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 (2014–19).

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 chapter 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 chapter, 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 of the Central Bureau of Statistic (BPS).

POLICY OVERVIEW

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.