Manufacturing Industry—Indonesia

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Indonesia's economic performance from 1969 to 1996 has been remarkable. From the mid-1960s to the early 1980s, gross domestic product (GDP) grew by more than 7.5 percent per annum (p.a.). After a mild economic recession due to the collapse of the price of oil in 1980–1985, the economy rebounded again and grew by 6.7 percent p.a. from the mid-1980s to 1996.

Continued economic growth transformed the structure of Indonesia's economy. In 1970, agriculture accounted for 45 percent of GDP, and manufacturing 12 percent. By 1996, agriculture had declined to 17 percent of GDP, whilst manufacturing rose to 24 percent.

Between 1970 and 1980, the manufacturing sector grew by more than 14 percent per year. However, Indonesia was confronted with a series of problems in the 1980s, and a large decline in oil prices hurt Indonesia's balance of payments. The government then launched economic liberalization programs to increase economic efficiency, and made development of non– oil and gas exports a top priority. The impact of these measures on non-oil manufacturing exports was quite remarkable; they experienced a 57 percent growth in 1987. After experiencing slower growth in 1980–1985 (8.5 percent), the sector grew by 10.7 percent in 1985–1990 and 10.4 percent in 1990–1995.

In 1997, however, Indonesia faced a serious economic crisis. The rupiah fell to a record low of 17,000 to the dollar in January 1998, and the economy shrank by 13.2 percent. In 1998 the manufacturing sector experienced negative growth of –11.4 percent while the overall economy declined by –13.2 percent. The overall economy slightly improved in 1999, experiencing 0.2 percent growth while the manufacturing sector grew by 2.2 percent. The share of the manufacturing sector to the total GDP was relatively stable during that period, implying a stagnation in structural change in this sector.

To understand about the structure of the manufacturing sector, it is important to observe how the structural change took place within it. Food products (International Standard Industrial Classification number 31, or ISIC 31), which accounted for 47 percent of total non-oil manufacturing in 1975, had declined to 23 percent of total manufacturing by 1995. On the other hand, the share of labor-intensive industry (ISIC 32 and 39) in total manufacturing continued to rise, from 11 percent in 1975 to 19 percent of total manufacturing by 1995.

Internationally, Indonesian exports were dominated by non-oil manufacturing products, particularly after the mid-1980s. In the 1970s, manufacturing exports contributed less than 3 percent to total exports, and primary goods dominated, but by 1987 the share of manufacturing exports had surpassed that of primary exports.

Before the mid-1980s, manufacturing exports were dominated by the Agriculture Resource Intensive (ARI) group. In the 1970s, ARI exports represented 90 percent of all non-oil manufacturing exports, and Unskilled Labor-Intensive (ULI) only 5 percent. But ULI exports grew rapidly, surpassing the ARI share in 1985. That year, ULI was 44 percent of total manufacturing exports, while ARI was 42 percent. The share of ULI continued to increase, reaching 54 percent in 1992, while that of ARI continued to decline, to 25 percent. This notable performance of labor-intensiveexports can be attributed to the trade liberalization that began after 1985, which allowed Indonesia to exploit its potential comparative advantage in labor-intensive products.

The Arco oil company's offshore facility in the Java Sea. (HANAN ISACHAR/CORBIS)

Another important feature of the Indonesian manufacturing sector was the high dispersion of trade protection among the industries, particularly during the period 1975 to 1998. But trade protection in the manufacturing sector was not random. In the 1970s it was mainly influenced by national policy, such as protection for infant industries. Particularly after the mid-1980s, it was strongly influenced by crony capitalists and various interest groups.

The period since 1985 has seen outstanding performance in the Indonesian manufacturing sector. This rapid expansion can be credited to factors such as the devaluations of the rupiah in 1983 and 1986, high savings and investment rates, and economic liberalization since 1985. Indonesia's remarkable growth in the manufacturing and export sectors during the pre-crisis era and this achievement can be attributed to credible macroeconomic management, a political predisposition towards moderate inflation, and trade liberalization during the 1980s.

During the 1997 economic crisis, the share of manufacturing in the total GDP remained relatively stable. After 1998 the manufacturing sector rebounded in line with the improvement of Indonesia's economic growth.

Basri, Muhammad C. (2001) "The Political Economy of Manufacturing Protection in Indonesia, 1975–1995." Ph.D diss. Australian National University, Canberra.

Chenery, Hollis, and Moshe Syrquin. (1975) Patterns of Development, 1950–1970. New York: Oxford University Press.