Industrial Policy in Indonesia: A Global Value Chain Perspective

Abstract

The gains of a country from participating in global value chains (GVCs) will depend on the productive activities taking place in its jurisdiction and their linkages to the domestic economy. Lead firms' decision on where to locate and how to coordinate production activities is influenced, among others, by industrial policies. On the one side, policy space provides governments with some leverage in guiding economic activities and influencing development outcomes. On the other hand, policy risks have the potential to adversely affect the outcomes. This study focuses on industrial policies in Indonesia, using the mineral sector as a mini case study. The case study assesses the Indonesian Government's recent effort to boost domestic value addition in the sector. This paper argues that the effectiveness of government policies in maximizing the gains from GVC participation depends not only on policy design, but also on policy consistency and coherence, effective implementation, and coordination. The views expressed in this paper are those of the authors and should not in any way be attributed to the institutions with which they are associated. The views expressed in this paper are those of the author 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. ASIAN DEVELOPMENT BANKADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.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. Note: In this publication, "$" refers to US dollars.The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly those facing the Asia and Pacific region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia's development and policy challenges; strengthen analytical rigor and quality of ADB's country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness.

Industrial Capital Intensity and Comparative Advantages Dynamism of Indonesian Export Products

“…Along with Malaysia and Thailand, Indonesia categorized as a second newly industrialized country by the World Bank due to high manufacturing exports since the late 1980s (Wie, 2006). Some of the reforms carried out in the mid1980s, including the reform of customs duty, exemption tariff to replace export subsidies, exante tax exemption unconditionally or various ex-post pieces have extended access domestic enterprises to input markets internationally while reducing business costs and uncertainty significantly (Tijaja and Faisal, 2014). These reforms contribute to boost export competitiveness.…”

“…In 2012 Indonesia's GDP growth ranges from 3.75% after experiencing high economic growth in prior periods. Indonesia therefore becomes the largest country in Southeast Asia which contributed nearly 40% of total GDP in ASEAN and 16 in the world rankings (Tijaja and Faisal, 2014).…”

The Evolution of Indonesia�s Participation in Global Value Chains:

“…To maximize gains from insertion into GVCs, a concerted effort in bringing multiple stakeholders together to establish stronger links among domestic industries is needed. This can be done through putting in place coordination mechanisms to ensure consistency and coherence of industrial policies (Tijaja and Faisal 2014); addressing key governance bottlenecks and constraints to foster a business-friendly environment where firms can not only thrive but also innovate; and developing, especially, technology intensive manufacturing to cascade structural transformation.…”

The Limits of Industrialization in Post-Orde Baru Indonesia: State-Corporatism and Technological Inferiority

“…Despite inclining to decline slightly, manufacturing remains a potential sector to be developed as an engine of growth comparing to other sectors like agriculture, oil and gas, and mining. In so doing, the government of Indonesia has intervened specific activities, industries, and sectors deemed beneficial for the long-term economy through introducing a set of industrial policy since 2008 to boost rapid and sustainable economic growth (Aswicahyono, Hill, & Narjoko, 2012;Tijaja & Faisal, 2014). The industrial sector in this paper refers to manufacturing industries specifically, not included extractive industries.…”

“…This situation signifies the importance of industrial revitalization in Indonesia by strengthening the weakest links, innovation, and human capital (Tijaja & Faisal, 2014). Besides ensuring that supply-side investment, open policies, and regulatory reform (Aswicahyono et al, 2012), focusing on innovation and human capital as the basis of industrial revitalization is essential agenda for the government to prompt re-industrialization effort as a way of avoiding growth slowdown.…”