Economy 4.0 and the Ambition to Become an Advanced Country

Umar Juoro

· 6 minutes read

The ambition to make Indonesia a developed country based on industry has become a widespread view not only within the government and academics but also in various walks of life.

To achieve the ambition, the government has begun the transformation into Industry 4.0, with President Joko “Jokowi” Widodo and Industry Minister Airlangga Hartarto serving as the pioneers in leading the industrial transformation by actively promoting the idea and implementing a number of policies in preparing and improving the quality of its human resources to support the program.

In fact, a number of ministries and businesses have used the term 4.0 for transformation in various fields, such as Education 4.0, Finance 4.0, Telecommunications 4.0, Tourism 4.0, and even Agriculture 4.0, which basically promote the transformation based on the digital technology.

Even in political campaigns, Industry 4.0 has become one of the main programs of political parties such as the Golkar Party. In the recent presidential candidate debate, President Jokowi showed his commitment to Industry 4.0. Although his rival Prabowo doubted the ability of the Indonesian economy in entering the digital era due to what he deemed to be low quality human resources, he acknowledged that the transformation could not be avoided and therefore preparations should be made.

Prabowo’s running mate Sandiaga Uno is enthusiastic about Industry 4.0. The success of the transformation into the Industry 4.0 will enable Indonesia to become one of the advanced economies in the world. But, it relies on the ability of national industries to transform themselves, not only the mainstay industries, namely textiles, electronics, automotive and chemicals but also other industries. The biggest challenge is establishing a synergy.

Industrial development

The manufacturing industry has the largest share in the national economy, with around 20 percent. The growth of the industry growth remains weak, still below 5 percent. Although certain industries, such as food and beverages, textiles and garments, basic metals and machinery, can grow as high as 9 percent. Indonesia’s Purchasing Managers Index (PMI) is still low at 51 (PMI above 50 represents an expansion when compared with the previous month).

Manufacturing exports have slowed lately, mainly due to external factors, especially the US-China trade war. Therefore, the ongoing negotiations to end the trade wars seem to be on track and it will have a positive impact on the development of the country’s industries, including export-oriented ones.

The decline in the oil and gas sector has also put pressure on industry and its exports. The decline in oil and gas production and its large contribution to the trade deficit have hampered industrial development and has also become a serious problem in the economy.

The inadequate direct incentives for the manufacturing and the low demand in the global market cause the industries to experience excess capacity, such as the cement and automotive industries as well as the producers of construction materials.

Low demand for property has caused a decline in the demand for cement and building materials. Infrastructure development helps push up cement demand but it occurs only on projects carried out by state companies or BUMN.

If incentives are also given to the demand side, such as in the property sector, industrial development will grow significantly. Therefore, synergy between the industrial sector and fiscal policy is quite important. Based on the current trend, the growth of the industry is not optimal. The biggest challenge in transforming into Industry 4.0 is synergy in important aspects of the economy, such as the efforts to improve competitiveness, increasing exports and expanding employment opportunities.

There should be synergy between state enterprises and private companies to prevent “crowding out” and to create a large multiplier effect. For a country with a large population, especially young people that account for about 30 percent of the total population, economic transformation should be focused on the industrial sector. Indonesia will be unable to develop its economy based on services or continue to rely on natural resources.

Interestingly, the transformation into Industry 4.0 will deplete the gap between the manufacturing and service industries. It will instead strengthen cooperation between sectors, such as manufacturing with agriculture and manufacturing with mining.

Economy 4.0

Indonesia\'s economic development has entered the era of Economy 4.0. Business activities and consumer spending are closely linked to the use of digital technology.

Low-income communities have begun to actively communicate and carry out transactions using digital technology. In certain sectors, such as the service sector, telecommunications, finance, e-commerce and other economic fields, transformation into the Industry 4.0 era has been progressing well.

Even though e-commerce still accounts for about 10 percent of the country’s retail transactions, its growth has reached double-digits. Indeed, the use of digital technology in the manufacturing industry is still limited because investment and also its human resources still need to be improved.

The present and future industries do not have much choice but to use digital technology to be competitive. This means that investment and the improvement of human resources should be a priority.

The government should, therefore, makes serious efforts to attract investment especially to support the transformation into Industry 4.0. Efforts to further promote export-oriented industries are also quite important. The quality of workers should be improved through training and education. Indonesia should also promote cooperation in science and technology education with renowned educational institutions.

The problem is that Indonesia has a variety of industries, ranging from labor intensive to capital intensive, with high technology. However, digital technology should become a catalyst for national economic development.

Guiding the transformation

The transformation into Industry 4.0 and the economic journey to become an advanced economy does not work on its own. A number of efforts must be made directly. Industrial development must be carried out sustainably, facilitated by synergy in sectoral and fiscal policies.

Investment should be in line with efforts to develop the capabilities of the domestic industry and to increase exports. The improvement of human resources is crucial in transforming the economy into an advanced one.

With young people accounting for about 30 percent of the population, the challenge lies not only in providing employment but also in providing them with adequate skills and knowledge to increase productivity and readiness to take advantage of the opportunities from the transformation into Economy 4.0.

The campaign for Industry 4.0, which has been expanded to Economy 4.0, can be considered a success if it is able to draw large participation from the people who have the same views on the economic transformation and the future of Indonesia’s economy. Based on the current trend, the transformation is on the right track.

Thus, the transformation into Industry 4.0 or Economy 4.0 is not only in the form of concepts and discussions but should be implemented. A number of obstacles should be removed because it is quite important to realize our goal to become an advanced economy in the future.

Umar Juoro, Senior Fellow of the Habibie Center

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