Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024: A Joint ADB–BAPPENAS Report

335 Pages·2019·2.685 MB·English

by  Asian Development Bank

POLICIES TO SUPPORT
THE DEVELOPMENT OF
INDONESIA’S MANUFACTURING
SECTOR DURING 2020–2024
A Joint ADB–BAPPENAS Report
JANUARY 2019
POLICIES TO SUPPORT
THE D EVELOPMENT OF
INDONESIA’S MANUFACTURING
SECTOR DURING 2020–2024
A Joint ADB–BAPPENAS Report
JANUARY 2019
Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)
© 2019 Asian Development Bank
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Some rights reserved. Published in 2019.
ISBN 978-92-9261-488-1 (print), 978-92-9261-489-8 (electronic)
Publication Stock No. TCS199910-2
DOI: http://dx.doi.org/10.22617/TCS199910-2
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On the cover: Jakarta's heavily urbanized skyline; a student from Batam State Polytechnic learning how to mass-produce
printed circuit boards and microchips; and Lina Tati, an embroider, with an employee from Kampung Baro in Aceh.
(photos from the ADB Library).
Cover design by Achilleus Coronel.
Contents
Tables, Figures, and Boxes iv
Foreword xi
Acknowledgments xv
Contributors xvi
Abbreviations xix
Overview xx
Part I:  Structural Transformation and the Relevance of the Manufacturing Sector 1
1 Indonesia’s “New Growth Normal”: The Need to Transform the Economy 3
during 2020–2024
2 Indonesia’s Potential and Balance-of-Payments-Constrained Growth Rates: 14
The Role of Manufacturing
3 Manufacturing as the Engine of Growth 39
4 A Historical Note on the Difficult Transformation of an Oil-Rich Economy 56
Part II:  Indonesia’s Manufacturing Sector 69
5 Indonesia’s Manufacturing: A Sectoral Overview 71
6 Indonesia’s Manufacturing: A Firm-Level Perspective 86
7 Indonesia’s Reform Packages, Incentives to the Manufacturing Sector, and 97
Industry 4.0
8 Constraints to Firm Growth: Evidence from Indonesian Manufacturing Firms 124
9 Developments in Indonesia’s Participation in Global Value Chains 162
10 Complexity, Global Value Chain Participation, and Upgrading in Indonesia 183
Part III: Prospects for Fiscal and Monetary Policy Coordination to Support Growth 215
and Industrialization in Indonesia
11 How Can Fiscal and Monetary Policy Support Growth and Industrialization 216
in Indonesia?
12 Indonesia’s Nonfinancial Corporate Sector, Financial Fragility, and 244
Macroeconomic Policy Consistent with Faster Growth
Part IV: Growth during 2020–2024 and Recommendations to Transform Indonesia’s 259
Economy
13 How Fast Can Indonesia Realistically Grow during 2020–2024? Potential and 260
Balance-of-Payments-Constrained Growth Rate Scenarios
14 Modern Industrial Policy 272
15 Recommendations to Transform Indonesia’s Economy during 2020–2024 284
References 299
Tables, Figures, and Boxes
TABLES
2.1 Input–Output Multipliers for Indonesia in 2014 26
A2.1 Determinants of Long-Run Implied Labor Productivity Growth—Models with ECI+ 32
A2.2 Determinants of Long-Run Implied Labor Productivity Growth—Models with 32
High-Tech Exports Share
A3.1 Empirical Work on the Engine of Growth Hypothesis 51
A3.2.1 Regression of Nonmanufacturing Growth on Manufacturing Growth, 1961–2016 53
A3.2.2 Regression of Nonmanufacturing Growth on Manufacturing Growth, 1961–1996 54
A3.2.3 Regression of Nonmanufacturing Growth on Manufacturing Growth, 2000–2016 55
4.1 Indonesia’s Growth and Industrialization Patterns between the Mid-1960s 57
and Mid-1990s
4.2 Indonesia’s Industrial Policies 58
5.1 List of Industries and Industry Codes 72
5.2 Sectoral Composition of Primary and Manufacturing Employment 75
5.3 Sectoral Composition of Primary and Manufacturing Value Added 77
5.4 Sectoral Composition of Primary and Manufacturing Gross Exports 81
A5.1 Descriptive Statistics 84
6.1 Value Added by Firm Size, Sector, and UNIDO’s Technology Classification 89
6.2 Monthly Wages by Sector and Size, 2014 94
7.1 Economic Reform Packages of the Jokowi Administration 98
7.2 Tax Holidays Based on Value of Investment and Pioneer Industries (PMK 150/2018) 108
