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«adb economics no. 411 working paper series october 2014 ASIAN DEVELOPMENT BANK   ADB Economics Working Paper Series Industrial Policy in Indonesia: ...»

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To operationalize the Plan, the Ministry of Industry has adopted a two-pronged approach.

First is a top-down approach through the development of 35 priority industrial clusters planned by the central government, to be followed by local and regional participation. Second is a bottom-up approach through determining local industries that become core competencies in each region, followed by the development of provincial, or regency or municipal excellence industry. The second approach is pursued based on the spirit of decentralization and regional autonomy. Based on the website of the Ministry of Industry, 18 provinces and five regencies have developed their roadmaps of provincial excellence industry and regency roadmaps of industrial core competencies, respectively.

The 35 priority industrial clusters planned by the Central Government are further categorized into agro-industry (12 clusters), transportation equipment industry (4 clusters), electronics and ICT industry (3 clusters), base materials industry (4 clusters, one of which is iron and steel industry), machinery industry (2 clusters), labor-intensive manufacturing industry (2 clusters), supporting and specific creative industry (3 clusters), and specific small and medium industry (5 clusters). The rationale behind the adoption of this cluster approach is to achieve collective competitiveness through the establishment of networks.

In addition to the 35 clusters, future industries are also identified as industries with high competitiveness, based on the country’s endowment (vast area, large number of population, and availability of natural resources) as well as less tangible assets, such as capability, creativity, skills, and human resource professionalism. These future industries are (i) agro-based industry, (ii) transportation industry, (iii) information technology and telecommunication equipment industry, and would be the first ones to be developed. This industrial group is considered more sustainable because it relies on knowledge and skilled-labor, renewable natural resources, and technological mastery.

Using different terms in the same document, such as “priority industrial clusters” and “future industries,” results in confusion as such terms are ambiguous in conveying the GOI’s level of priorities.

It might have been better to use the same term and indicate the level of priorities in terms of implementation timeframe. Maintaining consistency over the criteria for and the result of prioritization, and having in place a clear and transparent review mechanism is imperative to minimize the costs of policy uncertainty.

The development of these clusters has also been poorly coordinated across authorities as this initiative is regarded by other ministries as merely the domain of the Ministry of Industry, whereas the Coordinating Ministry for Economic Affairs seems to have a limited capacity in coordinating various ministries and sectors related to industrial development. The Ministry of Industry argues that it will take a few more years to see the results of the development of these clusters, considering several issues that have hampered industrial development in the country, such as limited infrastructure, increasing labor costs, increasing electricity tariff, limited supply of energy, e.g., oil and gas, the influx of illegal imported products as well as bureaucratic issues and red tape. However, they mention some


Based on interviews with the Ministry of Industry, Coordinating Ministry of Economic Affairs, National Development Planning Agency (BAPPENAS), and the Association of Indonesian Employers (APINDO) in April 2014 Industrial Policy in Indonesia: A Global Value Chain Perspective | 15 clusters of petrochemical industry in Banten Province and Bontang (East Kalimantan Province), which have shown good progress.11 As for the development of provincial excellence industry, or regency or municipal roadmap of industrial core competencies, the Ministry of Industry has provided technical guidelines on the development of these industries. However, as this is a bottom-up approach, the initiative or proposal for the development of regency or municipal core competencies comes from the regencies or cities.

This approach is aimed at accommodating Indonesia’s decentralized system of governance implemented since 2000, where district and provincial governments have been given broad authorities in planning and managing various sectors of development in the regions.

B. Master Plan for Acceleration and Expansion of Indonesia Economic Development (MP3EI) In 2011, Indonesia launched its Master Plan for Acceleration and Expansion of Indonesia Economic Development (MP3EI). The MP3EI aims to encourage rapid, balanced, equitable and sustainable economic growth. The goal of the MP3EI is for Indonesia to become a high-income country by 2025, and the world’s 10th and 6th largest economy by 2025 and 2050, respectively.

The MP3EI is a working document and as such, will be updated and refined periodically. While it is a source of possible confusion, the GOI has claimed that the MP3EI is an integral part of the national development planning scheme and is not meant to substitute the existing Long-Term Development Plan 2005–2025 (Law No. 17 year 2007, RPJPN) and the Medium-Term Development Plans (Presidential Decree No. 7 year 2009, RPJMN). Like the RPJPN, the RPJMN, and the National Industrial Policy, the MP3EI also combines sector and regional approach, in its case, into the economic corridors strategy. The MP3EI also includes regulatory reforms as an integral step in accelerating economic development.

The MP3EI seeks to pursue its objective based on a three-pillar strategy:

1. Spreading economic development across the country through the development of six economic corridors,

2. Improving domestic and international connectivity, and

3. Enhancing technology and human resources.

To meet the goal of the MP3EI, Indonesia needs to achieve a quantitative target of GDP per capita of $15,000 by 2025, a marked increase from its current $3,500. This requires GDP to grow between 6.4% and 7.5% during 2011–2014, and between 8.0% and 9.0% during 2015–2025. To do so, Indonesia could no longer afford to rely on business as usual, and would require accelerated industrialization. The Ministry of Industry is targeting for the industrial sector to grow at 8.5% in 2014 and to continue until it reaches 9.8% in the years 2020–2025. The share of industrial products in total non-oil and gas exports is targeted to achieve 61.9% by 2014 and 95.0% by 2025, and the sector is expected to contribute 25.0% of total employment by 2025 (Ministry of Industry 2012).

