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Policies to Support the Development of Indonesia's Manufacturing

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Policies to Support the Development of Indonesia's Manufacturing POLICIES TO SUPPORT THE DEVELOPMENT OF INDONESIA’S MANUFACTURING SECTOR DURING 2020–2024 A Joint ADB–BAPPENAS Report JANUARY 2019 POLICIES TO SUPPORT THE DEVELOPMENT 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 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org 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 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound by the terms of this license. For attribution, translations, adaptations, and permissions, please read the provisions and terms of use at https://www.adb.org/terms-use#openaccess. This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material. Please contact [email protected] if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo. Notes: In this publication, “$” refers to United States dollars. ADB recognizes “China” as the People’s Republic of China; “Hong Kong” as Hong Kong, China; and “South Korea” as the Republic of Korea. Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. 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
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