Economic Transformation

Policy for Manufacturing

Development

Bank Indonesia Manufacturing Seminar

Gedung Thamrin Bank Indonesia | August 12, 2019
 Development in Intermediary Goods is Very Important

• The missing link in intermediary goods halt Indonesia’s value added production of goods,
especially in Manufacturing.
• Value added might not be gained when there are still missing link between downstream and upstream on
industrial linkage. Hence, imported intermediate inputs used for export is still about 20% on average.
• Problem: Dependent on exporting raw materials and importing near-final goods to be assembled (or
even final goods)

Source: OECD, 2018 in Trade In Value Added: Indonesia

 Human Capital Contributes to High Growth Industries

We must focus on additional investment on the sectors with the highest output growth above economic growth to reduce ICOR.
Specifically, investment on linkage between upstream and downstream in these sectors. Moreover investment is not always in
physical infrastructure form. Investment in human capital (education) to increase labor capabilities can also reduce the ICOR.
Indonesia’s labor force still dominated by elementary and junior high school graduates.

List of Industries with the Highest Output Growth

Year 2017 – 2018

Sea Transports 7.22%

Pension Funds and Insurance 7.51%

Warehousing and Transportation

7.85%
Support Services; Post and Courier

Food and Beverage Industry 7.91%

Textiles and Apparel Industry 8.73%

Basic Metal Industries 8.99%

Iron Ore Mining 9.01%

Leather, Leather Goods and

9.42%
Footwear Industries
Machineries and Equipment
9.49%
Industries

Railway Transports 10.70%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%

Source: BPS 3
 HIGH LOGISTICS COSTS, NEEDS AN INTEGRATED SYSTEM

Farmers/
Village A Retailers Warehouse

Farmers/
Village B

Farmers/
Village C

Warehouse - Wholesalers
Urban Market
Farmers/ Farmers Local Aggregator Retailers
Village D

Rural Market Urban Market

4
Five Pillars of Economics Transform Towards Indonesia 2024

IMPROVING
ECONOMIC DECREASING HUMAN CAPITAL
INFRASTRUCTURE INVESTMENT
GROWTH DEPENDENCY ON AND LABOR
DEVELOPMENT CONFIGURATION TO
DISTRIBUTION FOREIGN CAPITAL IN MARKET
OPTIMALIZATION SUPPORT GROWTH
POLICY THE SHORT RUN EFFICIENCY

The five pillars that are built will be interconnected to

form the foundation of sustainable development.
5
 Compared to the other countries, Indonesia has a relatively high score of ICOR in 2018.

2018
Indonesia India Vietnam China This ratio shows the level of
6.5 6.3 7.5 efficiency or configuration
7.5 6.8
7
6.98
7.08
6.6 (the time of an investment to
6 7
6.6
6.5
6.5
yield) of all types of
5.5
5.17 6
6
6.4 investment in a country.
5 5.5
5.5 6.2
5
4.5 4.64 5
6 5.9
With relatively equal ratio of
4.5
4
4.5 4.31
capital formation, India and
4 5.8
3.5 3.5
4
Vietnam have lower ratio of
3.5 5.6
3 ICOR and higher economic
3 3
ICOR GDP Growth
ICOR GDP
Growth (%)
ICOR GDP 5.4
ICOR GDP Growth (%) growth.
(%) Growth (%)

Gross Fixed Capital Formation to GDP in 2018 High score of ICOR indicates
that in a macro level,
investment in Indonesia is
32.57% 32.37% 30.53% 44.06% less efficient.

In 2018, the ICOR of Indonesia is 6.30, still higher than India (4.64) and Vietnam (4.31)
Source: BPS, World Bank 6
 Lower ICOR is Needed to Achieve Growth

Evidence from China’s Evidence from Vietnam’s Indonesia’s Economic Currently, Indonesia
Economic Condition Economic Condition Growth Simulation is focusing on
9.7 10 10
10 exports without
9 9 9 industrial linkage.
8 8 8 Correct investment
7.08
7 6.6 7 6.5 7 configuration and
6.3
5.9 5.7
6 composition are
6 6 6 5.43
4.9
5.17 expected to reduce
5 5 5
4.3 the ICOR.
4 4 4

3 3 3 Hence, there will be

2 2 2 potential economic
2008 2018 2008 2018 1st Scenario 2nd Scenario growth in Indonesia
ICOR GDP Growth (%) ICOR GDP Growth (%) ICOR GDP Growth (%) by increasing share
of investment in
The decrease in efficiency of In the case of Vietnam, an By having 32.6% of gross capital non-infrastructure
Investment in China, which increase in efficiency led its formation to GDP in 2017 and 6.3 sector, especially
shown by its decreasing economic growth to rise by of ICOR in 2018 will result in
ICOR, led its economic
education.
1.38% 5.17%. To achieve 5.43%
growth to fall by 3.1% economic growth, we need to
𝛥𝑲 = 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑪𝒂𝒑𝒊𝒕𝒂𝒍
ICOR = reduce ICOR to 6.
𝛥𝒀 = 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑮𝑫𝑷 7
Source: OECD, World Bank, IMF, BPS
 Easing Investment Climate with Online Single Submission

Perfecting Online Single Submission is needed to further encourage the investment

Current OSS Improvement to OSS
Business Licensing process has not been
standardized. Most of the process are still Upgrade the Business Licensing
offline and require a lot of time and documents Process and Standardized Requirement
(such as AMDAL 115 HK and Commercial (NSPK)
License reached 35 HK.

