The manufacturing sector is the largest contributor to Indonesian exports as well as the country’s gross domestic product (GDP), but the fact that the sector is heavily concentrated on one island of the archipelago has been holding it back, experts believe.
Indonesia’s Java-centric industrial development reflects in Statistics Indonesia data from June, which show that Java alone accounted for 47.62 per cent of national exports. From January to June, 55 per cent of new investment projects were located in Java.
Edi Prio Pambudi, an expert staff member at the Office of the Coordinating Economic Minister, said the centralisation had led to high costs of the country’s manufactured products.
“Our manufacturing industries are mostly located on the island of Java, so we create all our logistics plans based on that location, which raises logistics and transactional costs,” Edi said during a seminar on the manufacturing industry at Bank Indonesia (BI) headquarters on Monday.
Below ideal standards
The manufacturing sector’s contribution to the country’s GDP is still below the ideal standard of 20 per cent, and it has even shown a slight decline. In the second quarter of this year, the manufacturing sector’s GDP share declined to 19.52 per cent from 19.8 per cent last year.
The sector’s growth is also declining and has fallen behind overall economic growth, which was recorded at 5.05 per cent in the second quarter.
In the same period, the manufacturing sector grew by a mere 3.54 per cent, down from 3.88 per cent in the first quarter and a far cry from the Industry Ministry’s target of 5.4 per cent for this year.
Another problem the government should address was the lack of skilled trainers to share their knowledge with the future workforce, especially in remote regions of the country.
Today’s labour force had to master many skills, Edi said, and it would take them years to acquire those skills.
“Expanding manufacturing eastward is not an easy feat, because we will have to move people [who have the required manufacturing skills] there.
“While people complain about the presence of foreign workers in manufacturing bases outside Java, these workers are actually needed to operate the technology,” said Edi.
Responding to the remarks, Industry Ministry Resilience, Regions and International Industrial Access director-general Doddy Rahadi said the government had tried to spread industrial activities through the establishment of industrial zones outside Java.
“One of the president’s goals is to expedite infrastructure development in order to connect these industrial zones,” Doddy said on the same occasion.
“We will move forward with efforts to improve connectivity and ease investment.”
One of the successful examples of industrial zones outside Java, he said, was the Morowali Industrial Park in Central Sulawesi, which hosted 11 companies.
However, most of the companies in the industrial zone are involved in the processing of base metals, such as nickel and steel, to benefit from abundant nickel reserves across Sulawesi Island. Meanwhile, key manufacturing industries such as chemicals, automotives and textiles remain centred in Java.
Speaking at the same event, BI deputy governor Doddy Budi Waluyo acknowledged that manufacturing was an important industry for sustained and long-term economic growth in Indonesia.
With its role of managing monetary policy, facilities the central bank had provided to encourage more investment included slashing its seven-day reverse repo rate by 25 basis points last month and lowering the primary statutory reserve in June.
“We will see if there is more room to slash the repo rate in the future … Governor [Perry Warjiyo] said there was room for that and we just have to wait for the right timing,” Doddy said.