A New Road Map for Industrialization in Indonesia
Jakarta. President Joko Widodo recently restated the importance of reorientation of Indonesia’s future economic development, from a consumption-driven economy to become more production-driven. The message recognizes that the industrial sector’s contribution to gross domestic product (GDP) has been declining over the past 20 years.
Jokowi’s statement implies changes in industrial development strategy in order to reach his economic growth target of 7 percent over the next four years. The industrial sector is targeted to rise by 8 percent over that period from 5 percent now. As a former businessman, the president understands that the right strategy for industrialization is essential to create a more balanced economy.
Many countries have demonstrated that the industrial sector plays a vital role in creating a strong economy. China created a strong base in manufacturing to fulfill domestic needs and then export to the international market. “China can produce anything for its own people, the US can also serve its own nation from domestic production and manufacturing because of the proper industrial strategy,” economist and businessman Gunawan Tjandra said recently.
Airlangga Hartato, himself an industrialist as well as a legislator, also believes that in order to boost the economy, the government has to increase the contribution of the industrial sector to about 40 percent of GDP from only 23 percent now.
“Sadly the trend has been sliding, from 29 percent in 2001 to only 23 percent in 2004, due to many problems,” adds businessman John H Nonto.
Airlangga in a paper presented to a meeting with the Ministry of Industry in 2014 stated that the trend of a slowing contribution of industry would sooner or later harm the fundamentals of the economy.
“In order to create a strong, growing, solid national economy the role of industry as a contributor of national income should reach about 40 percent of GDP, at which level we would see ample production from domestic manufacturers,” he stated.
However many problems and challenges confront the development of industry: poor infrastructure, a lack of financing schemes, a rigid bureaucracy, difficulty in clearing land and a shortage of human resources with competency in engineering that can boost creativity and innovation. Other problems are the lack of raw materials, corruption and – perhaps most importantly – the lack of leadership in the sector.
“We need strong leaders in the sector, able to deliver their programs, stick to their plans and who are able to make breakthroughs and to think out of the box,” says John Nonto, who believes that to take the economy to a higher level, Indonesia needs to invest a lot in education and science to drive creative ways of thinking to produce machinery and tools for industry, replacing costly imports.
The president agrees. He admits that science and technology have been neglected and the lack of economic leadership over the past 25 years has meant that Indonesian manufacturing has been neglected.
“A production-oriented economy requires strong innovation and creativity whether it is finding new tools, machinery, business processes and designs to make our economy more competitive and efficient,” Jokowi told the Indonesian Economists Association (ISEI) recently.
Existing competencies
Indonesia should not be in such a bad position. The country has already developed competencies that can be utilized to accelerate the growth of industry. Some state-owned companies (SOE) already operate in basic industries such as steel, shipping, armaments and electronics, and even aerospace.
“The only thing lacking is how to orchestrate all these parties to work together to reach a higher level in order for Indonesia to become an industrial country,” says Gunawan Tjandra.
But many complex problems remain. A full 99% of Indonesia’s industrial landscape is dominated by small-scale industry, contributing only 8% to value-added created by the sector. The remaining 1% is composed of larger firms.
Astra International is the only company which dominates the entire value chain in manufacturing. Yet many micro to small companies have been able to grow by themselves even without government guidance and support.
The Central Bureau of Statistics reports that this year only 2 percent of business operators in the industrial sector are graduates of higher education, a large group has only junior to higher school education, and the largest portion only graduated from elementary school.
This suggests that the capacity of these business people to absorb new science and technology to drive their companies forward is very limited. Only with reliable education and good training can good industrial development be achieved.
Needed: An industrial bank
So many papers have been written and discussions held among operators in the sector and the government that the problems in the industry are well understood and solutions have been put forward on how to solve the drawbacks. Structural problems such as infrastructure, energy, red tape and the lack of financial support are among the identified issues.
The logical step to be taken now is for clear road maps to be created for each industrial sector, backed by the creation of a special bank to provide finance, particularly for basic industries such as petrochemicals and steel.