7.3 Eligibility Criteria for Ease of Import Facility for Export Purposes (KITE) 109
7.4 Path to Achieving Industry 4.0 in Five Key Sectors 112
7.5 National Priorities to Achieve Industry 4.0 114
A7.1 List of Policy Incentives to the Manufacturing Sector in Indonesia 118
8.1 Constraints to Firm Growth—A Short Summary of the Empirical Evidence 125
8.2 Percentage of Manufacturing Firms Identifying a Business Environment Element 127
as the Biggest Obstacle to Doing Business
8.3 Select Hiring and Redundancy Rules in Asia by Country 133
8.4 Sectoral Problems and Challenges in Indonesia’s Manufacturing Sectors 134
8.5 Constraints to Employment Growth 136
8.6 Constraints to Sales Growth 138
A8.1 Summary Statistics 141
A8.2 Ordinary Least Squares Employment Growth Regression Results, 143
All Manufacturing Firms
A8.3 Ordinary Least Squares Employment Growth Regression Results by Firm Size and Age 145
A8.4 Ordinary Least Squares Employment Growth Regression Results
by Technological Classification of Manufacturing Sector, Ownership, 147
and Exporting Status
Tables, Figures, and Boxes v
A8.5 Ordinary Least Squares Employment Growth Regression Results 149
by Manufacturing Sector
A8.6 Ordinary Least Squares Sales Growth Regression Results, 151
All Manufacturing Firms
A8.7 Ordinary Least Squares Sales Growth Regression Results by Firm Size 153
A8.8 Ordinary Least Squares Sales Growth Regression Results by Firm Age 155
A8.9 Ordinary Least Squares Sales Growth Regression Results by Technological 156
Classification of Manufacturing Sector
A8.10 Ordinary Least Squares Sales Growth Regression Results by Ownership 157
A8.11 Ordinary Least Squares Sales Growth Regression Results, by Exporting Status 158
A8.12 Ordinary Least Squares Sales Growth Regression Results by Sector 160
9.1 Global Value Chains: Upstream and Downstream Revealed Comparative 173
Advantage, 2014
9.2 Value Chains Served by Selected Sectors, 2014 175
A9.1 Stylized Representation of Multiregion Input–Output Table 180
10.1 Resource-Based Manufacturing Subsectors and Export Specialization of Indonesia, 186
2000–2014
10.2 Shares of Exports of the Most Complex Products, 2014 189
10.3 Indonesia’s 10 Most Complex Exports, 10 Top Exports by Value, and 10 Top Exports 191
by RCA
10.4 Products with Above-Average Complexity in Which Indonesia has a Sustained 195
Comparative Advantage
10.5 Products with Above-Average Complexity into Which Indonesia Can 199
Naturally Diversify from Its Current Specialization Pattern
10.6 Complexity of Indonesia’s Pioneer Sectors/Products Selected for Tax Holiday 202
(PMK 150/2018)
A10.1 Top 100 Complex Products 204
A11.1 Sources of the Change in the Estimated Debt Ratio 243
12.1 Return on Invested Capital for a Sample of Indonesian Publicly Held Companies 249
12.2 Debt-Service-to-Cash Inflow Ratio for a Sample of Indonesian Publicly 251
Held Companies
12.3 Interest-to-Cash Inflow Ratio for a Sample of Indonesian Publicly Held Companies 252
12.4 Estimated Sensitivity of Debt-Service-to-Cash Inflow and Interest-to-Cash Inflow 254
to Changes in Interest Rates
12.5 Estimated Sensitivity of Debt-Service-to-Cash Inflow and Interest-to-Cash Inflow 255
to Decline in Return on Invested Capital and Higher Interest Rates
13.1 Effects of Deviations of the Actual Growth Rate from the Potential and 261
Balance-of-Payments-Constrained Growth Rates
13.2 Potential Growth Rate Scenarios for Indonesia in 2020–2024 265
13.3 Balance-of-Payments-Constrained Growth Rate Scenarios for Indonesia 269
in 2020–2024
13.4 Potential and Balance-of-Payments-Constrained Growth Rate Scenarios for 270
Indonesia in 2024 and 2020–2024
14.1 Potential Areas of Intervention to Promote Manufacturing Firms in Indonesia 277
vi Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024
FIGURES
1.1 Indonesia’s Actual Growth Rate, 1960–2017 3
1.2 Economic Diversification of a Group of Selected Asian Economies, 2000, 2007, and 2014 5
1.3 Standardness and Diversification, Selected Asian Economies, 2014 8
