Indonesia, an Advanced Country in 2045?

Agus Tjahajana Wirakusumah

· 10 minutes read

The previous three industrial revolutions exponentially increased the world’s gross domestic product or GDP. For example, Korea was able to become a developed country because its manufacturing sector contributes around 30 percent to the economy, even though in 1960 it was only 16 percent.

Indonesia has been and is trying hard to build this sector, which contributed only 8 percent to the national economy in 1960, through various policies. It did at one point contribute 29 percent to the GDP, before the 1998 economic crisis eroded its performance, so that many industries were sold to foreigners or closed. Industrialization today is being directed toward taking on the challenges of the fourth industrial revolution, also known as Industry 4.0. Even though not as fast as before the crisis, the manufacturing industry was able to rise; its world ranking according to UNIDO (2017) rose from the 18th position (1990) to the ninth (2015).

Indonesia’s potential to become a high per-capita income country with industry as the backbone of its economy is very large: Thousands of islands, 261 million people who are hungry for development, along with diverse and abundant natural resources with extraordinary world rankings.

Thousands of kilometers of roads, thousands of bridges, housing that needs to be built, not yet calculating the needs from transportation, communication, electrical equipment, medicine and medical devices to various needs of industrial machinery etc. are the capital for the growth of a strong manufacturing sector.

Experts have noted that the manufacturing sector is a key factor for Indonesia to escape the middle-income trap (Rodrick, 2010, and McKinsey Global Institute, 2012).

Development challenges

Economic growth in the past five years was only 5 percent to 5.2 percent per year. This was because the role of the manufacturing industry, which was initially able to grow slightly above overall economic growth at a rate of 5.45 percent, dropped to 4.27 percent last year. Its role in the economy, which was 29.6 percent in 2001, continued to decline to 19.9 percent last year. Indonesia is said to be experiencing early de-industrialization.

The caused behind this include a slowdown in the eight main (core) branches, which contributed nearly 80 percent to the industry\'s GDP from a total of 23 branches of the manufacturing industry (2 digit Standard Classification of Indonesian Business Fields/KBLI). In the last five years, five of the branches consistently grew below the average economic growth, so only three branches supported the industrial sector, namely food and beverages, metal goods and basic metals. It was also noted that the latter two grew in a mediocre way, just slightly above the overall economy, due to shortness of breath against imports, which were greater than the total national capacity of the two industries.

Therefore, the only branch to pushing growth was the food and beverage industry, which achieved growth of an average rate of 8.8 percent over the past five years.

Exports of the industrial sector also did not grow significantly, rising only 6 percent last year. Twenty-two percent of industrial product exports, such as textiles, rubber products, paper and electronics, grew negatively, while others grew on a weighted average of 11 percent.

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US President Donald Trump and Chinese President Xi Jinping arrive at a state dinner at the Great Hall of the People in Beijing on Nov. 9, 2017. Trump is on a 10-day trip to Asia.

The sluggish world economy, declining prices of oil and gas, mining commodities and plantation products, especially oil palm, also reduced the export performance, while factors supporting industrial competitiveness, including labor, electricity and gas, have yet to provide support.

Meanwhile, imports grew more than 20 percent in 2018 over the preceding year. Ninety percent of imported industrial products grew more than 15 percent, 73 percent of those grew at a rate above 20 percent. The trade deficit for industrial products in 2018 was recorded at US$17 billion, mainly from trade with China. The industry was stricken as growth margins were hit by imports of goods.

What is worrying is the poor mastery of industrial technology. An assessment through the ISIC Rev.3-2011 UNIDO method in 2014 measured high-tech industry capability at only 6 percent, medium-high technology at 28 percent, medium-low technology at 23 percent and low technology at 43 percent.

Therefore, as 65 percent of Indonesia\'s industrial output is of the low-tech type, it is only natural that 58 percent of the technological content of exported industrial products is low-tech, while 72 percent of imports of industrial goods are high-tech. This is the state in which the national industry enters the Industry 4.0 era, where technology and innovation are precisely the determinant of competitiveness.

Therefore, the trade deficit of the majority of our industrial products with partner countries in the free trade area (FTA) is hardly surprising.

Meanwhile, protecting new investment (infant industries) by fencing off the domestic market is almost impossible, because Indonesia’s average import duty is only 2.6 percent, as liberal as the European Union or the United States, even lower than Korea (7.7 percent), China (3.5 percent) and India (6.3 percent) (World Bank, International Monetary Fund). Therefore, the trade deficit of the majority of our industrial products with partner countries in the free trade area (FTA) is hardly surprising.

Therefore, Indonesia needs to carefully watch the effects of new FTAs. The negative impact of liberalization on the Australian automotive sector, which led to the closing of factories of Mitsubishi (2008), Ford (2016) and Toyota (2017), was an early warning against liberalizing our economy.

Industrial investors have not yet felt a fresh breeze from an improvement in the investment climate, even though 16 economic policy packages have been issued. For traders, the import business is more attractive because of its low risk compared to industrial businesses, so investors find themselves between a rock and a hard place, as the shorter dwell times for loading and unloading of goods at seaports is even a blessing for importers.

Where Indonesia’s industry is going

Developed countries have directed their industrial development to increasingly high technology, as reflected in the large amount of research and development (R&D) spending. Nearly half of the world’s research spending is focused on six branches of industry, which are high-growth and full of innovation and are believed to be the direction of the development of the world industry in the future (R&D Magazine, 2016).

