Explainer: Indonesia’s Return to Industrialization
Production Line in Manufacturing Sector. Credit: Unsplash/Ant Rozetsky
Introduction
To developing countries, there will always be some constraints to development, such as limited natural resources, lack of skills as well as underdeveloped human capital.
Theorists have proposed the term “
catch up development”, or convergence development theory, as a roadmap for these countries to move up the scale. This idea of “catching up” requires developing countries to copy the developmental policies of their more developed counterparts.
For example, previous decades saw countries such as Japan and South Korea adopting Western countries’ policies such as investing in export-oriented industries. These two governments have
actively intervened in their economy, especially through nurturing and guiding the market to support its industrialization. As a result, various industries netted positive benefits, including agriculture, textile, automobile and electronics.
Latin American countries such as
Mexico and Argentina have adopted this strategy too, especially in the early phase of national development through their import substitution industrialization. In their context, these governments
intervened heavily by stimulating domestic production as a substitute to imported goods, in order to protect domestic industries.
Recently, Indonesia has also come up with its version of catch up strategy by pivoting towards
industrial policy. The strategy of which aimed at boosting its downstream industries and shift away from a resources-based economy. This strategy is reflected by the enactment of
raw material export ban and local content requirement. It is hoped the country could industrialize and build up the capabilities for high value manufacturing goods such as electronics in the future.
The idea of catch up development is a “grand-narrative” that is used to justify the industrial strategy to further economic development. However, we contend that such a narrative is insufficient to comprehend Indonesia’s move towards industrialization, but rather useful to interpret the country’s evolution of developmental policy.
Development as a Discourse in Indonesia
Discourse on development can be defined as how ideas shape the economic policy of development. It is not firmly fixed, but rather shaped by the contestation of competing ideas.
In the New Order era (1967-1998), the popular
discourse on development was characterized as a developmentalist style of economic stability aimed at promoting growth and protecting domestic industries.
To achieve that, the Indonesian government restricted domestic competition, though in practice the move was susceptible to
rent-seeking activities by state apparatus, military officers and businessmen within the circle of President Soeharto. These activities ranged from granting protection from imported products, awarding contracts without due process and providing access to cheap loans.
Those policies were heavily influenced by thinkers and technocrats such as
Nitisastro and Habibie. However, disagreement and disunity among the technocrats and state bureaucrats at the time resulted in the absence of a clear industrial strategy and low industrial competitiveness.
The 1998 financial crisis forced the Indonesian government to implement reforms in order to secure assistance from the International Monetary Fund (IMF). These reforms led to the opening up of the Indonesian economy and minimized the role of the state in the economy.
This soon would change during the second Yudhoyono administration, which was characterized by the re-emergence of a developmentalist agenda called
“new developmentalism”. This new paradigm was characterized by government intervention in the domestic market, state support for local companies and state-owned enterprises (SOEs) supplied by more orthodox neoliberal policies aimed at promoting foreign investments in manufacturing activities.
This paradigm persists during the Jokowi administration, where it gains
popular support. The idea of development in this era is shaped by nationalist and populist discourses and supported by interest of oligarchs.
For example, the discourse of economic nationalism has been
amplified especially during the Indonesian government’s success in acquiring 51% of ownership from the largest foreign mining companies, PT. Freeport Indonesia. The timing seems on point, as it was done shortly before the 2019 elections where the usage of
economic nationalist discourse helped to bring Jokowi to power for the second time. Such discourses then translated to the country’s developmental strategy in building downstream resource industries.
The Political Economy behind Indonesia’s Industrial Strategy
What is the context behind the nationalist discourse and the return of industrial policy in Indonesia?
From the
colonial era, the Indonesian economy has long been characterized by the resource extraction and the dominance of the political and business elites. In the post-New Order era, this pattern of elite dominance persists, whereby oligarchs forge alliance with state apparatus at local and national level, leaders of mass organizations, and sometimes military or police commanders. Such an alliance serves a function to mobilize the masses, becoming some sort of
power consolidation that helps power holders such as Jokowi to easily advance and implement his developmentalist policies and agenda.
Another factor is what scholars and economists call a “
premature deindustrialization”, a state of the economy when the economic activity moves away from manufacturing production before an economy reaches maturity point.
This particular notion of deindustrialization is not a rare case in developing countries. Following the 1998 financial crisis, manufacturing value added to the Indonesian GDP
dwindled and has never recovered since then. As a result, Indonesia has suffered from “
jobless growth” and declining real wages.
There are many
explanations for this, ranging from incomplete reforms to financial liberalization policies and to commodity boom.
In the early 2000s, Indonesia experienced a
commodity boom, marked by significant increase in commodity prices from early 2000s until early 2010s. The boom was a response to the
growing demand in the emerging markets – such as China – to sustain its rapid industrialization.
The rise of China has also squeezed Indonesia’s labor-intensive, low-skilled manufacturing activities. Thus, the Indonesian government responded by shifting away from manufacturing to extractive sectors. The newly attained
extractive regime of the 2000s gave way to the rise of oligarchs in certain commodity sectors, such as coal and palm oil.
In the international context, globalization gives rise to the establishment of an international or regional network of production. Nevertheless, comprehensive analyses of the
global commodity chains determine that raw material exporter states in a marginalized position. Meanwhile, deindustrialization, alongside the increasing activities of resource extraction, means that Indonesia is becoming increasingly at a
peripheral position on the global/regional supply chain.
Indonesia’s open-door policy towards foreign investment during the commodity boom does not help either. Indonesia actively appeals to foreign investors to park their money in natural resource extraction sectors, which require low-skilled workers and large sum of capital but add low value to the Indonesian economy. This has placed Indonesia as a resource exporter country, but one which economy struggles to evolve.
This condition seems to be picked up by the government. From as early as 2009, the Indonesian government through its
Law on Mineral and Coal Mining has built a regulation that require the domestic and foreign companies to build domestic processing facilities. This strategy is called resource-based industrialization. The idea is to stimulate manufacturing activities in downstream sectors.
There are many strategies at play to achieve the policy goals of building downstream industries. One of which is mobilizing its
state-owned enterprises. For example, PT. Aneka Tambang (Antam), Tbk has been
directing its capital to build smelters for processing critical minerals such as nickel and bauxite.
Other than that, through
bargaining and political settlements with foreign entities and domestic business elites, the Indonesian government has been successful in pressuring multinational companies such as PT. Freeport Indonesia to agree giving up 51,23% of its ownership to the state-owned PT. Indonesia Asahan Aluminium (Inalum).
The condition above shows that the pattern of alliance between state apparatus-business elite persists and is used alongside the nationalist discourse by the Indonesian government to spur economic transformation to move away from raw mineral extraction towards the domestic mineral processing activities.
Conclusion
The article argues that the return of industrial policy in Indonesia is not simply a matter of economic strategy, but is also driven by various factors. Premature deindustrialization, as a result of the global commodity boom, has caused Indonesia’s economy to lack added value, which thus puts an imperative for bringing back industrial policies.
Meanwhile, ideas on development are internally contested, yet successive administrations have succeeded in defining the discourse of industrialization as the driver of economic development. This discourse has supported the Indonesian government’s legitimacy to enact industrial strategies to catch-up with its developed counterparts. The Indonesian resource-based industrialization strategy is aimed at creating added value to the previously resource extractive regime. However, shifting strategies so far does not translate to the reform of power structure. Using the discourse of nationalist economic development as stated above, the Indonesian government’s strategy has been effective in legitimizing its policy of resource downstreaming.
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