Tulus Tambunan Kadin Indonesia-JETRO November 2006

Transcription

1 THE DEVELOPMENT OF INDUSTRY AND INDUSTRIALIZATION POLICY IN INDONESIA SINCE THE NEW GOVERNANCE ERA TO THE POST-CRISIS PERIOD Tulus Tambunan Kadin Indonesia-JETRO November

2 I. The Growth and Structural Changes in Indonesian Economy 1 As a result of political instability in the country (including several revolting happened in succession during the period of )combined with poor economic management by President Soeharto, these first two decades of Indonesian economic development since its independence day in 1945 has created inferior economic and social condition in the country. Since the year 1950, domestic production and investment sectors has been stagnant, or even drastically dwindling compare to years before its independence, and real income per capita recorded in 1966 was below the figure in 1938 (Booth and McCawley, 1981). In the early years of the New Governance Era under the leadership of President Soeharto, the average income of Indonesian people was merely around US$ 50 per year; whereas 60% of Indonesian s children were not able to read and write; and close to 65% of its total population lived in poverty 2. Facing this rather deprived condition, the government directly set forth 3 significant steps during the early year of the New Governance Era that is stability, rehabilitation and economic reconstruction (Chalmers, 1997). In addition to those steps, government had also managed to set up five years development plan (Repelita) conducted gradually from 1969 with First Repelita, and made a number of crucial economic reformation policies during 1970 s and 1980 s, including liberalization in investment, capital balance, banking as well as external trade. Dissimilar with the Old Governance Era, industrial sector was its main priority in the New Governance Era. In order to support the development of national industry, the government adhere to two different industrialization strategies applied gradually starting from import substitution focusing in labor intensive industries such as textile and it products, footwear, wood products (particularly plywood s), food and beverages, and later followed by the development of automotive assembling industries, and in the early decade of 1980 s, the strategy shifts to promoting export. These two industrialization policies supported by several economic reformation policies and bring about dramatic results which was beyond the most optimistic expectation at that time; a rapid economic growth and sustained uninterrupted during the decade of 1980 s until the year 1997, sometimes before economic crisis emerged close to the end of year 1997 dan hit its lowest record in That remarkable growth resulted in an increase of real income per capita of more than 10 times from US$70 in 1969 to US$1100 in 1997 (by price) (Figure 1). From the middle of 1997 up to the whole year of 1998, Indonesian economic activities, particularly in formal sectors, practically halted due to the crisis. It starts with the collapse of exchange value of Thailand s baht over 1 Draft of the book to be published (The Development of National Industri since the New Governance Era until Post-Crisis Era) 2 Look up in Arndt (1974), Arndt dan Hill (1988), Asra. (1988), and Booth (1989). 2

3 US$, and finally brought pressure to the exchanges value of other countries in Asian region, especially Indonesia, Philippine s peso and South Korea s won. Rupiah s exchange value started to be heavily depreciated against US$ during the mid-1997 until mid-1998 by as much as 500%. Consequently, number of companies, big scale companies including those owned by so-called Indonesian s conglomerates which were strongly relying on imported raw materials and/or processing goods such as component, and borrowed a considerable amount of loan from commercial banks abroad, had been forced to trim or even stop their production activities due to skyrocketing import costs in rupiah and/or escalating rupiah amount needed to pay interests and debt installment. As a result, many companies decided to close its operation, and for the first time in Indonesian history since its independence, the economic suffered a negative growth by 13% in the year Figure 1. GDP per Capita and GDP Growth in Indonesia: Source: BPS In the year 1999, Indonesian economic situation started to recover (though it took relatively much time compared to fellow Asian countries which has been hit by similar crisis, such as South Korea that has been fully recovered within a year), and in the past few years, Indonesia has regained its healthy level as a result of macroeconomic stability, though the economic growth in 2005 was only 5.5%, lower than expectation at that time of 6.5%. The reduction of fuel (BBM) subsidy in October 2005 as a logical consequent of fuel price jumped in world market reaching more than US$50 per barrel, has augmented domestic fuel price by more than 100%. This 3

4 fact has driven a high domestic inflation. And as a twofold impact of those fuel subsidy cut, it is estimated that the economic growth in 2006 will be smaller than 6%. Estimation of economic growth has long been accepted as a significant indicator of the whole economic performance of a state. The economic growth might be further decomposition by sectors to obtain sectoral contribution against the formation or the growth of GDP. While economic growth estimation in a long term period revealed the direction and scope of economic growth in a nation, its sectoral composition give an insight of relative position from different sectors within the nation s economy. An analysis of changes within economic growth and contribution from economic sectors within certain period will give a measurement of structural changing in production and services pattern within the economy. Based on a time line data from BPS, it is clear that during the New Governance Era, Indonesian economy has experienced huge structural changes where agricultural sector played a dominant role in the formation/growth of GDP to an economy where GDP contribution from that sector has been diminished. In the year 1965, agricultural contribution recorded around 56% and in 1997 was only 16% from GDP, or merely one third of its share in 1965 (Figure 2). Meanwhile, manufacture industry has rapidly growing within a range of 13% in average per year during the period of As a result, share of manufacture industry in GDP rose from around 8% in 1965 surpassing the agricultural sector in 1991, and became 24% in 1995 of Indonesian GDP, or three times bigger than its shares in Generally, other secondary sectors such as constructions, transportation, electricity, gas, clean water supply as well as tertiary sector such as finance and other services will be also developed following the industrial growth, or in other words, secondary or tertiary sector became more important in the industrialization process, since the industrial growth will eventually created demand over those non-primary sectors. The development of industrial sector might need infrastructures support such as highways, industrial complex and offices building as well as financial services and licensing. In this sense, services sector has shown a positive trend during the same period. Based on a study by Hill (1966), staggering output growth in services sector particularly during the decade of 1970 s until 1980 s, had mainly been driven by the establishment of infrastructure funded by oil productions as well as foreign aid. His study concluded that there was a clear positive correlation between the growth of government real spending and the growth of services sector during that era. As it is stated before, industrialization strategy in Indonesia is started with import substitution backed by high wall of protection and gradually shifted in early 1980 to promote export activities by a number of economic reformation policies. The export strategy is directed especially to improve non-oil/gas export, namely manufacturing products. Figure 3 indicating a long term development pattern of Indonesian export since 1965, times when the country is still strongly oriented to primary sectors, such as oil and agricultural product, both in 4

