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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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The second area that needs addressing is the existence of inconsistencies between national and sectoral policy, and between national and subnational policy. Indonesia’s decentralization effort may be aimed at reducing bureaucratic red tape and making investment more responsive to regional needs and priorities However, the unintended consequence is increased uncertainties and inconsistencies for investors when there is discrepancy between subnational and national policies. This is partly due to the varying capacity of local authorities to formulate, interpret, implement and enforce the regulations, and the lack of a framework (or weak implementation of such a framework) to

                                                            

The rate of rebate is differentiated between domestic and imported machinery. This might be in violation of Indonesia’s WTO commitments.

30 | ADB Economics Working Paper Series No. 411 coordinate investment policies at all levels of government. Under the current Medium-Term Development Plan (RPJMN 2010–2014), the GOI, led by BAPPENAS, plans to conduct a comprehensive regulatory review of inventory, and review and simplify laws and regulations at all levels of government. This effort, if successful, will build on the current momentum of high investment flows.

F. Local Content

The new industrial bill includes a provision that would allow the government (through the Minister of Industry) to set local content requirements for selected industries.24 The bill also contains a provision that would encourage government institutions and SOEs to use domestic products.25 Details of the definition and criteria of domestic products and strategic industries are needed to allow for policy assessment. Depending on the definition, flexibility might also be required in light of the fact that some goods might not be domestically produced to the required level of quantity and quality.

The GOI also currently has a procurement program to promote the use of domestic products by obliging government authorities to maximize local content in procurement using public budget. To operationalize this policy, the GOI is providing free certification services for firms that would like to verify the level of local content in their products. This service is outsourced to two designated surveyors. Certified goods and services would be granted prioritization in the procurement process. In practice, implementation of this measure might have uneven implications, as it might be harder for smallholders or firms located in outer regions to benefit from such initiative.

G. The Weakest Link

The measures above highlight how the GOI has sought to pursue its industrial development objectives.

Some measures are likely to be more effective than others, nevertheless, they all point to the government’s effort to adopt a holistic and proactive approach to industrial policy.

There are two areas that appear to be the weakest link in this strategy. First is labor and human capital, and second is innovation; the two are related. It is commonly acknowledged that labor market instability is a key source of business uncertainty in Indonesia. The implementation of regulations relating to outsourcing and the setting of regional minimum wages has regularly led to workers’ strikes.

So far, discussion focuses mainly on reducing hiring (and firing) costs, particularly from the business perspective.

Due to a large number of unemployed persons (7.4 million in August 2013), the bargaining power of workers in Indonesia, particularly those in labor-intensive industries, is very low. They are not only forced to accept low real wages, but also a non-permanent, contract-based employment, which makes them even more vulnerable. They can be easily replaced by new job applicants, who are not inexperienced as the latter have been previously hired by another firm but, for some reason, had to leave and look for a new employer.

A minimum wage policy that is created by region is problematic for several reasons. First, the process of determining regional minimum wage, which is based on predetermined living cost indicators, has been more political than technical. Even though a survey has been conducted to assess regional living costs, which involve representatives from workers, employers and the local governments

                                                            

Article 87, verse 4.

Article 86, verse 1.

Industrial Policy in Indonesia: A Global Value Chain Perspective | 31 (tripartite), the decision made by the local government on the minimum wage often does not refer to the survey. Instead, the government decision tends to be influenced mostly by an imbalanced negotiation between employers and workers. Second, once the minimum wage is decided by the local government, law enforcement for the policy is often weak. Many companies often request postponement to comply with the new minimum wage due to financial constraints. There are also some companies that still pay their laborers under the minimum wage without getting penalties.

In addition to the problem of low real wages, there have been very limited government incentives provided to workers relating to health, education for children, pension as well as accommodation and transportation costs. Except for those who live in Jakarta, there are no health or education subsidies provided by the local governments. There are also very limited subsidies provided by local governments and/or employers to cover accommodation and transport costs to and from the workplace while these costs may account for 35.0% of wages. Furthermore, because many firms impose a contract-based employment, there is no superannuation or pension provision, or incentives based on productivity and experience.





Vocational training for workers has rarely been found particularly in labor-intensive sectors.

Training services provided by government-funded training centers are also very limited and often irrelevant to the needs of the industry. This is different from the situation in the 1980s and 1990s when there were many firms, especially Japanese firms, which conducted vocational training during the weekends for their laborers. 26 Policymakers and businesses should start to consider workers as assets and a source of productivity and innovation rather than costs to production. While having a stable labor market is important, the main objective should also include developing a competitive labor market. The latter should focus policy toward developing workers’ productivity, including through education curricula and training centers, and also providing incentives to employers and workers to participate in on-thejob training and invest in productivity improvement. Labor policy should be an integral part of industrial policy as labor is an indispensable input to the industrialization effort. For instance, if the government has to raise minimum wage, they should prepare a set of policies to minimize the increase in other production costs, such as energy costs, loan interests, and deregulate to minimize logistics costs, etc. This burden sharing between the government and firms will be able to sustain or even increase industrial competitiveness.

On innovation, there has been an increasing awareness on the part of the GOI on the contribution of science and technology (S&T) on economic development. However, it was not until recently that there are focused efforts to integrate S&T into the national development strategy. The MP3EI expressly acknowledges increasing technology contribution as one of its three main strategies.