1.4 Complexity of a Selected Group of Asian Economies 9
1.5 Indonesia’s Structural Transformation during 1995–2017 10
2.1 Actual and Potential Growth Rates, 1960–2017 15
2.2 Contributions to Potential Growth of Demographics and Productivity 16
2.3 Indonesia’s Demographics and Potential Per Capita Gross Domestic Product 17
Growth Rate
2.4 Contributions to Actual Labor Productivity Growth: A Shift and Share Analysis 20
2.5 Indonesia’s Income Elasticities of Exports and Imports, and Balance-of-Payments- 23
Constrained Growth Rate
3.1 Output Growth versus Change in Manufacturing Output Share 44
3.2 Three Measures of Economic Complexity, Indonesia 45
3.3 Industrialization in Employment and Output 47
3.4 Manufacturing Shares and Year Peak Was Attained 47
3.5 Year Peak Was Attained and Income per Capita 48
3.6 Share of Manufacturing in Global Output with Regional Contributions 49
3.7 Share of Manufacturing in Global Employment with Regional Contributions 49
5.1 Aggregate Employment and Sectoral Shares, 2000–2014 74
5.2 Composition of Employment across Asian Economies, 2014 76
5.3 Aggregate Value-Added Shares, 2000–2014 76
5.4 Composition of Value Added across Asian Economies, 2014 78
5.5 Levels of Labor Productivity in Selected Asian Economies, 2014 78
5.6 Annual Average Growth Rate of Labor Productivity in Selected Asian Economies, 79
2000–2014
5.7 Relationship between Product Complexity and Labor Productivity, 2014 79
5.8 Aggregate Gross Export Shares, 2000–2014 80
5.9 Share of Intermediate Goods in Exports by Sector 82
6.1 Manufacturing in Indonesia—Firm Distribution by Size, Employment, and 87
Value Added, 2014
6.2 Manufacturing by Industry—Firm Distribution by Sector, Employment, and 88
Value Added
6.3 Value Added by Technology Intensity 90
6.4 Distribution of Firms and Employment in Manufacturing by Technology Intensity 91
6.5 Source of Material Inputs into Manufacturing by Product, 2014 91
6.6 Annual Productivity 93
6.7 Average Monthly Wages by Sector, 2014 94
6.8 Geographical Distribution of Manufacturing in Indonesia 95
7.1 Indonesia’s Ranking in the World Bank’s Ease of Doing Business Index 99
7.2 Logistics Performance Index 102
7.3 Existing Policy Incentives to Promote Manufacturing 105
Tables, Figures, and Boxes vii
7.4 Fiscal Incentives—Tax Allowance 107
7.5 People’s Business Credit Interest Rate, 2010–2017 109
7.6 The Four Industrial Revolutions 111
7.7 Indonesia’s 4IR Country Readiness 113
8.1 Obstacles to Doing Business in Indonesia 128
8.2 Starting a Business 129
8.3 Cost of Registering Property, Enforcing Contracts, and Resolving Insolvency 130
8.4 Getting Electricity 131
8.5 Paying Taxes 131
8.6 Trading across Borders 132
8.7 Labor Market Regulations 133
9.1 Downstream Global Value Chain Participation of Asian Economies, Manufacturing 165
and Primary Sectors
9.2 Upstream Global Value Chain Participation of Asian Economies, Manufacturing 166
and Primary Sectors
9.3 Upstream and Downstream Global Value Chain Participation, Manufacturing 167
and Primary Sectors, 2014
9.4 Sectoral Downstream Global Value Chain Participation of Manufacturing 168
and Primary Sectors in Indonesia
9.5 Sectoral Downstream Global Value Chain Participation of Manufacturing 169
and Primary Sectors in Indonesia and the Republic of Korea, 2014
9.6 Sectoral Upstream Global Value Chain Participation of Manufacturing and 169
Primary Sectors in Indonesia
9.7 Sectoral Upstream Global Value Chain Participation of Manufacturing and 170
Primary Sectors in Indonesia and the Republic of Korea, 2014
9.8 Value Added and Employment Contributions of Indonesia to Other Economies’ 171
Value Chains, 2014
9.9 Value Added and Employment Contributions of Other Economies to 171
Indonesia’s Value Chains, 2014
9.10 Developments in Indonesia’s Upstream Revealed Comparative Advantage, 174
2000 and 2014
9.11 Developments in Indonesia’s Downstream Revealed Comparative Advantage, 175
2000 and 2014
9.12 Value-Added Contribution to Indonesia’s Final Demand by Economy of Origin, 2014 176
