One method to ignite structurally high economic growth for a sustained period of time in Indonesia is to encourage the development of the country's stagnant manufacturing sector. A thriving manufacturing industry (especially when it can export domestically manufactured products) will accelerate economic growth and generate plenty of employment opportunities (which will then encourage rising household consumption).
Based on research that was conducted by the Asian Development Bank (ADB), there are two key strategies to boost the development of Indonesia's manufacturing industry. Firstly, Indonesia can diversify the range of products that are manufactured at home. Secondly, it can raise the focus on further development of the existing manufacturing industries in Indonesia (several good examples are electronics, chemicals, automotive and food industries).
But there are at least two issues that need to be dealt with in order to apply one (or both) of the above-mentioned strategies. Firstly, Indonesia needs to have plenty of quality workers that can work in the manufacturing sector. Secondly, an improvement in the investment climate is required to attract much-needed investment (both foreign direct investment and domestic direct investment).
Indonesian Finance Minister Sri Mulyani Indrawati said the momentum is currently rising for Indonesia with strengthening commodity prices, growing consumer confidence, and rising government-led infrastructure development across the country. Therefore, the government set a 5.4 percent (y/y) economic growth target in the 2018 State Budget, significantly higher than the 5.07 percent (y/y) growth realization in full-year 2017.
Indrawati said that the Indonesian government encourages investment in the manufacturing sector by allowing a wider range of imports/exports, reducing dwelling times, as well as by revising and improving tax allowances and tax holidays that are offered to investors (who meet specific criteria). She added that according to the United Nations Conference on Trade and Development (UNCTAD) Indonesia is one of the most lucrative nations for investment. In the UNCTAD's June 2017 survey Indonesia ranked 4th in terms of most prospective investment destinations (after the United States, China and India).
However, research conducted by the Institute for Development of Economics and Finance (Indef), shows there are seven basic bottlenecks that obstruct higher economic growth in Indonesia.
- Indonesia's improving export performance is not accompanied by industrial development. The country's improving export performance is mainly caused by strengthening commodity prices.
- Indonesia is too dependent on imports of raw materials and capital goods. This indicates that the Indonesian economy is not independent.
- Lack of incentives and weak market protection obstructs industrial development.
- Business and consumer optimism was bleak in the fourth quarter of 2017.
- Although improving, Indonesia's investment climate still fails to attract significant investment.
- Government spending is not optimal.
- The village funds that are transferred from the central state budget to the regions are not handled optimally, hence public investment in the regions is not as good as it should be.
Andry Satrio, economist at Indef, says the government should prioritize the development of the processing industry. In 2017 Indonesia's processing industry grew by a disappointing 4.27 percent, below overall macroeconomic growth of 5.07 percent year-on-year (y/y).
Is not the UU 13 2003 also an issue?