In addition to six economic corridors, the MP3EI would focus on eight main programs of agriculture, mining, energy, industry, marine, tourism, telecommunication, and the development of


Interview with the representative of the Ministry of Industry on 14 April 2014.

16 | ADB Economics Working Paper Series No. 411 strategic areas. The eight main programs further consist of 22 main economic activities, which include nickel, copper, bauxite, and steel.12 Although different ministries and business associations have been involved in the design process of the MP3EI, there are no clear links at the technical level. Coordination across relevant stakeholders is also limited in its implementation stage. The major constraint in coordination is the lack of enforcement and leadership in synergizing efforts among line ministries or sectors. The Ministry of Industry suggested that a series of consultations has been conducted with the Coordinating Ministry for Economic Affairs during the development of the MP3EI, and the plan has taken into account the development of industrial clusters under the Ministry of Industry. However, it is not clear how the 8 main programs and 22 activities in the MP3EI are linked to the 35 priority clusters and the 3 future industries implemented by the Ministry of Industry.

Accelerated Industrialization in the MP3EI: From Theory to Practice

The MP3EI points to the critical importance of international competitiveness and the need to focus the industrial development strategy on developing sustainable competitiveness in the international market. This could be interpreted as the current GOI’s commitment not to revert to an inward-looking approach to industrial policy. In doing so, the GOI seeks to optimize “all efforts to exploit the country’s resource potentials and the capability to exploit every opportunity on hand, from inside and outside.” This could also be understood as an aspiration to maximize the benefits from current endowments, such as natural resource endowments, and from accessing international opportunities, including access to external markets and competitive imported inputs.

The MP3EI seeks to identify potential strengths and constraints to determine the basic strategy of accelerating industrial development. The Plan aims to pursue accelerated industrialization

through five main strategies:

1. Promoting participation of the business sector in infrastructure development,

2. Debottlenecking of bureaucratic barriers,

3. Re-orienting export policies of raw materials and energy resources,

4. Enhancing productivity and competitiveness, and

5. Improving domestic market integration.

The above strategies will be implemented through the application of six policy areas:

1. Domestic industry security, by enhancing industrial competitiveness in facing global competition and industrial restructuring,

2. Infrastructure development,

3. Improvement in the quality of service bureaucracy,

4. Improvement and harmonization of regulations,

5. Fiscal policy, and

6. Development of human resource-based industry (labor-intensive industry).


The other 18 activities are: palm oil, rubber, oil and gas, coal, cocoa, animal husbandry, timber, fishery, tourism, food and agriculture, Greater Jakarta (Jabodetabeka) area, Sunda Straits strategic area, transportation equipment, ICT, shipping, textiles, food and beverages, defense equipment.

Industrial Policy in Indonesia: A Global Value Chain Perspective | 17 Based on these considerations, during 2012–2014 the MP3EI’s accelerated industrialization effort focuses on 15 subsectors under three major groups: mining industry group,13 agriculture-based industrial group,14 and human resource-based industry and domestic markets.15 How these selected subclusters are linked to the main programs and activities under the MP3EI, however, remains unclear.

MP3EI Implementation Framework

Apart from a departure from business as usual, the MP3EI also differs from previous initiatives in terms of the level of political support and an expressed desire for more inclusive coordination. On the apex of the MP3EI implementation framework is the Committee on Economic Development Acceleration and Expansion of Indonesia 2011–2025 (abbreviated KP3EI in Indonesian). The KP3EI was established

under Article 4 of the Presidential Decree No. 32 of 2011. The tasks of the KP3EI are:

1. to coordinate the planning and implementation of the MP3EI,

2. to monitor and evaluate the implementation of the MP3EI, and

3. to outline the steps and policies in the context of solving problems and barriers to the implementation of the MP3EI.

The full structure of the MP3EI implementation committee comprises the following:

1. The Implementation Team is composed of Ministers, the Chair of Non-Ministerial Institutions, and representative agencies that shall contribute to the implementation of the MP3EI. The team is responsible for providing general guidance, approving strategic decisions, and solving strategic issues which may arise during the implementation of the MP3EI.

2. The Working Team is composed of high-ranking officials (echelon 1) and key officials from relevant agencies involved in the implementation of the MP3EI action plans. The team is responsible for coordinating the implementation of investment projects and infrastructure projects. This team will act in collaboration with relevant agencies and is also responsible for solving inter-ministerial problems, and ensuring government support for the implementation of the MP3EI.

3. The Secretariat is composed of a dedicated and full-time support team that is responsible for developing a monitoring and coordinating system for the MP3EI implementation. The Secretariat will actively support the Implementation Team and the Working Team by providing them with a clear analysis of, and technical proposal to overcome, the problems arising from daily monitoring.

The KP3EI is chaired by the President, while the Secretariat is chaired by the Coordinating Minister for Economic Affairs. This signifies the central government’s leadership and ownership of, and commitment to, the MP3EI (Strategic Asia 2012). It is yet to be seen if this structure would be carried on by the new government under the Jokowi’s administration. Ideally, any long term plan would be placed under the custody of able bureaucrats to insulate it from politically induced changes. One weakness highlighted in the implementation framework of the MP3EI is the limited involvement of


Four subsectors that come under this group: coal conversion industry, refining and oil refinery industry, basic chemical industry (including petrochemicals), and basic metal industries.

Five subsectors that come under this group: edible oils and fats industry, sugar cane-based industry, cocoa processing industry and chocolate manufacture, pulp and paper industry, and rubber goods-based industry.

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