INTRODUCTION

The competitive environment for Indonesia's manufacturing industries has changed a great deal in years following the Asian economic crisis. The major factors in the global environment which have adversely affected Indonesia's competitiveness in its manufactured exports include increasing economic openness, shorter product cycles and continuous technological improvements (World Bank, 2003: 4). For countries, like Indonesia, which are highly dependent on foreign trade and therefore deeply integrated in the global economy, it is vital to monitor regularly the productivity and international competitiveness of their industries, which are of great importance to their economies.

Other major factors which have adversely affected or may adversely affect the competitiveness of Indonesia's manufacturing industries are China's rise as a formidable competitor in the world markets for manufactured exports and as an attractive host country for foreign direct investment (FDI); the emergence of global contract manufacturers in Singapore, Malaysia and Thailand; the expiry of the Multifibre Agreement (MFA) in early 2005; trade liberalization within the ASEAN countries; and the WTO mandated reduction in tariff barriers (World Bank, 2003: 3).

This paper discusses Indonesia's low industrial competitiveness and the steps which could be taken to remedy this problem. A brief overview will first be given of Indonesia's industrial development before and after the Asian economic crisis. This will be important to understand why Indonesia's industrial competitiveness is relatively low compared to its competitors in the region.

INDONESIA's INDUSTRIAL DEVELOPMENT BEFORE AND AFTER THE ASIAN ECONOMIC CRISIS: AN OVERVIEW

1. a. Industrial development during the Soeharto Era

2. During the 32 years of “New Order” rule (1966–98) the Indonesian economy experienced rapid and sustained growth, which enabled Indonesia to graduate from the ranks of one of the poorest countries in the mid-1960s to one of the eight “high-performing Asian economies” (HPAEs) in the early 1990s, along with Japan, the four “Asian Tigers”, and Indonesia's two Southeast Asian neighbours, Malaysia and Thailand (World Bank 1993: 1, 37).

3. Rapid economic growth averaging 7.0 per cent during the period 1965– 97 was driven by the expansion of the three main sectors of the economy, namely agriculture, manufacturing, and services.