Picking up the Pace – Renaissance in Indonesian Manufacturing

While working with the World Bank over the summer, I contributed to this in-depth report on the state of Indonesia’s manufacturing sector, which has just been published.

Having never fully recovered its dynamism after the Asian financial crisis, now is the ideal moment for Indonesia’s manufacturing sector to recapture its former glory. With recent improvements and a favorable outlook, the sector may be on the verge of a renaissance if critical competitiveness challenges can be overcome.

Getting the policy framework and business environment right can unleash the vast potential of Indonesian manufacturing to drive economic development, create jobs, reduce poverty and regain competitiveness.

Indonesia can capitalize on growing domestic demand, a dynamic regional market, rising production costs in China, access to raw materials and its favorable demographics.

Indonesian manufacturing has underperformed since the East Asian crisis, held back by a changing macroeconomic environment and micro-level constraints:

• An appreciating currency, rising labor costs, external competition, and shrinking profit margins are the main macroeconomic factors hurting export competitiveness.
• Meanwhile, poor infrastructure, difficulties in accessing finance, and regulatory uncertainty are preventing new manufacturers from coming in and existing manufacturers from expanding.

There are some ‘quick wins’ that can showcase successful reforms, but achieving broad-based progress requires that Indonesia address the fundamental constraints that have undermined manufacturing for so many years.

Real reform will foster the innovation ecosystem needed to sustain future competitiveness in the local and global market place.

A coherent policy framework requires a strong commitment from the government and other stakeholders to:

• Address the phenomenon of the “missing middle” by removing the barriers that make it difficult for firms to grow and thrive.

• Involve the private sector in the policymaking process and ensure that a mechanism is in place to encourage meaningful private sector consultation and feedback.

• Stimulate Indonesia’s rise up the value chain by encouraging competition, taking advantage of openness to trade and foreign investment, and investing in skills, technology and infrastructure.