has instead been siphoned off into low productivity sectors such as retail and construction.

Revitalizing the manufacturing sector must be high on our agenda to avoid the middle income trap. Manufacturing is the sector that adds value to our core sectors and natural resources, and provides the foundation and markets for our services sector. Achieving 7 percent economic growth without strong manufacturing is impossible.

However, the global economic landscape has changed radically. China’s dominance and the rapid technological progress of the 21st century mean that the old industrial scenario that led to the meteoric rise of East Asia will simply no longer work for us. The only real way forward is to move towards more complex, high-value and sustainable production. The goal must therefore be clear: we must promote greater integration with international markets, but this can only happen if we break free from old industrial models and embrace new ones. And we’re running out of time.

One of the most glaring shortcomings of Indonesia’s current industrial strategy is the lack of a coherent vision for the manufacturing sector. Should we focus on becoming an export-oriented power, or is our destiny tied to supply and domination of the domestic market? Should we open up to more imports for the benefit of domestic consumers and industrial users, or should we protect local producers at all costs? Should we process our natural resources locally from processing to the last mile or should we join global production networks and focus on multiple segments of the production chain to achieve maximum added value?

These questions have plagued policymakers for too long, and indecision is holding us back. An example is one of the government’s favorite topics of conversation: deep processing of minerals or Hilirisasi. We were told about the supposed success of the bauxite and nickel export ban. Of course, a ban on the export of raw materials sounds patriotic and far-sighted. Yes, the value of nickel exports has increased from US$2 billion in 2017 to US$84 billion in 2021.

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But let’s be honest: it’s not always a positive story, and it certainly isn’t without costs. The capital and technology requirements to support such policies are astronomical, and we lack the internal capacity to keep up. This affects the competitiveness of our products. If our processing industries fail to compete globally, we will only create more problems, including domestic overproduction and plummeting mineral prices. The government needs to be much more strategic. Instead of strict export bans, we can use our position to negotiate deals that will increase the flow of foreign direct investment (FDI) to enable better integration into global production networks.