5 production as well as exportation. Up the end of 1970 s, export of manufacture products was not more than 4% of total export value of Indonesia. In 1987, market share of manufacturing products in total export has gone above agricultural shares, and in 1992 export share of manufacturing product had also surpassing those sectors of oil, mineral, and basic metal. Seeing the slowing trend of export shares from agricultural as well as other primary products and yet, at the same time, the increase export shares of manufacturing products, Indonesian economy became less sensitive to the fluctuation of fundamental international exchange. Since the price of manufacturing products in global market has always been stable or even tend to follow the technology advancement as well as the growth of income per capita of world community, yet prices of primary commodities, both in absolute or in relative term (terms of trade; ToT), tend to decline and unstable due to its heavily dependent on climate factor at supplier countries. Figure 2: Structural Changes in Indonesian Economy (% of GDP) Source: quoted from one of the figures of Carunia, (2000). One interesting point from Figure 3 is that since the early decades of 1980 s, Indonesian manufacture export has started to grow steadily. However, whether that exports has been at its utmost performance or not, in terms of its share growth pace in total export, need to be further observed. For that matter, the growth of Indonesian manufacture exports has to be perceived within international perspective. Study results from Aswicahyono (1996) which attempted to make a comparison between export performances of Indonesian manufacturing products with several countries in most of developing countries in Asian region for the period of might provide some answers. As can be seen in Figure 4, in terms of manufacture export share to total export, it turns out that Indonesia was the least exporting country among other countries described in that figure. In other words, role of 5

6 manufacture industry in the formation of Indonesian export is relatively weak, although there was some increasing movement during the observed period. Figure 3: The Composition of Indonesian Export, Source: Carunia, and friends. (2000). Figure 4. Export Share of Manufacture from Total Export in Indonesia and Numbers of Other Developing Countries, (%). Source: Graph 2.3. of Aswicahyono (1996) (data processed from UNIDO) 6

7 As a comparison, Table 1 explained data regarding the growth of average real GDP per year in Indonesia and three other big developing countries such as Brazil, China and Developing Countries as a group for the period Within those 30 years, the growth of Indonesian economy recorded at 5.7% and it was higher than the growth of all developing countries, yet extremely low compare to the growth pace of China s economic that reached around 7.1%. For the first 10 years, the economic growth in India was recorded at the lowest among the other four countries, whereas the economic growth of Brazil was the highest, followed by Indonesia. However, the situation has changed in the past 10 years: China lead the average growth pace with little over 10%, while the acceleration of Indonesian economic growth continue sly weaken, from 7.9% in the decades of 1970 s to 6.4% during the period of 1980 s, and 4.3% during 1990 s. Table 1. The Growth of Real GDP in Indonesia, India, Brazil, China, and Developing Countries simultaneously, (average per year in %) Indonesia India Brazil China 7,9 3,2 8,5 5,4 6,4 5,6 1,6 9,2 4,3 5,8 2,5 10,4 5,7 4,6 4,8 7,1 NSB 5,5 3,2 3,2 Source: World Bank (World Development Indicators CD-ROM 2001) and BPS 4,4 Further, using the data from World Development Indicators, 2003 (World Bank), Hayashi (2005) also explained the difference of Real GDP growth in Indonesia with numbers of developing countries, mostly Developing Countries, and the world, as a whole for the period of (Table 2). It can be seen that during the first decade of the New Governance Era, Indonesia ranked at the second position with an average growth of almost 8% following Singapore which ranked the highest of reaching close to 9%. However, in the second decade, the growth of Indonesian economy slightly fell to 6.4%, which among other things caused by the oil price drop in world market after the second oil boom era ended at the end of 70 s to early 80 s. Meanwhile, at the same time, China emerged to lead the economic growth in the region by surpassing Indonesia, and during 1990 s right before the crisis, the growth has reached over 10%. In this sense, China might be considered lucky since it was not hit by the crisis in 1997/1998 and enjoyed a positive growth, while Indonesia suffered from a negative growth of 13%, worst than other Asian countries that were also severely affected by the same crisis. Right after the crisis, Indonesia faced some difficulties to recover in a matter of short time. During the period of , the growth of real GDP of Indonesia was the lowest compared to other ASEAN countries with the same crisis, yet Singapore and Malaysia come forth to be the two countries that quickly back on their feet, and showed a remarkable growth ever since. Table 2. The Growth Rate of Real GDP in Indonesia and Other Neighboring Countries, 7

