Newsmaker Interview: Enny Sri Hartati

Senior INDEF economist shares her insights on what Indonesia can do to address de-industrialization

By Gilang Ardana
Sunday, April 9, 2017

There is continuing concern over the weak performance of Indonesia’s manufacturing sector and its lagging contribution to the economy. This has led to the risk of widening inequality and rising unemployment, say some analysts.

Last year’s AmCham Indonesia investment report, “Vital and Growing: Adding Up the US-Indonesia Economic Relationship,” highlighted the issue, noting the country’s premature de-industrialization, largely fueled by the reaction to the 1998 Asian economic crisis and many years of dependence on the now-busted commodity boom. It reported that despite having the region’s largest labor force, Indonesia only contributed 16 percent of the Association of Southeast Asian Nations’ (ASEAN) manufacturing exports. Along with numerous government economists and other, the report supports cutting back the over-reliance on commodities. 

So what is actually happening, and what can the government do about it? AmCham Indonesia reached out to Enny Sri Hartati, Executive Director of the Institute for Development of Economics and Finance (INDEF) to ask for her insights.  INDEF is a prominent independent Indonesian think tank that undertakes research and policy studies on a wide-range of economic and finance issues.

Enny, a prominent economist, has been part of INDEF’s leadership since 2011.

AmCham Indonesia: Is it true that Indonesia is de-industrializing? 

Enny Sri Hartati: If we are looking at the industry sector’s performance, we can see that in the 1980s and 1990s we were doing well with double-digit growth. The contribution of the sector to GDP even reached 24 percent on a yearly basis. However, after the country was hit by the monetary crisis in 1997-1998 our industry experienced a decreasing growth trend, and for the past decade, it has decreased persistently. In 2016, the sector’s contribution was only 19.6 percent, with growth reaching the lowest level in the history of Indonesia’s economy, at only 3.36 percent.

In addition to that, qualitatively, industry is also decreasing. In the beginning when we had double-digit growth, industry was really a manufacturing industry, or a secondary industry. However it appears that currently we have a tertiary industry sector, semi-industry or even a service industry. In the automotive sector for example, we tend to be the assembler only. Almost all the electronic components are imported.

So yes, it is by definition de-industrialization.

Why it is being called premature de-industrialization and why is it a problem?

Quantitatively, most successful big economies reached an industry sector contribution of 35 percent of GDP on average. Then they had a mature industry and shifted to the service sector.  In our country, industry is not yet at the maximum – it reached 24 percent and then went into free fall. Currently, some of the key components of Indonesia’s economy are already shifting to the service industry. That’s what is known as premature de-industrialization.

Why is it a problem? We should understand first the Rostow and Lewis theory of economic  development, which states the modernization of a country happens through several phases, from the agriculture sector to the industrial sector.  In our country, we tend to jump [skipping some phases]. As background, in PELITA II and III [five-year development plans under President Soeharto], the contribution of the agricultural sector to GDP was 54 percent, half of Indonesians [around 48 percent] relied on the agriculture sector as their main job. Today, the number of Indonesians working in the sector is still relatively stable at 34 percent, however, the contribution of this sector to GDP has dropped significantly to only 14-15 percent.

If we do the transition and the transformation of the economy right, when the agriculture sector is no longer attractive and we focus on shifting to other sectors, the workforce should follow.  But this is not happening, the people stay. Then what? Inequality rises.

Why do you think the country couldn’t anticipate this better?

What makes us different from other countries also pursuing industrialization is that we don’t have an industrial policy.  When we had that double-digit manufacturing growth, we didn’t have clear guidelines for the future of the sector, and we over relied on the market mechanism. 

At that time, we benefited from the global economic situation, we had abundant natural resources and relatively cheap and affordable energy.  The government just let the industry develop as it was, without thinking how to build a back-up industry, or a strategy on how to make it sustainable in the long term.

And then the inevitable came, during the crisis, the rupiah’s value was decreasing significantly [from Rp2,000/$1 to Rp17000/$1], and industry could not import raw materials due to higher prices. And guess what? We didn’t have a back-up industry for raw materials, so the industry collapsed. 

When we don’t have these back-up industries for upstream to downstream, it makes our industry vulnerable. It is all back to lack of policy in the sector.

What can we do better now to mitigate the risk and keep ensuring the industry sector does not continue decreasing?

We now have Industry Law 2014. The government already has a RIPIN [Industry Development Plan]. However, the RIPIN is actually just based on a consensus from one ministry [the Ministry of Industry] and we don’t have yet a shared vision from all sectors. This is the area where we can improve.

We can learn also from other countries that have successfully achieved industrialization. However, we should also have a blueprint to prioritize which sectors are capable to be handled by SMEs and which ones are fit for corporations.

Local content requirements appear to be one of the government’s ways of addressing this. What is your comment on that?

The economy is about action-reaction. The economy needs processes. If there is an affirmative policy to increase the competitiveness of industry through TKDN [local content regulation], I think the government should show some support first. We can’t just impose policy like that. TKDN is important, but we should have the right policies on how investors can invest in basic industry. If the government wants to have availability of raw materials in the country to be ready for industry, it is imperative that it needs to give incentives for investment in the upstream industry sector first.

The government needs also to have better planning, to map which industry sectors become our priority. If we can categorize our priority industry, then we can move to re-industrialization. To be noted, support from all sectors and no sectoral egos are also needed.

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