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Manufacturing Sector Key to Boosting Indonesia's Growth — ADB–BAPPENAS Joint Report

News from Country Offices | 8 February 2019

JAKARTA, INDONESIA (8 February 2019) — Diversifying and upgrading Indonesia’s manufacturing sector is essential for the country to attain higher economic growth rates and become an upper-middle-income economy, according to a joint publication of the Asian Development Bank (ADB) and the National Development Planning Agency (BAPPENAS) released today.

“Indonesia wants to become an upper-middle-income economy in the next 15 years. The findings of this report suggest that the current structure of the Indonesian economy, which is still based on agriculture, natural resources, and simple manufactures and services does not allow us to attain higher growth rates,” said Minister of Indonesia’s National Development Planning and Head of BAPPENAS Mr. Bambang P.S. Brodjonegoro. “Therefore, the development of a sophisticated manufacturing sector is necessary to unlock Indonesia’s growth in the medium to long term.”

The report, Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024, analyzes Indonesia’s growth prospects for 2020–2024, particularly whether it can attain growth rates of 7% and above. It further discusses ways Indonesia’s manufacturing sector could diversify and upgrade, approaches for the government to modernize its industrial policy, and the role of fiscal and monetary policies in supporting higher growth rates.

For Indonesia to reach its higher income aspiration, it is essential to develop niches in complex manufacturing activities that have a high value addition, the report says. It also highlights the importance of increasing the nation’s productivity, supporting product diversification, and creating strong links between large firms and small and medium-sized enterprises, as well as between domestic firms and the international market.

“The government can play an important role in revitalizing the manufacturing sector by working more effectively with the sector,” said Mr. Jesus Felipe, Advisor in the Economic Research and Regional Cooperation Department of ADB. “The government needs to initiate dialogue with the private sector to jointly identify and address obstacles to the development of a modern manufacturing sector. It is critical for policy makers and the private sector to collaborate in discovering those new and more sophisticated products that Indonesia could successfully diversify into.”

Transforming Indonesia’s economy in 2020–2024 and beyond must be the top priority of the country’s economic managers, the report says.

“This report provides a solid basis for Indonesia’s policy makers to delve into the policies that the country needs to implement that will support the nation’s development in the medium and long term,” said Mr. Brodjonegoro. “The analysis and the recommendations in the report will be important inputs to the 2020–2024 development agenda.”

Indonesia’s manufacturing sector is currently very undiversified and exports relatively few products. Its main exports are unprocessed natural resources and simple manufactured goods, very different from the complex and high-value products exported by advanced economies, such as machinery, chemicals, or electronics. Indonesian firms are linked to the global value chains, but mostly as suppliers of natural resources. Moreover, the share of manufacturing employment in total employment is lower than it was in Asia’s high-income economies decades ago. About 99% of the country’s manufacturing firms are micro or small-sized and the food sector is the country’s largest employer.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members—48 from the region.