8 (% average per year) Indonesia Malaysia Philippines Singapore Thailand China Vietnam ,1 6,5 4,9 9,8 8,2 3,6 tad 7,9 7,8 5,9 8,9 6,9 6,2 tad 6,4 6,0 1,7 7,4 7,8 9,3 tad 7,4 9,2 3,1 8,8 6,7 11,2 8,4-13,1-7,4-0,6-0,9-10,5 7,8 5,8 2,8 7,2 3,9 7,9 4,5 7,5 5,8 NSB World 5,3 5,5 5,4 3,7 Source: Table 1 of Hayashi (2005) 2,9 3,1 3,3 2,5 1,8 2,2 3,9 3,4 II. The Development of National Industry Not only that its rapid economic growth might be sustained for a long period of time, but also due to the staggering industrial development that Indonesia was once included in the group of South East Asia and East Asia countries that was named after East Asian economic miracle. (Hill, 1996). Even in a group that involving Hong Kong, Japan, Malaysia, South Korea, Taiwan, Singapore, and Thailand, the economic expansion of Indonesia was highly impressive particularly for its accomplishment in industrial growth. In addition, Indonesia was also extremely different than other oil producer countries that joint in the oil exporting countries organization (OPEC) for the establishment of its manufacture industrial sector. Even in the period of 1980 s and 1990 s, Indonesia had once become the key player in several industries, from palm oil to textile until electronic industry (USAID and SENADA, 2006). Thus, it can be said that the rapid growth and development of manufacture industry output has been the main characteristic of Indonesian economy during the New Governance Era. Prior to the New Governance Era (1966), Indonesian economy entered stagnate period where there were no growth of GDP and industry output combined with skyrocketing inflation rate and declining income per capita. Following the transition from Old Governance to New Governance era, GPD rate started to show some growth from only an average of 5% per year until the fallen price of oil in world market in 1982, and afterward start to move upward to reach an average of 7% per year until 1997 (Figure 5). In the early years of New Governance era, manufacture industry has developed in a relatively slow manner. For instance, according to data from BPS, the production value of manufacture industry in 1969 was only recorded at US$1.42 billion. One of the significant barriers at that time was limited state foreign exchange. Since there were only a few of pure local industry, almost all machinery types have to be imported. The rarity of foreign exchange has urged the government to put a tight control over import activities and this limitation was a serious obstacle for Indonesia to build industries. However, in the following years, the industry output growth has begun 8

9 to expand and at the end of 1983, manufacture output recorded at around US$7.84 billions. Not to mention that the output of manufacturing industry grew at an outstanding level (viewed at that particular time) reached an average of 13% per year during 1970 s, and undoubtedly became one of the fastest in the world after South Korea and Singapore (Prawiro,1998). Only in the early 1980 s that the growth of manufacturing industry output had once deeply plunged at times when Indonesian economy suffered from bad recession following the fallen oil price in world market and during the crisis period in (Banerjee, 2002) 3. The rapid growth of Indonesian manufacturing industry occurred in almost all of its modern industry, which generally comprising of big scale production units with total labor of 100 people or more and middle scales industry employing 20 to 99 labors (Thee, 1998). Figure 5. GDP Growth, Manufacture and Agriculture, (%) PDB Manufaktur Pertanian Note: PDB: GDP; Manufaktur: Manufacture; Pertanian: Agriculture Source: BPS and Banerjee (2002) Output growth rate in manufacture industry has always been larger than the growth of production in oil/gas industry, which made the industry to have a non-proportional influence over the economic growth of Indonesia. Therefore, Indonesian economy might proceed to reduce its dependencies toward oil/gas and then rapidly improved even though the output growth in agriculture sector per year was slowing down. During the New Governance era, agriculture sector has only made several signs of improvement in its output by more than 5% (Hill, 1997). According to Thee (1988), McCawley (1979) and others, there was numbers of factors that allowed such rapid growth. First, economic climate of Indonesia at the end of 1960 s has gone through significant recuperation due its economic policies in areas of stability, reconstruction and rehabilitation which was applied straightaway by the New Governance government right after the power transition from the Old Governance. Second, several concrete actions conducted by the government within the New Governance directed to give more opportunity for market power with eliminating tight control applied by government of the Old Governance. Among other things, 3 Since the oil export (oil/gas) hold a dominant position in the New Governance era (it still is) and government financial sources was heavily relying on oil export, then any fluctuation of oil price in world market will disrupt Indonesian economy. 9

10 international trade liberalization, particularly through abolishment of tight control over export and import, as well as eliminating the troublesome twofold foreign exchange rate which characterized the economic policy of Old Governance. Third, special treatment that was enjoyed only by State-Owned Companies (i.e. subsidy) is reduced. Fourth, the issuance of investment law that suggested inaugurate of domestic investment liberalization, that is The Law of Foreign Direct Investment (FDI) in 1967 and The Law of Domestic Direct Investment (DDI) in This Investment Law not only provides opportunity but also a solid law foundation for foreign as well as domestic investors to invest their capital in various productive activities, including industrial sectors in Indonesia. Fifth, due to a huge shortage of various finished products that emerged in the last years of Old Governance. Market condition has potentially created massive demand and it will be sort of a stimulus for domestic industrial growth. In this sense, especially for industries existed during the Old Governance that operated far below its maximum level due to several reasons such as the availability of raw material, components, and parts, or facing difficulties in importing those inputs due to lack of foreign exchange, as a result, these demand excess market condition was a big chance for those industries to improve production to meet their installed capacity at that time without the need of make a huge investment. Sixth, the availability of foreign exchange in a considerable amount after the year of 1998 caused by rapid increased in crude oil and non-oil minerals, wood pile as well as foreign capital inflow in the form of FDI or foreign aid. Seventh, industrialization pattern of import substitution penetrated by the government of the New Governance, which allowed domestic production growth especially for finished goods. It is true that in the early New Governance era, government has a bold reason to maintain an open policy of investment and trade. That is because the Soeharto government realized that it was the only way to attract investment and financial aid from abroad, particularly west world, which was needed to support the recovery process of national economy that was in extremely bad shape inherited by the Old Governance. However, at the end of 1970 s, government returned to protection regime and extended its direct intervention, especially related to industrial development. There were at least 4 ways in which the government conducted its direct intervention during the 1980 s. First, through the domination of state-owned banks who provide subsidized loan to selected customers. Second, direct involvement in production through state-owned companies (BUMN), especially heavy industries. Third, through the enforcement of import restriction, and lastly, through a regulation package aimed at supporting various objectives industrial policies, such as spatial disseminate, small scale industry development, and establishment of local business ( Carunia,dkk, 2000). As a comparison, Table 3 pointed out the growth rate of output in Indonesian industry (oil/gas and manufacture) and three other big developing countries as well as Developing Countries to be included as one group for the period of , as in Table 1. It was very clear how fast the industrial output growth in 10