Indonesia was supposed to have an industrial development road map years ago, since such a map provides the basis for any government to develop, no matter who leads the country.
Rosan P Roslani, deputy chairman of the Indonesian Chamber of Commerce and Industry (Kadin), believes that industrial success in many developed countries depended on clear long-term plans for industry and effort by government to integrate all sectors to achieve success.
In the area of finance, he suggests integrating and synergizing institutions in order to strengthen industry. In developed countries, he notes, an industry finance institution is an important part of the road map.
Korea between 1962 and 1966 focused on the cement, fertilizer and oil and gas sectors.
Then between 1967 and 1971 it focused on the steel industry, followed by electronics, machinery and automotive. Special financing institutions were critical to support each of these sectors.
In the past, Indonesia did utilize the Indonesian Development Bank (Bapindo) for this purpose but it failed to grow well since the management changed its business focus to become a commercial bank that ended in liquidation.
“We are waiting for a real initiative from government to set up a special bank or finance institution that can back up industrial development,” says businessman Michael Cahyadi, adding that the bank should offer low interest rates that will help businesses to obtain working capital, fund start-ups and assist government in restructuring its basic strategic industries.
In reality, Indonesia’s efforts to industrialize have been lack-luster. Krakatau Steel was formed to develop the steel industry, but up until today it is unable to fully compete with foreign entities due to structural problems and limited capacity to respond to the demand from industry, forcing many manufacturers to import steel.
Boosting the educational base
Another substantial requirement, says John Nonto, is to boost the level and quality of the education system. Science in particular should be a driving force to boost innovation; engineers are needed to create new production processes to assist the creation of value, turning raw materials into processed materials or end products.
Prof. Dr Muhammad Nasir, Secretary of the Department of Research and Higher Education, agrees that education to create more engineers and technicians is essential to boost industry.
At the moment, he notes, the ratio of engineers in the population is low compared to other ASEAN countries at only 2.671 per 1 million of population. Neighboring countries have achieved a ratio of 3.337 engineers per 1 million. He stresses that Indonesia must not be left further behind by failing to create better education systems focusing on science and technology.
While Indonesia now commits 20 percent of budget funds to education, debates continue about what should be taught, the quality of teachers and the standard of educational facilities, while poverty and malnutrition continue to limit the capacity of at least 28 million people to learn.
“Forget about the 28 million people that live in poverty, as government has special programs for them, but what efforts are being made elsewhere in the education sector?” asks Silviana Roselin, a teacher in Jakarta.
“There is much more that needs to be improved.” Budget is not the only issue, she states, adding that the government should spend less time on social sciences and encourage the creation of schools and universities specializing in science and technology.
Vocational training is also important. Silviana says it is little wonder that many small-scale businessmen have very limited innovation skills, because of their lack of education and training and the government’s lack of action to improve the skills of small entrepreneurs.
Quick wins
In its short-term plan (RPJMN) for industry, the government is targeting some quick wins that can be achieved, as long as it can put enough money into programs to build infrastructure and boost energy supplies. At the same time it has recognized that structural problems need to be addressed.
It has nominated 14 new industrial regions throughout Indonesia with specific specializations according to the strengths of each region. The Minister for Development Planning, Dr. Andrinof Chaniago, is leading the charge to implement development in these areas.
Sumatra, the heartland of the palm oil business, will see encouragement of downstream industries to add value to crude palm oil (CPO). Kalimantan is rich in coal and minerals and is planned to become a center for alumina processing, as well as CPO.
The oil and gas sector will be developed at the Bintuni Industrial Estate in Papua. Tanggamus in Lampung is planned to become the national logistic center for western Indonesia.
The plan also includes a detailed program to empower small and medium enterprises to achieve economic growth of 7 percent to 8 percent by the end of 2019.
“The idea is good, but do we have enough skilled people for example to work in the fisheries and maritime sectors,” says Silviana. “I think there is still a lot of work to be done.”
GlobeAsia
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