Improve the operational licensing in

The licensing process requires the K/L/D and strengthen the role of
approvals of many K/L/D and work One-Door Integrated Services
unit in 1 K/L/D (PTSP)

The feature of OSS System has not been
able to fulfill the entire licensing process
and the needs of business actors. K/L/D’s
supporting system has not fully complied
with the OSS System
Improve the feature of OSS system that
can accommodate the needs of
business actor. Improve the service and
stability of the supporting system from
K/L/D

World Bank’s Ease of

Doing Business Index 2018
73 < 50

Further improvement of OSS is by involving the active role of local government and K/L in running the OSS and
completing the Omnibus Law to further simplify the licensing system in Indonesia.
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 OSS System Attracts Foreign Investors' Interests
Even though the OSS system still needs the improvement, the incoming foreign investment is quite
significant.
Contribution of Automotive
Industry reached 0.12% of GDP
Growth in 2018
• Automotive company from
South Korea, Hyundai, opened
its factory in Indonesia
• The estimated investment
value reaches 12.8 trillions of
ID Rupiah or 800 Millions of US
Dollars
Source : Kompas, Gatra, 2018
Contribution of Electronics
Industry reached 0.07% of
GDP Growth in 2018
• Electronics company, Sharp,
moved its two washing
machines factories to
Indonesia from Thailand
• LG also moved its factory from
Vietnam to Indonesia
• The total investment reached
100 millions of US Dollar
Contribution of Textile and
Textile Products Industry
reached 0.10% of GDP Growth in
2018
• Textile company from China
relocated its factory to
Indonesia from China with
investment value of 6 trillions of
ID Rupiah
• Footwear company from China,
PT Shoetown Ligung
Indonesia, also add up its
factories in Indonesia with
investment value of 200
millions of US Dollar
9
 Optimizing Export-Oriented Investment

Further efforts are needed to reinstate the position of export-oriented industry and also to generate reserves

GDP Growth 6.2% in GDP Growth 5.2% in

2007 2018

In 2007, the contribution of Manufacturing Sector to In 2018, the contribution of Manufacturing Sector to
GDP growth of Indonesia reached 1.30% GDP growth of Indonesia reached 0.91 %

Export-oriented Industries
Contribution of Automotive 0.77% Contribution of Automotive 0.12%

Contribution of Food Contribution of

Contribution of Products and Contribution of
Food Products and
Chemical 0.19% Chemical-0.03%
Beverages 0.36% Beverages 0.51%
Contribution of Contribution of Contribution of
Contribution of Textile and Textile
Electronics Textile and Textile
Electronics -0.01%
0.01% Products -0.11% Products 0.10%
Contribution of the Contribution of the Contribution of
Contribution of
Downstream of Natural Downstream of Natural
Resources 0.09% Tourism 0.20% Resources 0.15% Tourism 0.27%

The contribution of the three industries (Automotive, Chemical Industry and Electronics) decreased in the period of 2007 to
2018. However, the contributions of Textile & Textile Products, Tourism, Food Products & Beverages, and Downstream of Natural
Resources increased. Indonesia has to reinstate the contribution of the Manufacturing Sector since it is only 1.30% like in the
pre-2008 crisis period. Between 2000-2018, the GDP growth was at its peak in 2007. 10
Sumber : BPS
 Improving Export-Oriented Industries

Encouraging Export-Oriented Industries

Priority Industry in
Industry 4.0 Roadmap Other Industries

Food & Textile & Natural Resource Products (Mining, Plantation &
Beverage Cloth Electronic Automotive Chemical Tourism
Horticulture, Forestry, and Fisheries)

Breakthrough

Machine Modernization Facility Revision of Imported Raw Optimizing Indonesia’s Product- New Travel
Modernization of Machines Completion PPnBM Materials (Nafta potential as the downstreaming Destination
biggest Nickel
with Taxation Income Tax structure Condensate & and increased Development
producer (Electric Car
Facilities Article 23 Ethylene) battery material) in the value added and
world exports
11
11
 Fiscal Incentives to Support the Investment

in Reducing Import and Encouraging Export and Export Production

Fiscal Incentives would encourage investment and increase output, hence, despite the tax relief, the
government still benefits from the increased of production and export in the aggregate level.

Incentives for
s
business entities Busines Increase
x
that will invest in Entity Ta Investm
d
n ent
strategic industries, Deductio
pioneers, labor-
intensive, vocational Increased
VA
funding, industrial and even In T
iday, com
R&D, even for PPh Tax: Hol Tax with th e
ce , e
SMEs. Allowan on increase o
ucti f
dan Ded Productio
n
Volume

12
Thank You

www.ekon.go.id