11 Indonesia compared to the other three countries, except China for the last 3 decades. During the first decade, the output growth of Indonesian industries was a little over 10% compared to 6.3% industrial output growth in Developing Countries altogether, or China with around 9%. However, following that period, the industrial output growth in Indonesia has been relatively dwindling, whereas on the contrary, China enjoyed a robust growth, particularly during 1990 s. Indeed, in the past ten years, China has emerged to be an important country within the world economy from the point of its industrial expansion, especially in the middle and down-stream industries. Table 3: The Growth Rate of Industrial Output in Indonesia, India, Brasilia, and China and Developing Countries altogether, (average rate per year in %) Indonesia India Brazil China 10,4 4,1 9,9 9,2 7,1 7,1 0,5 9,6 6,0 5,6 2,0 14,1 NSB Source: see Table 1. 6,3 3,3 3,8 Further, Table 4 tried to compare the evolution of GDP s share from three most important sectors in the economy during the same period in Indonesia and the three other countries. It can be seen that Indonesia has the most obvious differences in its changing pattern compared to the pattern in India, but almost similar to those in Brazil and China. In addition, Indonesia has displayed slightly improvement in its GDP share from services sector, whereas its contribution to the formation of GDP from industrial sector has sharply increased where part of them reflecting the role of advancing oil industry. At the same time, GDP s share from agriculture sector has been declining from the level equal to India in the year 1970 to a lower level from India at the end of that period. In Brazil, shares from industries and agricultures experienced a downturn period whereas its GDP s share from services sector climbed to the level of above 60% in In China, GDP s shares from services sector has not indicated any sign of improvement during that period; whereas shares from agriculture sectors has slightly drop which was balanced by the equivalent increase in its industrial share to 49.3% at the end of the period. In India, during the year of 2000, more than one fourth of its GDP deriving from agriculture sector, or around twice as big from shares of all Developing countries, or three times bigger than the share in Brazil and far more enormous share compare to Indonesia and China. This part of the economic structure in India was clearly described by higher shares of its GDP from agriculture sector of around 46.3% in 1970, and another part of it was caused by relatively small output growth in its industrial sector, especially during the first decade. Other measurement which might be observed from data in Table 3 was during that period, shares of sectoral within India s economic indicating an evolution pattern similar to those in Developing Countries as one group, which was a moderate 11

12 increment in its GDP s shares from industry, a substantial cutback from agriculture s share, and a big jump from output contribution in services sector on the formation of GDP. Country Indonesia Table 4. Sectoral Shares in GDP, (%) Sector Agriculture Industry Service Period ,9 24,0 19,4 19,5 18,7 41,7 39,1 43,3 36,4 34,3 41,5 37,3 India Agriculture Industry Service 46,3 21,7 32,2 39,7 23,7 36,6 32,2 27,2 40,6 25,2 26,7 48,1 Brazil Agriculture Industry Service 12,3 38,3 49,4 11,0 43,8 45,2 8,1 38,7 53,2 8,6 30,6 60,8 China Agriculture Industry Service 35,2 40,5 24,3 30,1 48,5 21,4 27,0 41,6 31,3 17,6 49,3 33,0 NSB Source: see Table 1. Agriculture Industry Service 23,8 33,7 42,5 18,4 40,1 41,5 15,8 38,1 46,1 12,4 35,0 52,6 As another comparison, study result from Timmer (2000) related to the role of manufacture industry over the economic growth in several countries in Asia and USA might be a good case to be discussed here. As it is shown in Table 5, based on current price for the period of , share of manufacture industry as a percentage from GDP increased in all countries except Japan and US. In 1953, the lowest shares was from South Korea which was merely 8% compared to the highest rank, held by Japan, with 32% shares. Next, in the year 1963, the role of industry in Indonesia was too small to be translated by GDP s share of only 7%. One interesting issue from this table that the growth rate of industrialization in China was relatively far more ahead than India. However, the growth of industrial sector in Indonesia might be considered well ahead during the same period, although its contribution to the formation of GDP during the last years was relatively smaller than what has been accomplished by Chinese manufacturers. Table 5: Shares from Manufacture sector in the Total GDP at the current price, (%) Period China* India Indonesia South Korea Taiwan Japan USA Note: * =based on constant price Source: Timmer (2000)

