Indonesia = Japan 2 nd Industrial Dialogue JICA mission @ Bappenas Indonesia s Challenges toward Industrial Upgrading 11 August 2017 Yuri Sato Executive Vice President Institute of Developing Economies Japan External Trade Organization (IDE-JETRO)
2 1. Indonesia s Advantages 2. Challenges Facing Indonesia - From Deindustrialization to Reindustrialization - Weak Productivity - Weak Financial Intermediation 3. Assessing Economic Reform Policies 4. Conclusion
3 1. Indonesia s Advantages are Double-edged Swords. 1. The world 4 th largest population (+) Demand & supply base ( ー ) Hotbed of poverty and unemployment 2. Demographic bonus (1970s~2030s) (+) Locomotive of growth ( ー ) One chance, hard to catch up after that 3. Rich natural resource endowment (+) Resource booms repeat ( ー ) Dutch disease risk Discontinuous industrial development cf. East Asia
4 1. Indonesia s Advantages are Double-edged Swords. Needs right policy intervention for promoting - Growth investment - Industrial upgrading - Equity
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 (%) 50 40 30 20 10 2. Challenges Facing Indonesia 0 Rise and Fall of Manufacturing Share Shares in GDP (1970-2016) Authoritarian Developmental Regime (Soeharto Regime) Mining Oil boom Agriculture, Fishery, Forestry Transition period Democracy Service industries Manufacturing Commodity boom Note: Base year of GDP is 2000 up to 2012, and 2010 after 2013. Source: BPS Indonesia (Central Agency of Statistics). Under the authoritarian developmental regime, the manufacturing share constantly increased, even in the oil booms. Full-set industrialization (resource-based + labor- intensive + capital-intensive industries) progressed. However, In the 2000s commodity boom, Indonesia moved to deindustrialization. 5
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2. Challenges Facing Indonesia Export : Repeated Dependency on Resource 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Export Structure: 1975-2010 Soeharto's Developmental Regime Source: UN Comtrade. Manufactured goods = SITC 5-8 Misc.goods Machinery Manuf.goods Chemicals Vegetable Oil Mineral Fuel Crude materials Food Manufactured goods After the oil boom, exports shifted from crude oil to manufactured goods (5% in 1982 to 59% in 2000). In the 2000s commodity boom, manufactured exports decreased to 41% (2010). Minerals (coal), vegetable oil (CPO), and low-processed resources dominated exports. 6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7 The 2000s Commodity Boom was Over... 30 ($ bil) Major Exports (value) 2000-2014 25 20 15 10 Coal Natural rubber Copper ore 5 0 Source: Compiled based on data from World Trade Atlas.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Some Manufactured Exports Picking Up 8 3.0 ($ bil) 2.5 2.0 Motor cars Plywood Fatty acid/alcohol Footwear 1.5 1.0 0.5 0.0 Source: Compiled based on data from World Trade Atlas.
Challenge 1: From Deindustrialization to Reindustrialization Indonesia s Top 10 Exports (HS4 digit) 1993 2011 2014 1 Petroleum oil Coal Coal 2 Plywood Natural gas Palm oil 3 Natural gas Palm oil Natural gas 4 Garment Petroleum oil Petroleum oil 5 Electrical appliance Natural rubber Natural rubber 6 Textile fabric Copper ore Motor cars 7 Rubber products Palm kernel oil Palm kernel oil 8 Petroleum oil products Petroleum oil products Plywood 9 Shrimp Copper Fatty acids/alcohols 10 Other textile products Unwrought tin Petroleum coke Top 10 (% of total) 63 52 45 Total exports ($bil) 37 203 176 Source: World Trade Atlas and BPS. The peak and the end of the 2000s commodity boom 9
1970-85 1985-95 1995-00 2000-05 2005-08 1970-85 1985-95 1995-00 2000-05 2005-08 1970-85 1985-95 1995-00 2000-05 2005-08 14 12 10 8 6 4 2 0-2 -4-6 Challenge 2: Weak Productivity 6.9 7.5 Sources of Economic Growth Labor, Capital, and Productivity (TFP) Indonesia Thailand China 0.8 4.7 5.8 6.1 9.1 Source: Asia Productivity Organization (2011) APO Productivity Databook, p.63. 0.5 5.0 4.1 Labor Capital stock TFP Output growth 7.4 9.6 8.3 9.3 11.5 10 China s source of growth shifted from labor to capital, and to productivity. Indonesia s source of growth started from capital, moved to labor. Productivity has made the least contribution. = The Myth of Asia s Miracle Indonesia should focus on enhancing productivity.
Selected Indicators of Technological Capabilities in ASEAN and other Asian countries Country Number of ISO 9001certification High-technology exports (% of manufactured exports) 2000 2010 2000 2010 2000 2008 Cambodia 1 6 n.a. n.a. 0.05 n.a. Lao PDR 0 9 n.a. n.a. 0.04 n.a. Myanmar 4 26 n.a. n.a. 0.11 n.a. Brunei 193 61 9 n.a. 0.02 n.a. Philippines 1,027 944 73 68 0.14 0.11 Viet Nam 184 2,036 11 6 0.19 n.a. Singapore 3,900 3,934 63 50 1.85 2.66 Indonesia 1,860 6,524 16 11 0.07 0.08 Thailand 2,553 6,799 33 24 0.25 0.21 Malaysia 2,355 8,614 60 45 0.47 0.63 Total/ Average 12,077 28,953 49 39.6 0.32 0.77 Korea 15,424 24,778 35 29 2.30 3.36 India 5,682 33,932 6 7 0.77 0.76 Japan 21,329 58,836 29 18 3.04 3.45 China 25,657 297,037 19 28 0.90 1.47 Note: In high-tech exports, the figure of Burnei is at 1998, those of Korea and Viet Nam at 2009 instead of 2010. In R & D expenditure, figures of Burnei, Lao PDR, Philippines, and Viet Nam are at 2002. Those of Philippines, Thailand, and India at 2007, Malaysia at 2006, and Indonesia at 2009. Source: ISO, ISO Survey 2011, and World Bank, World Development Indicators. 11 R & D expenditure (% of GDP)
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Challenge 3: Weak Financial Intermediation Indicator of Financial Deepening (M2/GDP)1995~2014 (%) 200 China 180 12 160 140 120 100 80 60 40 Malaysia Thailand Vietnam India Indonesia 20 0 Source: World Development Indicators.
3. Assessing the Current Economic Reform aims at domestic-demand-led investment-led economy 1. Mobilize domestic savings - Broaden taxation base - Mobilize financial savings (deposit) 2. Promote investment = Reindustrialization with higher value added and higher productivity - Fiscal incentives - Credit expansion - R&D promotion - FDI utilization 3. Reduce business costs (=improve productivity) - Deregulation, rationalization, simplification - Improve logistics and infrastructure 13? but still needed
14 Conclusion Indonesia is amid the phase of critical importance, an unrepeatable chance of demographic bonus. Higher growth accompanied with industrial upgrading should be pursued. Reindustrialization with higher value added and higher productivity would be the key indicator. It is crucial to make smart policy intervention in order to boost domestic-demand-led growth by mobilizing savings, investing them toward industrial upgrading, and reducing business costs. Government efforts of economic reform need to be more intensified.
Terima kasih!! Yuri_Sato@ide.go.jp