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12. The Indonesian Wood Products Industry
- ISEAS–Yusof Ishak Institute
- Chapter
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12 THE INDONESIAN WOOD PRODUCTS INDUSTRY1 This chapter analyses the development of Indonesia’s wood products industry, particularly the plywood industry, which from a small base emerged in the 1980s as one of Indonesia’s major manufacturing industries. This account is of interest since it provides a good example of ‘export-substitution’, that is the enforced development of the wood products industry by limiting the exports of logs through prohibitive export taxes and subsequently by a partial and later by a total ban on log exports. However, because of the difficulties which the wood products industry, particularly the plywood industry, has experienced over the past decade, the question arises whether ‘export substitution’ provides the proper incentives to develop an efficient manufacturing industry. INTRODUCTION The following account outlines the development of Indonesia’s wood products industry, particularly the plywood industry, which from a small base emerged in the 1980s as one of Indonesia’s major manufacturing industries. This account is of interest since it provides a good example of successful ‘export-substitution’, that is the enforced development of the wood products industry by limiting the exports of logs through prohibitive export taxes and subsequently by a partial and later by a total ban on log exports. As a result of this ‘export substitution’, by the early 1990s Indonesia had become the largest manufacturer of hardwood plywood in the world. The exports of wood-based products were even more impressive, as plywood exports increased from US$1 billion in 1985 to US$4 billion in 1992, while pulp and paper exports during the same period rose from US$28 million to US$400 million. As a result, during this period the wood products industry The Indonesian Wood Products Industry 231 became the second most important contributor to the rapid growth of the manufacturing sector after the textile and textile products industry (World Bank, 1994: 24). However, by the early 2000s the wood products industry experienced great difficulties because of the problem of accessing adequate raw material supplies, allegedly due to the rampant smuggling of logs, mainly to China.The industry most adversely affected by this smuggling is the plywood industry (Aswicahyono & Hill, 2004: 288–89). As of today this problem still besets the plywood industry. However, aside from this problem, this industry over the past few years has been experiencing strong competition from China’s plywood industry. This may indicate that Indonesia’s plywood industry has not been able to enhance its international competitiveness when it was still the dominant producer in the world market. Because of the difficulties which the wood products industry, particularly the plywood industry, has experienced over the past decade the question arises whether ‘export substitution’ is the right way or provides the proper incentives to develop an efficient manufacturing industry. The reason for this doubt is that the ban on log exports has led to the artificial lowering of the domestic prices of the timber. This has enabled the wood products industry to capture the considerable rents from it, reducing the incentive to develop an efficient, internationally competitive wood-processing industry. This paper tries to address this question in the following pages. THE DEVELOPmENT OF THE FORESTRY SECTOR IN INDONESIA SINCE THE EARLY 1970s When Soeharto’s New Order government assumed power in the late 1960s, it badly needed new sources of government revenues to finance the rehabilitation of the dilapidated infrastructure and productive apparatus which had been neglected during the final years of the Sukarno government. To this end, the lush forests in Sumatra, Kalimantan and the other islands in the Indonesian archipelago with their tropical hardwood (Dipterocarp) trees looked like a valuable natural resource which could be easily exploited and sold in the export markets. For this reason the New Order government in 1967 issued the Basic Law on Forestry. This Law was prepared in a hurry, since it did not reflect an awareness that tropical hardwood, although a renewable natural resource, is not a resource which can be quickly renewed. The contents of the Law also did not reflect an awareness of the adverse effects of the indiscriminate felling of trees on the environment. Only in the 1980s did an increasing public concern arise [54.89.70.161] Project MUSE (2024-03-28 11:41 GMT) 232 Indonesia’s Economy since Independence in Indonesia about the adverse effects of rapid deforestation, but this concern did not result in effective action on the part of the government to halt or slow down this rapid deforestation. By...