13 Aswicahyono (1996b) has also analyzed the development of Indonesian manufacturing sector within international perspective. The result is described in Figure 6 using NT ratio of GDP-manufacture from several countries for the period of It can be judged by looking at that figure, that Indonesia was completely left behind in terms of industrialization process, compared to other countries posted in the figure. In the year 1965, industrialization level of Indonesia was similar to Malaysia, and lower than China, Brazil, Mexico, South Korea, India, Turkey and Thailand. Indonesia continued to be at the lowest position until the early decade of 1990 s, at times when Indonesian GDP-NT was recorded around 20% of what had been achieved by Malaysia in early 1980 s. Then it was in the year of 1994, that industrialization level in Indonesia based on these indicators had gone well above several such as Turkey, Mexico and India but still behind China and South Korea and two neighbor countries Malaysia and Thailand. Figure 6: NT Shares of Manufacture Industry in GDP in Indonesia and Several other Developing Countries-95 (%) Source: Graph 2.1. of Aswicahyono (1996b) (World Bank Data) Other than comparing the industrialization level with NT shares approach in GDP, Aswicahyono (1996b) also used other indicator that is manufacture s NT per capita. Similar to the more advance of health sector in one country then the larger of total doctors ratio per 1000 population (as one of the indicator), thus same thing applied to the more advance of industrialization process in a country then the faster of manufacture sector will grow relatively compared to population growth rate, and the higher manufacture s NT per population. As can be seen in Figure 7, the same with Figure 6, Indonesian position within industrial development using this indicator was the smallest compare to other countries, especially those who already started the industrialization process such as Turkey, Brazil and Mexico; and in the year of 1992, Indonesia still below those countries but the discrepancies became smaller. The reason might be due to larger population of Indonesia compared to those three countries, but 13

14 has to be admitted that their industrial development was in fact accelerated than Indonesia as it was reflected from manufacture s NT share in GDP that was higher than Indonesia (Figure 6). Figure 7: Manufacture Industry s NT per capita in Indonesia and Several other Developing Countries-94 (US$) Source: Graph 2.2. of Aswicahyono (1996b) (World Bank data). Other interesting empirical data concerning the industrial growth in Indonesia is from Hayashi (2005), with a study covering the government of the New Governance era up until The study results are described in Table 6, Table 7 and Table 8. First Table showing the experience of Indonesia in the structural transformation during the three decade before the crisis in 1997/1998. The role of agriculture in the form of output has been shrinking, while it was getting bigger from the industries. In terms of export, the second table pointed out those shares from primary products was declining from almost 100% in 1960 s and 1970 s to around 50% in the 1990 s. The last table stated that the growth pattern of real NT in manufacturing by sub-sector since the year of Prior to the crisis in 1997/1998, total output in manufacturing industries improved with an average rate of 14.1% per year. Growth 2) Table 6: The Growth and Sectoral Shares from GDP in Indonesia, (%) Agriculture Industry 1) Manufacture Total Service Non Oil-Gas Total With Oil- Gas ,2 4,2 3,3 3,6 1,0 3,7 3,4 8,9 10,2 8,9 11,3 0,7 10,2 9,0 10,8 10,3 6,6 11,9-0,8 10,3 8,9 3,6 8,9 5,5 7,9-2,5 7,3 6,1 4,7 7,5 5,2 8,3-1,2 7,0 6,0 7,4 7,1 3,0 7,4-1,3 6,5 5,6 14

15 Sectoral Share 3) ,4 34,5 27,8 21,8 17,9 11,9 14,6 17,6 22,8 26,8 17,6 23,7 26,6 32,8 38,9 40,0 41,8 45,6 45,4 43,2 Sectoral contribution to the growth 4) ,9 19,2 17,7 9,5 14,9 22,5 19,8 30,1 31,0 15,6 40,4 32,5 33,8 47,0-25,8 30,7 49,6 48,3 43,2-90,0-101,0 Note:: 1) Industries include manufacture, mining, utility and construction; 2) GDP growth representing average growth per year by constant price of 1983 in each period; 3) Sectoral shares is calculated as an average per year for related years in each period; 4) Contribution from each sectors over GDP growth is measured with GDP s shares from related sectors. Source: Hayashi (2005) (calculated using data from van der Eng (2002: 172-3), updated data for 1999 and 2000 with data from BPS (Income of Indonesia)). Table 7: Sectoral Shares from Indonesian Export, (%) 1) Period Agriculture 2) Mining 3) Manufacture Others Total ,8 36,7 25,5 13,3 20,9 16,5 15,8 44,6 61,7 72,4 79,0 50,8 34,3 26,9 Note : 1) Sectoral shares from export commodities (at US$ price) calculated as an average from related years in each period; 2) Agriculture including food and raw material; 3) Mining include oil/gas, ore steel and metal.. Source: Hayashi (2005) (calculated from World Bank, World Development Indicators 2001) 2,1 1,4 2,0 7,2 28,3 49,2 47,3 0,5 0,2 0,1 0,5 0,0 0,0 10,0 Table 8: The Growth and Sectoral Shares in Real NT in Non-oil/gas Manufacture Industry in Indonesia, (%) 1) Sector 2) Growth3) Manufacture Food (31) Textiles & its products (TPT)(32) Wood & Papers (33 & 34) Chemical & Basic Metal (35 & 37) Machineries (38) Metal Works (381) General Machine (382) Electric Machine (383) Transportation Tools (384) Precision Tools (385) Others 4) (39 & 36) 9,3 6,2 19,1 19,5-4,3 39,3 22,1 54,4 42,9 58,8 51,6 22,8 13,2 8,2 7,5 21,4 19,7 21,4 12,0 11,7 25,8 24,2 27,8 18,2 13,8 9,0 13,6 19,5 21,6 10,1 19,8 8,5 7,2 9,6 15,1 13,6 15,6 13,2 20,4 22,2 13,3 17,1 8,3 18,4 9,4 26,9 18,9 7,8 13,3 6,4 16,3 9,3 13,4 22,2 20,3 16,4 31,6 18,6 42,6 15,6-1,8 7,2 0,7 1,7-8,2-6,5-7,8-26,1-1,4-8,2 13,0-7,5 14,1 9,9 14,3 18,2 16,3 16,8 14,3 16,4 17,7 17,2 26,4 12,6 11,9 9,6 12,4 15,9 12,7 13,5 11,1 9,7 15,0 13,5 24,6 9,7 Sectoral Share 4) Foods (31) 50,3 40,8 35,5 26,7 22,8 23,4 15

