«adb economics no. 411 working paper series october 2014 ASIAN DEVELOPMENT BANK ADB Economics Working Paper Series Industrial Policy in Indonesia: ...»
Chemical-related industries experienced only a mild decline due to a strong inelastic demand from the domestic-oriented fertilizer industry. Non-metallic mineral products took a bad hit, reflecting the collapse of the construction industry; similarly with basic metals, and machinery and equipment sectors, where the former fed into the latter with a high level of protection and dependence on the domestic market. The electronics sector managed to sail through the crisis due to its export orientation and the boost in competitiveness it received from exchange rate depreciation; its output has recovered by 2000. The automotive sector, which was also highly protected, was able to adjust better thanks to the agility of the private sector in deepening its technological learning and export orientation.
Some studies were fast to point at changes in labor market policies as the main cause for Indonesia’s inability to recoup competitiveness. Prior to the crisis, real wages rose at a lag relative to Indonesia’s rapid economic growth. Under Soeharto’s authoritarian regime, trade unions were heavily managed. After the crisis, pro-labor pressures emerged, resulting in a sharp hike in regulated minimal wage and the introduction of rigidities in hiring processes. This led to an increase in wages but not in productivity. In reality, the labor market in Indonesia is less than perfect and there is definitely room for improvement. However, it is unlikely to be the main cause for the slow recovery. The inability to maintain, let alone invest in, infrastructure at the pre-crisis level was a strong factor in hampering the recovery process.
One thing unanimously agreed on was the cost of institutional uncertainty in Indonesia.
Political and institutional infrastructure was imperfect even before the crisis, and profiteering was rampant. However, the highly patrimonial political system, and well-established connections between the political and business elites, had resulted in some certainties for those politically well-connected.
After the crisis, this centralized structure has broken down, exacerbated by the decentralization process that started in 2001, which created a highly decentralized environment of 500 sub-national governments. As authoritarianism collapsed, the central government had less control in formulating and implementing a consistent development strategy across the vast economy, and in allocating the scarce resources (Kimura 2005). This had resulted in relative economic inertia, since the New Order until very recently, creating a very uncertain investment environment, particularly for foreign investors.
This situation hit the resource-based industry, such as minerals especially hard, partly due to the lower level of mobility of such value chains, hence adding to the picture the complexity of bargaining with local stakeholders and political interests. Despite Indonesia’s strong comparative advantage in resource-based industry, their long term viability requires predictable and sustainable access to raw materials (Aswicahyono et al. 2010). There are also other key factors, such as the lack of Industrial Policy in Indonesia: A Global Value Chain Perspective | 11 competitive supporting services sector as well as sufficient and well-maintained infrastructure. Foreign investors, but also small and medium enterprises (SMEs), local or foreign, are likely to require facilitation to navigate these institutional complexities. Facilitation is often just as, if not more, important than liberalization in attracting investment (Kimura 2005).
2004 to 2007: Recovery of Demand and the Start of Proactive Industrial Policy
Since 2003, the Indonesian economy has been showing some signs of recovery. Domestic demand for automobiles and motorcycles increased rapidly, the exchange rate stabilized around Rp9,000 to Rp10,000 per US dollar, and the inflation rate at around 6.0% (Kimura 2005). Supply capacity, however, did not recover as well as demand. While Indonesia has made a steady progress in its political reform, no clear plan was in place in terms of its medium- to long-term economic development. When the first Indonesian Unity Cabinet5 came to power, the GOI was determined to address this.
In 2007, the GOI introduced Law No. 27 on Long-Term National Development Plan (Rencana Pembangunan Jangka Panjang Nasional or RPJPN) for the period 2005–2025. RPJPN placed the industrial sector as the engine of growth for strengthening the economic structure. This is to be supported by agriculture activities in its broad term, the mining sector, and effective services provision.
The law also included a commitment to apply industry and management best practices for robust economic security.
Improving efficiency, modernization, and value addition in the primary sector, including mining, was highlighted as the main target to promote local and international competitiveness, and strengthen the national industrial base. Reference was also made to the integration of SMEs into the value chains, stronger forward and backward value chain linkages, more balanced economic development outside the most populated island of Java, and a commitment to eliminate monopolistic behavior and other market distortions.
Value chain development through product processing and diversification (downstream development), structural deepening (upstream development), and vertical integration (upstream and downstream development) was expressly mentioned in the RPJPN. The plan also underscored the need to strengthen horizontal inter-industry relations, including with supporting and complementary industries, goods and services, and networks of relevant multinational firms.
In an encouraging development, RPJPN recognizes the institutional and infrastructural issues requiring urgent attention, including transportation, communication, energy, and technology. It also highlighted the need for calibration, testing, standardization, and quality control institution and infrastructure. This is particularly pertinent as standard compliance capacity is increasingly becoming a non-negotiable criterion for participating in GVCs. The desire not to be trapped in low value-added GVC participation was also reflected in the mention of the need for industrial education and training facilities.
The development of the manufacturing industry would be focused on subsectors that meet one or more of the following criteria: create employment, meet domestic needs (such as food or pharmaceuticals), process domestic natural resources, including agricultural resources in its broadest sense, and have export development potential. While minerals can be argued to meet at least two of
The first Indonesian Unity Cabinet referred to the first term of the current coalition government from 2004–2009 as led by President Susilo Bambang Yudhoyono.
12 | ADB Economics Working Paper Series No. 411 the four criteria, it was not among the 106 clusters listed as priority for the next 5 years under the first Medium-Term National Development Plan (Rencana Pembangunan Jangka Menengah Nasional or RPJMN).
