Indonesia marginalised in global value chains, in need of trade reforms: World Bank

Data from Statistics Indonesia also revealed that the manufacturing sector’s share of the country’s gross domestic product has been declining over the years.

Deni Ghifari

Deni Ghifari

The Jakarta Post


Containers are loaded on Dec 18, 2018, at Tanjung Priok Port in North Jakarta. PHOTO: ANTARA/THE JAKARTA POST

October 5, 2023

JAKARTA – The World Bank has praised Indonesia over recent legal changes encouraging investment in the country but said Jakarta has not done enough to reform trade policies that are hurting the manufacturing sector.

World Bank chief economist for the East Asia and Pacific region Aaditya Mattoo said Indonesia needed to implement deeper reforms to facilitate imports and exports.

“Indonesia has been relatively marginalized by global value chains,” Mattoo said on Monday in a press briefing, adding that a downward trajectory in the country’s manufacturing sector could be rectified by reforming trade policies.

Data from Statistics Indonesia (BPS) revealed that the manufacturing sector’s share of the country’s gross domestic product (GDP) has been declining over the years.

In 2010, the sector was responsible for 24.80 percent of Indonesia’s GDP, but that figure shrank to 20.84 percent in 2015, and then dropped further to 18.34 percent in 2022.

Trade reforms are needed to mend the situation, Mattoo said, noting that current policies failed to make it easier “to import in order to export”, referring to companies that import parts or materials to create products for export.

Begging to differ, Institute for Development of Economics and Finance (Indef) executive director Tauhid Ahmad said imports were hampering the development of the manufacturing sector.

The fact that goods could easily be brought into the country was a disincentive for domestic producers to build industries higher up in the value chains, as shipping in goods was cheaper than onshoring, considering that the latter required building entire industries, Tauhid added.

“We do imports, but it’s for the domestic [consumer] market,” Tauhid told The Jakarta Post on Monday, contrasting that with manufacturing countries like China or Vietnam, where most imports are aimed at the production of value-added goods intended mainly for export.

“[Indonesia] is worlds apart from China or Vietnam [in terms of industrial capacity],” he added.

Economist Intelligence Unit (EIU) research analyst Wen Chong Cheah said Indonesia’s export share of value-added goods was low compared to Singapore, Thailand or Vietnam, and this was common for countries with vast mineral resources because of their reliance on their natural wealth.

That, rather than trade policies, was the reason for Indonesia’s dawdling manufacturing industry, Cheah said.

“Data from the World Trade Organization shows Indonesia’s global value chain participation lagging that of its peers. This reflects the less-developed state of the industrial sector,” Cheah told the Post on Monday.

Nevertheless, Cheah said trade policy reforms could help attract foreign investment and, consequently, growth in value-added sectors “to spare the economy from the Dutch disease, in which a booming natural resource sector harms the growth of other sectors.”

Cheah opined that joining trade pacts like the Regional Comprehensive Economic Partnership (RCEP) would improve Indonesia’s export competitiveness, given the significant reduction in tariffs, but nontariff measures like cumbersome trade approvals, licensing requirements and export price controls remained major trade barriers for Indonesia.

This contrasts with Tauhid’s more protectionist view that import curbs can induce industrialization and that joining the RCEP will result in imports rising more than exports in the long run.

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“Our trade policy is not a cautious one; we lost in the negotiations. […] There is no coordination between ministries and government agencies. When it comes to negotiations, only the Trade Ministry is there, while the Industry Ministry should’ve been involved too,” said Tauhid.

Trade Ministry international trade cooperation director general Djatmiko Bris Witjaksono dismissed that accusation.

“[Negotiations of] free trade agreements or comprehensive economic partnership agreements involve all the ministries and agencies, which form a position, and the Trade Ministry cannot act without their approval,” Djatmiko told the Post on Monday.

He declined to comment on trade reforms.

As the manufacturing sector’s share of GDP dropped, that of the service sector rose. Statista data sourced from Indonesia and the World Bank shows an uninterrupted decline of the industrial share of GDP from just below 44 percent in 2011 to less than 39 percent in 2020, while that of services rose from 40.6 percent to 44.4 percent.

In 2021, however, the secondary sector did claw back a little bit of the GDP share lost to services over the preceding decade, which may be partly attributed to President Joko “Jokowi” Widodo’s aggressive push for investment into the downstream processing of nickel and other commodities.

Read also: Nickel: Overplaying our hand?

“I still believe that Indonesia has been a remarkable example of the dynamism that can come from […] new technologies in the services sector,” said Mattoo, emphasizing that the country could reap more benefits from further reforms in the services sector, too.

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