16 Textile & its products (TPT)(32) Wood & Paper (33 & 34) Chemical & Basic Metal (35 & 37) Machineries (38) Metal Works (381) General Machine (382) Electric Machine (383) Transportation tools (384) Precision Tools (385) Others 4) (39 & 36) 14,9 5,3 16,5 8,9 3,0 1,1 2,3 2,5 0,0 4,1 13,7 6,9 17,4 14,3 3,4 1,1 4,3 5,4 0,1 6,9 Total Note: 1) This table used data for manufacturing industry with total labor of 20 people or more, except between 1971 and 1973 where companies with only 5 or more people and applying electricity, or companies with 10 or more people without electricity equipment. Oil/gas Sub-sectors (SIC 353 and 354) not included; 2) Figure in parenthesis indicating ISIC code ((International Standard Industrial Classification); 3) Growth indicating average growth per year in each period. NT data in this table is deflated with implicit GDP deflator for manufacture (1993=100) from BPS (National Income of Indonesia), since there is no long term deflator matched with sector and subsector; 4) Others include miscellaneous (ISIC 39) and non-metal/mineral products (ISIC 35); 5) Sectoral shares or sub-sectoral from NT is an average for the related years in each period. Observed periods for this share was: , , , , , and ,7 9,7 21,1 15,9 3,5 1,2 4,2 6,9 0,1 6,0 15,4 15,6 23,6 14,3 4,3 1,0 2,7 6,2 0,1 4,4 17,9 14,2 2,1 19,3 3,7 1,4 4,7 9,3 0,2 4,8 18,2 14,2 19,0 20,7 3,2 1,4 7,0 8,7 0,4 4,5 However, as can be judged, output growth or real NT varied based on industry category; there was even a case that some of them enjoyed an expansion rate of output from manufacturing industry as whole. For example, NT from machine industry (ISIC 38), except for certain years including the crisis period. In the first mid-decade of 1990 s, this industry has contributed more to the total growth of NT from manufacturing industry compared to other industry categories. All of sub-sectors from machine industry such as metal processing industry (ISIC 381), general machine (ISIC 382), Electricity machine (ISIC 38), transportation means (ISIC 384) and precision tools (ISIC 385) have growth sharply during the decade of 1970 s and during the period of Particularly since 1986, that is the economic boom era, a number of deregulation policies accelerating the expansion of production from machine industries sub-sectors. For instance, after hitting one digit growth, during the period of , transportation means sub-sectors including automotive production have set yearly growth of more than 18%. Table 8 also pointed out that composition of manufacture s NT has drastically changed since early decade of 1970 s, which reflected a different growth rate among sub-sectors. Machine Industry (ISIC 38) contributed 21% from manufacture output in the second mid of 1990 s, more than twice its shares during the past 30 the years. This industry became the creator of the second biggest manufacture s NT below food industry. In more detail, electric machine industry (ISIC383) and transportation means (ISIC 384) have substantially added their output shares, which is 7 % and 8.7% respectively at the end of 1990 s. As a comparison to the Study conducted by Hayashi, empirical study from Trimmer (2000) is also interesting to be further discussed in this chapter. He analyzed which sub-sectors that have given the biggest contribution toward manufacture s NT in similar countries mentioned in Table 5. For this matter, he used decomposition 16

17 approach. The calculation result can be observed in Table 9. In the case of Indonesia, the most significant industrial groups was food industry which during the period of has contributed an average of 15.5% toward the total growth of NT within Indonesian manufacturing industry; followed by wood industry and its products by around 13.3%, and chemical industry with the rate of 13.2%. Nevertheless, Indonesian food industry was still behind those in South Korea with a contribution of almost an average of 20% per year, or chemical industry in Indonesia was smaller than India, China and Taiwan. Yet, it is clear that the competitiveness of Indonesian wood industry was higher than other countries. It was not a surprising result since food and wood production were the industrial activities in which Indonesia hold the comparative advantage above other countries. As it is said by Adam Smith that it is much better for a nation to make a product in which the country possessed its competitive advantage factors, and importing goods where the country has no competitiveness factor, or if it is done unwillingly then the result would be inefficient production activities and producing uncompetitive products. Indonesian comparative advantage in food and wood production is cheap labor and producing food and wood products is definitely a labor intensive industry, and richness of natural resources (agriculture and wide forestry). Obviously, with respect to the advance development of current technology, Indonesia should also establish its competitiveness such as the quality of human resources in order to stay ahead in the world market for the two products mentioned above. Since it is possible that there will be time when a small country with a few total population (meaning that labor wage relatively more expensive than in Indonesia), and poor human resources (has to import commodities like agriculture and wood), might emerged to lead the export value and volume of food and wood, cause the country owned qualified labor, empowered the latest trend of technology in the production of food and wood, as well as possessing global scale of market network. Other issue to be looking at from the national industry development is from the horizontal perspective, as shown in Table 8 and Table 9 (that is classification into heavy and mild, or consumer goods industry, capital goods and supporting goods as well as raw materials), that even though the national industrial structure has expanding (there were variety of industrial branches), the weight of Indonesian industrial structure lies in the mild industries, and NT produced by this industry group is centered by food industry branches, beverages, tobacco and textile. 17