The industrial branches in question are (1) life science, (2) aerospace and defense, (3) automotive and transportation system, (4) energy system, (5) ADI and chemical materials (6) as well as information and communication technology.

Germany chooses energy, health and safety industries, while China focuses on fast trains, high-precision numerical machines and electric vehicles. Singapore is moving toward space technology.

Looking at the capital, experience, conditions and opportunities we have, a two-stage program is needed to help the industry grow fast and restore its important role for the economy. First, implementing a reindustrialization process while simultaneously accelerating the process of developing high-tech industries to produce far more valuable products than those that already exist.

Reindustrialization is intended to restore the performance of certain industry branches that are sluggish, increase the capacity and strengthen export capabilities. In essence, a consolidated systematic program must be completed in two years at most to eliminate all the inhibiting factors for the performance of the core industry branches, especially to be able to reduce imports of illegal products, reduce investment costs, and increase investment competitiveness. Reindustrialization must focus on core industry branches, which have grown below the economic average over the past five years, such as the chemical industry, motorized vehicles, nonmetal mining goods, electronics, basic metals, textiles and apparel, and rubber.

Investment is needed to strengthen R&D capabilities, localize supporting components and input products and protect industries against an influx of fraudulent goods.

That group contributes 40 percent to the national industrial GDP, with a large workforce, but is characterized by high import dependence, susceptible to fluctuation in commodity prices, and exchange rate fluctuations, so its performance is strongly correlated with global conditions. Investment is needed to strengthen R&D capabilities, localize supporting components and input products and protect industries against an influx of fraudulent goods.

By looking at the development of the world, the needs and potential of Indonesia in the future, priority industry 4.0 branches must be defined to realize the ideals of increasing technology mastery and multiply the added value to pursue the target of raising the industry’s share of GDP to at least 30 percent. Industrial branches predicted to realize this are advanced materials and ADI chemicals, automotive and transportation equipment, professional electronics and medical equipment, sensing equipment, construction and industrial machinery, information technology and smart office systems, microelectronics and precision electronics as well as aerospace. The production pattern must be able to reach the level of "independent design and production".

To estimate Indonesia\'s posture in 2045, the writer conducted a development simulation last year. Under a scenario of 5.5-7.0 percent economic growth for different periods, Indonesia\'s GDP could reach Rp 75,000 trillion by 2045. This value can be achieved if industrial output grows by at least 8.1 percent from 2019 to 2045. In the target year, the industrial component of GDP would then reach 32.5 percent, fulfilling the ideal industrial role for the economy of a developed country based on literature of at least 30 percent.

With the assumption that population growth does not exceed a maximum of 1.18 percent per year, GDP per capita in 2045 would reach US$15,181, a number that would categorize Indonesia as a developed and high-income country.

Requirements for development

The requirement for ensuring the success of the reindustrialization program and priority industry development 4.0 is total support from all relevant sides by eliminating sectoral silos of interest and having to focus on the improvement and development of various aspects of industrial support. The program can only work if there are sufficient industrial zones with convenient investment supporting infrastructure, especially fiscal and nonfiscal incentives that are competitive with other countries, which must be easy and fast to obtain.

A professional workforce, a key factor in the growth of high-tech industries with a background in STEM (science, technology, engineering, mathematics), has to be available in terms of quantity, quality and expertise. Training centers may produce a skilled workforce in the digital world, control, and precision mechanics. It has to be added with R&D cooperation among industries, academics and research institutions which has been running well and complementary.

Attracting high-tech industries is to compete fiercely with Singapore or Malaysia, which is already prepared with its ultramodern industrial areas and provides competitive investment incentives up to the costs of construction, promotion, interest costs and even fiscal incentives if investors establish business headquarters, renovation, expansion/modernization, R&D, up to acquisitions and mergers.

It makes sense that the world micro-electronics industry exists in Singapore. Nine of the world\'s 15 best fabless semiconductor companies, 14 silicon integrated circuit (IC) wafer fabrication plants, including three of the world\'s best wafer foundries, and hard disc media manufacturing, invest there. In Indonesia, as it is so thrifty about incentives, even though the tax holiday was rolled out eight years ago, only 17 companies have obtained it, or two companies per year. In reality, Indonesia\'s business climate, according to the World Bank, ranks second-lowest in the ASEAN region.

To sure that we need a comprehensive, consistent and holistic breakthrough to improve the performance and improve the structure that is currently 65 percent low-tech.

The plan to become a high-income developed country can only be put into practice if Indonesia has a strong manufacturing industry before the service industry appears. To sure that we need a comprehensive, consistent and holistic breakthrough to improve the performance and improve the structure that is currently 65 percent low-tech.

The reindustrialization program and efforts to attract highly reputed investors who are willing to share technology in the high-tech industry are the answer. Without support from the manufacturing sector, especially with more complex challenges in the future, it is doubtful whether the Indonesian economy can grow above its current average and it is even more doubtful that Indonesia can achieve its goals of becoming a high-income country in 2045.

Agus Tjahajana Wirakusumah, Former Secretary-General of the Industry Ministry; Advisor of the Mineral and Metal Industry Institute, PT Inalum

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