Innovation-driven development underlies the third phase of the MP3EI implementation. Innovation is an underlying contributor to upgrading GVC participation at the firm and at the wider economy level.

R&D in Indonesia had lagged behind other economies in the region. The two main reasons for this are the lack of synergy and awareness between research efforts and industry needs, and the low technological capabilities of domestic industries, as evidenced in the low adoption rate of developed technologies.

                                                            

Interviews with the Confederation of Indonesian Trade Unions (KSPI) on 5 March 2014 and the Confederation of National Trade Unions (KSPN) on 12 March 2014, in Jakarta.

32 | ADB Economics Working Paper Series No. 411 R&D is still mostly undertaken as in-house efforts by individual firms, with few collaborations and sharing among industries, and between industries and research institutions. Better alignment of regulations, policies and incentives to promote innovation is also required, and would include regulations on S&T, finance and tax systems, manufacturing and service industries as well as trade, education, and intellectual property policy. The GOI should demonstrate commitment to supporting R&D, among other things, by meeting the current expectation to allocate a greater share of the GDP for supporting R&D.

Current efforts to boost innovation are centered on the development of a national innovation system as stated in the Ministry of Research and Technology’s Strategic Plan 2010–2014. The establishment of National Innovation Committee was mandated by Presidential Regulation no.

32/2010, and the review process of S&T law and regulations is underway. There are also plans to revitalize the National Research Council, develop or revive S&T Park and research centers, and facilitate the formation of R&D consortiums (Pahlevi 2013). A regional and/or cluster approach to innovation will also be undertaken by putting innovation in the center of the development of the six economic corridors. Strong human resources, good information network, and established quality institutions were highlighted as imperative to innovation efforts (Pahlevi 2013).

–  –  –

The mining sector provides a concrete example of the GOI’s effort to accelerate industrial development. It is a sector that Indonesia is blessed with natural comparative advantage in and one that is well-connected to GVCs. The GOI, however, does not want development of the sector to be constrained by static comparative advantage alone. This aspiration is not a new one, but one that has only recently gained momentum in its realization. The myriad of stakeholders and interests involved, and manifold factors for consideration point to the challenge of designing and implementing an effective industrial policy. This high risk, however, is no reason to fully abandon efforts. Under the right conditions, the potential benefits of intervention may more than offset the potential loss for leaving matters in the invisible hands of the, often imperfect, markets.

The mining and quarrying sector comprised 11.2% of Indonesia’s GDP in 2013 (Bank Indonesia Real Sector Statistics 2014).27 Indonesia is the world’s largest exporter of refined tin and nickel ore and a significant exporter of iron ore and bauxite (Tijaja 2013a). Mineral ores have long been a key contributor to Indonesia’s exports, which are still concentrated on energy and natural resource-based products (minerals), with little change over the last decade. In 2010, mining and quarrying (including coal) accounted for 27.0% of total exports, followed distantly by food, beverages and tobacco at 8.0%.

The share of mining in total exports has been on the rise lately at the expense of the shares of agriculture and industry exports. Overall mining exports amounted to $31.32 billion throughout 2013, out of $182.57 billion in total exports (Yulisman 2014c). This means mining accounted for 17.0% of total exports in 2013, a near tripling of the share in 2003 of 6.5%. The shares of agriculture and industry fell in the same period from 4.2% to 3.1%, and from 66.9% to 61.9% respectively (Kementerian Perdagangan 2014). As shown later, this is at least partly a short-term reaction to the GOI’s policy of banning mineral ore exports by 2014.

                                                            

See http://www.bi.go.id/sdds/series/NA/index_NA.asp Industrial Policy in Indonesia: A Global Value Chain Perspective | 33

B. Sectoral Policy Objectives

Earlier in the paper, we have highlighted Indonesia’s industrial policy direction focusing on increasing the contribution of non-oil and gas manufacturing, maximizing the value adding potential of its domestic resources, including through ensuring domestic supply of raw materials and achieving international competitiveness. These are echoed in the sectoral policy objectives of the Ministry of Energy and Mineral Resources (Kementerian Energi dan Sumber Daya Mineral or KESDM). The vision of KESDM is to realize energy security, and improve energy and mineral value added to generate greater benefits for the Indonesian people.28 Its missions include improving domestic supply security for mineral commodities, developing domestic capacity in processing minerals, and increasing value added from mineral resources.

The mining sector and its various subsectors have been highlighted as priority sectors in a number of policy documents. In the MP3EI mining is identified as one of the sectors that will be the focus of accelerated industrialization efforts. Of the 22 main economic activities under the MP3EI, four are directly related to the mining sector— nickel, copper, bauxite, and steel. The base metal industry is also identified as one of the six pioneer industries eligible for income tax facilities.

The GOI’s decision to promote domestic refining of mineral ores is not without considerations.

Indonesia is the world’s main supplier of nickel (18.0% for ores and 5.0% for processed nickel), lead (20.0%), and bauxite (15.0%). Up to October 2013, Indonesia exported 46.5 million tons of nickel ores,

16.1 million tons of iron ores, 47.0 million tons of bauxite, and 1.0 million tons of copper. Global demand for various commodities, most distinctly from the PRC, has been on the rise, but this increase is not always reflected in the price. Despite this significant level of, and increase in, exports, there is also little increase in government revenue from the sector, either from royalty or tax income.



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