Indonesia's Economy since Independence

10. Policies Affecting Indonesia's Industrial Technology Development

10 POLICIES AFFECTINg INDONESIA’S INDUSTRIAL TECHNOLOgY DEVELOPmENT1 INTRODUCTION The competitive environment for Indonesia’s manufacturing industries has changed a great deal in years following the Asian economic crisis. The major factors in the global environment which have adversely affected Indonesia’s competitiveness in its manufactured exports include increasing economic openness, shorter product cycles and continuous technological improvements (World Bank, 2003: 4). For countries, like Indonesia, which are highly dependent on foreign trade and therefore deeply integrated in the global economy, it is vital to monitor regularly the productivity and international competitiveness of their industries, which are of great importance to their economies. Other major factors which have adversely affected or may adversely affect the competitiveness of Indonesia’s manufacturing industries are China’s rise as a formidable competitor in the world markets for manufactured exports and as an attractive host country for foreign direct investment (FDI); the emergence of global contract manufacturers in Singapore, Malaysia and Thailand; the expiry of the Multifibre Agreement (MFA) in early 2005; trade liberalization within the ASEAN countries; and the WTO mandated reduction in tariff barriers (World Bank, 2003: 3). This paper discusses Indonesia’s low industrial competitiveness and the steps which could be taken to remedy this problem. A brief overview will first be given of Indonesia’s industrial development before and after the Asian economic crisis. This will be important to understand why Indonesia’s 176 Indonesia’s Economy since Independence industrial competitiveness is relatively low compared to its competitors in the region. INDONESIA’S INDUSTRIAL DEVELOPmENT bEFORE AND AFTER THE ASIAN ECONOmIC CRISIS: AN OVERVIEW a. Industrial development during the Soeharto Era During the 32 years of “New Order” rule (1966–98) the Indonesian economy experienced rapid and sustained growth, which enabled Indonesia to graduate from the ranks of one of the poorest countries in the mid-1960s to one of the eight “high-performing Asian economies” (HPAEs) in the early 1990s, along with Japan, the four “Asian Tigers”, and Indonesia’s two Southeast Asian neighbours, Malaysia and Thailand (World Bank 1993: 1, 37). Rapid economic growth averaging 7.0 per cent during the period 1965– 97 was driven by the expansion of the three main sectors of the economy, namely agriculture, manufacturing, and services. As the manufacturing sector throughout this period was growing at double digits, much faster than the two other sectors which were growing at single digits, the Indonesian economy underwent a rapid transformation, as reflected by the rapid rise in the relative importance of the manufacturing sector (Table 1). By 1991 manufacturing’s contribution to GDP exceeded the contribution of the agricultural sector (Aswicahyono 1997: 25). During the late 1960s and early 1970s Indonesia’s rapid industrial growth was fuelled by the liberalization of economic policies, and the return to normal economic conditions after the political turmoil and economic chaos TAbLE 1 Economic growth and Transformation in Indonesia, 1965–97 Average annual growth rate (%) % of GDP 1965–80 1980–90 1990–97 1965 1997 GDP 7.0 6.1 7.7 Agriculture 4.3 3.4 2.8 51 16 Manufacturing 12.0 12.6 10.8 8 26 Services 7.3 7.0 7.2 36 41 Source: For the period 1965–80: World Bank: World Development Report 1992, Oxford University Press, 1992, table 2, p. 220; table 3, p. 222. For the periods 1980–90 and 1990–96: World Development Indicators 1999, Development Data Center, table 4.1, p. 189; table 4.2, p. 193. Policies Affecting Indonesia’s Industrial Technology 177 of the early 1960s. During the oil boom period (1974–81) rapid industrial growth was facilitated by protectionist import-substituting policies. During this oil boom era the liberal economic policies were largely replaced by more interventionist policies, when the Indonesian government, flush with windfall revenues from the oil booms, initiated an ambitious, second phase import-substitution policy after the ‘easy’ phase of import-substitution had been completed by the mid-1970s (McCawley 1979: 13). This second phase of import-substituting industrialization involved the establishment of various upstream, state-owned, capital-intensive, basic industries. Even though many Indonesian and foreign economists were concerned about this costly and inefficient pattern of upstream import-substituting industrialization, which largely ignored comparison of production costs with border prices (Gray 1982: 41), the large oil boom revenues enabled the Indonesian government to ignore their criticisms. However, by 1983 the end of the oil boom forced the Indonesian...