Implementation of the RPJPN is operationalized through the 5-yearly RPJMN. The latter serves as a basis for ministries and government agencies in formulating their strategic and budget allocation plans. To ensure better central–regional coordination, regional governments are also required to take RPJMN into account when formulating and adjusting their Regional Development Plans (Rencana Pembangunan Jangka Menengah Daerah or RPJMD). To ensure the timely and effective implementation of the RPJPN, the RPJMN is further elaborated in the Annual Government Work Plan (Rencana Kerja Pemerintah or RKP) that will then become the basis for formulating the Draft Government Budget (Rencana Anggaran Pendapatan dan Belanja Negara or RAPBN).7 The second RPJMN covers the period 2010–2014.
The effectiveness of RPJPN and RPJMN would depend on their implementation.
Inconsistencies and lack of coordination across ministries, between central and local governments, between theory and practice, still remain an issue. It is nevertheless encouraging to see recognition of some of the underlying obstacles to industrial development.
D. Global Financial Crisis (2008–2009)
The 2008 GFC did not have the same catastrophic impact on the Indonesian economy as the 1997 AFC due to its different nature. In 2008, the Indonesian domestic economy held up better than the international economy. The country’s financial sector remained broadly intact, while the exchange rate depreciated only moderately. Export-oriented firms, particularly those focused on traditional markets which were hit worst by the recession, might have been affected more, while the effect on the domestic market was much less felt (Aswicahyono et al. 2010).
This historical overview of industrial policy in Indonesia showed that the country has not been following one linear policy trajectory. In general, however, there is a move toward greater exportorientation, a greater desire for maximizing domestic value added and realizing the benefits from the country’s natural resources, a greater focus on employment generation, and SME participation.
Macroeconomic policy tends to be more technically formulated, while the reverse might be observed for microeconomic policy. The country’s recent move toward decentralization has, to an extent, contributed to increased policy uncertainty due to the increase in decision making points. Policy inconsistency and uncertainty remain a key outstanding problem.
The next section would focus on the current state of the industrial policy in Indonesia, starting with its National Industrial Policy as set out in the Presidential Regulation No. 28 in 2008.
The ten clusters are: (1) food and beverage industry, (2) marine resource processing, (3) textiles and garments industry, (4) footwear industry, (5) oil palm industry, (6) wood-products industry (including rattan and bamboo), (7) rubber and rubber products industry, (8) pulp and paper industry, (9) electric machinery and electronics industry, and (10) petrochemicals industry.
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IV. CURRENT INDUSTRIAL POLICY (2008–PRESENT)
In addition to the RPJPN and the RPJMN, two other key documents have formed the basis of Indonesia’s current industrial policy. The first is the 2008 National Industrial Policy and the second is the Indonesian Master Plan for Acceleration and Expansion of Indonesia Economic Development (MP3EI) launched in 2011. Both documents would be deliberated below. Indonesia has also just endorsed its new Industrial Bill in late 2013 and its new Trade Law in early 2014; many of their implementing regulations are still forthcoming.
A. National Industrial Policy (Presidential Regulation No. 28 of 2008 and Regulation of the Minister of Industry 41/M-IND/PER/3/2010) The 2008 Presidential Regulation on National Industrial Policy has set a long-term industrial development vision for Indonesia to be a strong industrialized nation by 2025. This vision was elaborated further in the Regulation of the Ministry of Industry issued in 2010,8 which states that the vision of Indonesia to be a strong industrialized nation by 2025 would be achieved through becoming a new industrial developed country by 2020 (Vision 2020). The two different timeframes (i.e., 2025, for becoming a strong industrialized nation and 2020, for becoming a new industrial developed country) created some confusion as the difference between the two targets was not clearly articulated.
The document only stated that to be a new industrial developed country, Indonesia should
meet the following broad criteria:
1. It has a huge role and contribution to the national economy,
2. SMEs have balanced abilities with large industries,
3. It has a strong industrial structure (Industrial Tree is complete and in-depth),
4. It has an advanced technology that has been at the forefront of development and market creation,
5. It has a tough industry services to support the international competitiveness of the industry, and
6. It has a competitive advantage to face full liberalization within APEC countries.
The policy has a target to increase the contribution to GDP of non-oil and gas industry from the current 24.0% to 30.0% by 2020.9 It also aims to raise the contribution of small and medium industries to be comparable to large industries. To achieve this, the sector will need to grow by 9.4% on annual average during 2010–2020, a very ambitious, if not impossible, target. The policy highlighted seven “strategic outcomes” required to achieve this target, which include increasing industrial value added, market share at home and abroad, innovation and technological capabilities, and broadening industrial development. Nevertheless, it was unclear how these outcomes are to be achieved and how the GOI plans to monitor when and whether the outcomes have been achieved.
The 2008 National Industrial Policy was launched a year after the RPJPN and the first RPJMN.
The development of this policy has referred to and is in line with the RPJPN 2005–2025
Regulation of the Minister of Industry No. 41/M-IND/PER/3/2010 on Strategy Mapping and Key Performance Indicators for the Ministry of Industry.
See http://www.kemenperin.go.id/artikel/19/National-Industrial-Policy. Average contribution of non-oil and gas industry to GDP during 2010–2013 (Central Board of Statistics, Indonesia).
14 | ADB Economics Working Paper Series No. 411 (Law 17/2006) and the RPJMN 2004–2009 (Presidential Regulation 7/2005). The 2010 Ministerial Regulation also refers to the more recent RPJMN 2010–2014 (Presidential Regulation 5/2010).10 It does not, however, clearly mention any reference to the 2008 Presidential Regulation in which the notion of industrial cluster development was initially suggested.