18 China Table 9: The Contribution of Industry Group to the Growth of Manufacture s real in Indonesia and Several Other Countries, (% of total growth) Foods Textile Clothes Leather Wood Paper Chemical Rubber Mineral Metal Machin eries Elect. Others Total 4,3 7,0 15,3 13,9 8,1 9,5 6,3 14,1 7,0 5,8 2,0 1,4 3,0 1,5 1,2-0,2 1,2 1,6 1,1 1,3-1,3-1,0 1,6 0,4 0,0 4,5 2,4 3,3 4,6 3,7 30,7 18,3 19,7 13,4 12,9 2,9 3,1 3,5 4,6 6,9 8,3 5,8 9,9 9,4 11,0 23,5 17,9 8,6 12,3 10,4 2,6 27,7 10,1 18,3 19,4 1,5 6,7 4,8 11,8 14,6 11,6 3,2 4,4 1,7 2, ,7 9,0 1,9 1,3 0,0 3,7 19,9 4,0 8,8 14,7 14,7 7,1 5,1 India ,7-5,7 18,4 7,9 7,2 10,7 4 15,6 4 9,7 4 9,3 4 8,9 4 0,6 0,6 0,7 0,7 1,7 1,4-0,3-0,1 0,6-0,3 5,7 5,1 1,3 4,4 2,3 12,3 5 38,8 5 21,1 5 31,0 5 40,3 5 4,4 2,0 4,0 7,4 4,5 22,9 7,9 10,5 7,4 23,5 19,2 11,9 17,6 11,4 11,3 8,3 16,3 1,9 10,2 2,8 7,7 7,8 5,0 9,8-2, ,5 10,9 0,8 0,3 3,7 27,3 4,2 14,6 14,8 0,1 5,7 India ,1 6,0 7,8 24,9 4 11,9 4 18,5 4 1,2 0,8 2,2-1,3 0,0-1,0 1,9 4,9 2,8 13,4 5 24,8 5 32,2 5 3,8 6,0 4,6 9,6 9,7 17,8 14,1 12,0 12,9 7,9 11,9 3,9 7,4 12,3-1, ,5 19,7 1,4-0,9 2,9 21,9 4,6 12,1 13,2 7,7 5,9 Indonesia ,4 17,4 15,1 12,0 13,8 11,7 8,4 2,8 6,9 0,4 0,8 7,9 11,3 21,5 8,7 2,0 5,9 4,7 19,9 9,7 8,2-3,9 0,4 5,2 6,7 4,1 4,4 11,7 21,5 6,9 10,3 1,6 13,1 6,4-0,2 5,5 0,3 0,7 1, ,5 12,4 6,3 3,0 13,3 4,0 13,2 0,3 5,2 12,8 8,8 4,3 0,8 South Korea ,5 12,4 11,9 8,9 9,9 1,0 22,4 14,1 4,2 6,6 3,4 6,9 6,3 2,5 4,0 0,3 3,0 1,7 1,4 0,1 1,6 2,9 2,3 0,3 1,3 3,8 3,3 5,6 3,8 4,9 13,4 17,7 5,1 7,7 16,5 1,7 6,0 3,1 6,4 5,6 6,4 4,7 1,9 4,4 4,9 3,1 5,5 7,2 7,5 14,8 10,8 7,1 24,4 19,7 14,0 1,5 6,5 12,7 28,3 15,9 4,5 1,5 3,6 4,9 1, ,6 10,1 4,8 1,3 1,8 4,4 11,8 4,3 4,4 7,3 15,4 11,7 3,2 Taiwan 1 18

19 ,9 8,9 9,9 9,9 5,8 13,4 13,4 13,8 6,2-4,7 1,8 7,6 8,2 2,2-8,6 0,0 0,8 1,8 1,8-3,0 4,3 4,2-0,7 4,0-3,6 5,0 3,1 2,6 2,9-2,0 22,5 14,0 4,5 10,2 26,1 6,2 9,6 8,2 10,8-1,4 6,2 1,6 3,3 2,5 9,0 5,0 7,0 11,9 12,2 31,3 11,7 8,1 12,3 8,3 20,8 8,4 17,2 15,7 21,3 38,8 2,6 4,6 8,5 7,6-8, ,4 9,0 3,0 0,4 1,4 2,2 14,3 6,8 4,3 13,4 12,3 20,1 3,4 Note: 1) all business scale; 2) average per year; 3) only those are listed; 4) including clothes; 5) including rubber & plastic; 6) all businesses; 7) medium and large businesses scale, not including oil-gas; 8) enterprises with 5 or more workers Source: Timmer (2000). 19

