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.

INTRODUCTION

Joko “Jokowi” Widodo was sworn in as the new president of Indonesia in October 2014, replacing Susilo Bambang Yudhoyono (SBY) who had governed Indonesia for ten years from 2004 to 2014. At the time of the transition, the picture of the Indonesian economy was not too positive. Economic growth had steadily declined since its peak in 2011 and poverty reduction had stagnated since 2012. Meanwhile, inequality, as measured by the Gini Ratio, had steadily increased and reached its highest point ever of 0.41 in 2011 and remained at this level thereafter. An underlying fundamental beneath these trends was the continuously declining commodity prices since 2011. During the previous decade, Indonesia had been riding a commodity boom — a steady increase in the prices of primary commodities.

Figure 12.1 depicts the trends of economic growth, poverty rate, and Gini Ratio during the 2002–17 period. It shows that Indonesia's economic growth rate has steadily increased from 4.5 per cent in 2002 to 6.35 per cent in 2007, but the Global Financial Crisis (GFC) brought it down to 4.58 per cent in 2009. The recovery was relatively quick, reaching 6.49 per cent in 2011. However, it has steadily declined since then, bottoming out at 4.88 per cent in 2015. It has progressively increased in the following two years, reaching 5.17 per cent in 2017.

During this period of positive economic growth, the poverty rate has generally declined, falling from 18.2 per cent in 2002 to 10.64 per cent in 2017. The exception was in 2006 when the poverty rate increased to 17.75 per cent from 15.97 per cent in the previous year due to increases in fuel and rice prices. Meanwhile, the Gini Ratio has steadily increased from 0.32 in 2004 to 0.41 in 2011, remaining at this level until 2015. It then slightly decreased to 0.393 by 2017.

The stagnating poverty reduction and high inequality level posed a double challenge in social welfare for Jokowi when he took over the presidency at the end of 2014. He immediately launched a couple of initiatives in this area, which he had flagged during his presidential campaign. First, he introduced the KIP (Kartu Indonesia Pintar, Smart Indonesia Card) and KIS (Kartu Indonesia Sehat, Indonesia Health Card), two major social assistance programmes in the areas of education and health, respectively.

BACKGROUND

The world is gradually recovering from the 2008–09 Global Financial Crisis. In 2017, for example, economic growth climbed back to 3 per cent. During this transition phase, however, the role of trade has been much smaller — thanks to the maturation of global value chains, the shift to robotization and the services economy, fluctuation in commodity prices, as well as rising protectionism around the world.

At the same time, more than 3 billion people still have to struggle to live with US$2.50 or less per day. The richest 10 per cent of the global population owns more than 85 per cent of the global wealth. Even in countries where poverty has gone down, inequality is on the rise — prompting social tensions. These factors are often seen as the main cause of the re-emergence of anti-globalization sentiments and seem to have encouraged world leaders to adopt populist, inward-looking policies. Examples of consequent surprises coming from the voting booths include Duterte, Brexit, and Trump among others. Moreover, often by riding on the back of this disdain for globalization, those in power display increasingly authoritarian inclinations — such as Erdogan in Turkey, Putin in Russia, and Xi in China, to name a few.

Indonesia is no exception. In this country, dissatisfaction with globalization has manifested itself in rising protectionism, rejection of foreign interference, and expressions of distrust of democracy — sometimes with a New Order flavour. The disappointment, nevertheless, is not totally unfounded. As in the case elsewhere, globalization — and nationalism — can bring both good and bad results, “boon and curse”, as Amartya Sen put it. Trade creates winners and losers, and in the absence of (1) wellfunctioning compensation mechanisms and (2) free movement of labour across sectors, the gains may remain concentrated in the hands of a few. And corruption only worsens this situation.

Nationalism in the economic sphere takes the form of protectionism — protecting domestic industries from foreign competition. It usually reveals itself in policies aimed at self-sufficiency in a number of commodities, including those of which Indonesia is a natural net importer.