9.13 Value-Added Contribution of Indonesia to Other Economies’ Final Demand 177
by Economy of Origin, 2014
9.14 Value-Added Contribution of Indonesia to Other Economies’ Final Demand 178
by Sector, 2014
9.15 Value-Added Contribution to Indonesia’s Final Demand by Sector, 2014 179
10.1 Downstream Breakdown of Value Added and Employment in Agriculture 184
and Fisheries-Based Sectors
10.2 Downstream Breakdown of Value Added and Employment in Mining-Based Sectors 185
10.3 Product Complexity of Indonesia’s Exports by Sector, 2014 187
10.4 Relative Complexity of Exports for Selected Asian Economies, 2014 188
viii Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024
10.5 Complexity of Indonesian Export Value in Comparative Perspective, 2014 188
10.6 Complexity of Indonesian Export Value Broken Down by Four Sectoral Groups, 2014 189
10.7 Downstream Linkages and Product Complexity, Indonesia and the 190
Republic of Korea, 2014
10.8 Upstream Linkages and Product Complexity, Indonesia and Selected Asian 193
Economies, 2014
11.1 Indonesia’s Sector Financial Balances 218
11.2 Sector Financial Balances Map 220
11.3 Indonesia’s Sector Financial Balances Map, Golden Triangle and Fiscal Rule, 221
1990–2017
11.4 Comparison of Indonesia’s Recent Financial Sector Balances with the 222
People’s Republic of China, Thailand, the Republic of Korea, and Japan
11.5 Comparison of Indonesia’s Financial Sector Balances in the 1990s with 223
the Republic of Korea and Thailand
11.6 Decomposition of Indonesia’s Domestic Private Sector Balance 225
11.7 Indonesia’s Household, Firm, and Financial Sector Balances, 2011–2017 (B9C) 226
A11.1  Nominal Gross Domestic Product Growth and 10-Year Interest Rate on 239
Rupiah-Denominated Government Debt
A11.2  Bank Indonesia Target Rates and 10-Year Interest Rate on Rupiah-Denominated 240
Government Debt
A11.3  Indonesian Government Primary and Total Deficit Ratios, Inflation, and 10-Year 241
Interest Rate on Rupiah-Denominated Debt
A11.4  Change in Value of Foreign Currency-Denominated Government Debt and 241
Growth Rate of Rupiah per United States Dollar
12.1 Indonesian Corporate Sector Borrowing in United States Dollars, Yen, and Euros 246
14.1 Indonesia’s Policy Option 277
14.2  Management Scores, by Firm Size and Cross-Country Difference 280
BOXES
1.1 Revealed Comparative Advantage 5
1.2 Construction of Complexity Indices 9
2.1 The Shift and Share Methodology 19
2.2 The Determinants of Indonesia’s Implied Labor Productivity Growth 21
2.3 The Role of the Oil Sector in the Estimation of Indonesia’s Balance-of-Payments- 25
Constrained Growth Rate
2.4 The Determinants of Indonesia’s Income Elasticities of Exports and Imports 28
3.1  Why Manufacturing Is the Engine of Growth 43
4.1 Indonesia and India’s Performances between the Mid-1960s and the Mid-1990s 57
4.2 Land Reform in Indonesia 59
4.3 Indonesia—A Case of Unsuccessful Transition in the Aerospace Industry 61
6.1  Data on Firms—Two Main Surveys 86
8.1 Constraints to Growth of Indonesia’s Manufacturing Firms—Empirical Strategy 135
9.1  Identifying Indonesia’s Positioning within Global Value Chains 165
Tables, Figures, and Boxes ix
10.1 Palm Oil Production in Indonesia—Upgrading with Global Value Chains 192
10.2 Conditional Probabilities and Potential Exports of Indonesia 197
11.1 Inflation Targeting in Indonesia 229
11.2 Bank Indonesia’s Balance Sheet 234
11.3 Government Deficits without Issuing Debt—A Thought Experiment 236
12.1 Metrics to Evaluate the Financial Positions of the Corporate Sector 248
13.1 Potential Gross Domestic Product Growth Rate Scenarios—Assumptions 263
and Methodology
13.2 Is a 7%–8% Potential Growth Rate Scenario Realistic for Indonesia? 266
13.3 Balance-of-Payments-Constrained Growth Rate Scenarios—Assumptions 267
and Methodology
14.1 Market Failures 272
14.2 Orthodox Arguments against Industrial Policy 273
14.3 The Role of the Eximbank Addressing Market Failures 278
14.4 Government Support to the Textile Sector 279
14.5 Institutions for Industrial Policy and Principles to Implement It 282