20 Yet, in reality, industrial structure expansion has not yet indicating any improvement in the industrialization process, as explained by Suhartono (19810 as follows: a developing country which has reach it industrial structure level equal to the level of an industrial country, could not straightway be considered as an industrial country. At times when developed country exported their clothes production, for instance, it has gone through a very long journey : textile, thread and buttons are made domestically, as well as its raw materials and machinery; in addition, all the materials for producing raw materials, machineries for producing raw materials as well, and to make another machines and so on, has gone through a time consuming production process domestically, all the way to the most upstream industry branches (such as petrochemical, steel, and iron). On the other hand, if developing countries involves in clothes production, then it may not only need to import the machineries but even to textile, thread and buttons (pa. 82). So, what is needed to be stressed here is that Indonesia might have all the industrial branches, starting from food and beverages all the way up to transportation means. However, all of that is merely occurs in the downstream area, which is domestically far more simple in terms of its chain of production process 4 compared to those industry in the industrial country. Thus, an attempt to analyze the industrial development in Indonesia from horizontal side, or by ISIC clarification, stated that Indonesia already has the ability to produce or establish branches of automotive industry though as a whole or most of the components still needed to be imported. In other words, the availability of a branch will not served as a reflection of the existence of the production process measures in the producing of a good. As it is explained by Suhartono (1981), before an industrial branch producing an end product for that industry, various production processes must first be taken place. This production process could be explosive in nature meaning that. Various production processes must be applied in parallel; each process may need one type of an interval input and conducting series of type s transformation (i.e. petrochemical industry using one type of interval input as feedstock but producing variety of chemical materials). On the other hand, production process could also be implosive in nature. If explosive process need branches of basic industries, then implosive process might be applied at the end of the chain of production and does not need any depth of industry structure (assembling industry could be developed without the existence of one component type produced domestically) (p.83) 4 Chain of Production process describing all the steps including in the production process in which the production result from one step is an input to tnext production, By ISIC classification and horizontally perceived, each products from one step of the production process, is the end result of related industry s branches, apart from the reality that the product will still need to be manufactured, on the next chain of production process (i.e. alumina) or there is no goods production activities at all, but limited to assmbling process (Suhartono, 1981). 20

21 It can be argued that the more advanced the industry in one country, then the more industrial branches that could carry on explosive and implosive processes in a whole chain of production. For example, an automotive industry need many supporting industries on its back from the most upstream to downstream industries that supply various inputs, so it needs explosive as well as implosive production process such as metal processes and metal components. The weaknesses of industry in Indonesia as it is in most Developing Countries is attributable to the weak supporting industries starting from machinery production until all the components might be formed to be one product such as car. Since generally, the essential of production process in heavy industry group such as metal processing until a complex machineries and needed highly qualified human resources, technology and considerable amount of capital compared to mild industries, though in many cases, implosive production process in heavy industry sub sector for the type of engineering industries might be done efficiently using relatively labor intensive technology (Suhartono, 1981). Thus, aside from horizontal perspective, the improvement of manufacture industry in a nation should also be viewed from its vertical side which is related to its industrial structure. And, as it is mentioned above, it can be understood that the depth of industrial structure differs across its industry s branches, meaning according to its product types as well as the essence of its production process which all of them will determined how long the chain of production process would be from upstream to downstream. It is clear that the industry chain of producing simple consumption goods will be shorter than those in aero plane industry, for instance, with such a depth in its structure. 5 As a whole, there are still some weaknesses that can be found in the national industry development up until today. First, as it is explained above, tough the national industry has gone through structure expansion since the government started it industrialization early New Governance era until now, the weight is still heavier in mild industries, particularly mild consumption goods such as food, beverages, textile, tobacco, and wood. In addition, though many industries emerged throughout the said period that produced supporting goods and raw materials, most of the NT produced by those industries originated from industrial branches which the nature of its raw materials processing does not need a long chain of production to directly produced finished goods such as textile or textile to be ready to wear clothes, and wood to be furniture and paper.. Second, most of the industrial branches processing raw materials and supporting goods managed relatively brief production steps, and only involving implosive process at the very end to those steps. This can be judged 5 According to Suhartono (1981), it is impossible to use the available data to make an anaylisis to the depth of industrial structure in Indonesia quantitatively. Nevertheless, the image related to the depth of industrial structure might be obtained from data analysis of international trade using STIS classification, thus it will be clear to see which product is still imported by Indonesia and this would be a sign that Indonesia has not yet build an industry to produce that types of products. 21

22 from the international trade data of Indonesia that display such a high imported contents from those products. Up until today, most of the industrial branches are still served as assembling industries, except those of rubber, manure, cement, wood and oil refinery industries. Third, even though there is some improvement in the last three decades, the contribution to the formation of NT from manufacture industry or GDP at broader spectrum from basic industries or upstream industries such as iron steel is relatively small. Whereas, it is known that the improvement of industrial sector or industrialization in one country is also reflected from the improvement in NT s share of manufacture industry or GDP from iron steel industries. This is mainly due to the fact that domestic capital goods industries or others using output from iron steel industries as their input, are no yet fully-and-well-developed. In other words, the interconnection of domestic production from iron steel industries with those in middle stream is still weak: downstream industries that need machines or components or other materials with iron or steel related materials is still imported from abroad, while the output from steel iron industries in Indonesia is directly exported thus as a result it failed to realized meaningful NT. Fourth, generally, the dependencies of import from national industries is still high, particularly those middle stream industry group producing raw materials and supporting goods, capital goods and production tools, and downstream industrial especially long lasted or durable consumption goods. As an effect of NT contribution from relatively small industries is that although there is an improvement from certain industries in the last three decades. One of the reason is that most of the industries is still assembling in nature, and supporting industries are not fully-and well-developed. III. Determinant Factors in the Development of Industry Theoretically, the growth of industry output is mainly attributable to the combination of several factors that may be classified into two categories; factors from supply side (production) such as labor, fund capital or capital goods, technology, energy, raw materials, infrastructure, and many more. While from the demand side (household and government consumption, and private investment or businessman consumption for production needs (called as trade among companies), and net foreign demand (export-import). Several methods might be used to analyze the main determinant factors for the growth of industrial output. Among other things, a tool which frequently applied in case studies in Indonesia is an analysis using input-output data (I-O). By calculating the changes in year 1 I-O data to y+1, then the growth factors of an industry might be reduced into 5 effects, that is: (1) effect of domestic end demand, (2) effect of export expansion, (3) effect of 22