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Indonesia’s Trade Ministry in cooperation with the USAID-SEADI Project held a half-day seminar entitled "Upgrading Indonesia's Exports: A Strategy and Policies for Moving Indonesia Up the Value Chain" in Aryaduta Hotel Jakarta on 24th July, 2013.
Tyler Biggs from the USAID-SEADI Project delivered the first presentation in which he described Indonesia’s exports in comparison with other Asian countries, Indonesia’s performance in Global Value Chains (GVCs), and strategies that Indonesia should implement in order to upgrade its exports.
Tyler said that even though Indonesia has been participating in GVCs, its integration remained limited compared with regional rivals and exports have been growing slowly. While there were arguments that Indonesia should move up to higher value added links of GVC, he questioned whether a ‘moving up strategy’ was right for Indonesia given its comparative advantages and the opportunities it would face; especially as China’s labor costs are rapidly increasing.
“It is important to underscore that moving up to high-skill, service intensive GVC links is not a prerequisite for income growth, as China’s example proves. Indonesia still has much room to expand GVC trade in manufacturing link that can drive large increases in income growth, and build the foundation for future moves up to high-skill links,” said Tyler.
However, Tyler added that what Indonesia could achieve in a manufacturing link would be determined by decisions of multi-national FDI investors on their preferred manufacturing locations. He then listed top five factors that positively and negatively influenced sourcing and investment decisions. On the top of the positive list was the ability to consistently meet production deadlines, while topping the negative list was corruption and graft. Indonesia should continue its efforts to improve its infrastructure and to eradicate corruption in order to attract more FDI investors into the country and help expand its manufacturing link.
Meanwhile, World Bank’s Economist Sjamsu Rahardja presented his team’s research on Imported Intermediary Inputs and Industry Performance. He emphasized the importance of imported goods and services even for a successful manufacture exporting country, as imported inputs enabled manufacturers to respond to demand.
He gave an example of a food processing company in West Java which has successfully upgraded its production lines, employed around 400 workers, and exported to Malaysia, Singapore, Vietnam, and Australia. The factory’s expansion plan beyond 2014 met several challenges, namely the necessity to import milk powder from Australia due to unreliable local supply and lower quality; uncertainty at the port due to frequent changes of import policies; the road congestion that increased transport time exponentially; the occasional production cuts due to delays at the port; and the difficulties to secure land in greater Jakarta.
“Future growth, diversification of exports and job creation depends on fewer delays in ports and lower transport costs. Support to the domestic milk supply chain would help farmers benefit from the growth of this business in the medium to long term,” said Sjamsu.
He also said that the use of intermediate inputs was associated with reviving activities of the manufacturing sector in Indonesia, which may be a sign of the shift away from resource-based and low value added exports towards a more sophisticated production process.
“Given the current international pattern of industrialization, it is very likely that demand for intermediate inputs will increase. Manufacturers need to connect with the global production network, at least at a minimal level. To that extent, the deliberate policy of import substitution of intermediate inputs is likely to raise risk from creating policy uncertainties that deter or create sub-optimal investment and an inefficient strategy with a low probability of success and/or bad governance,” he concluded.
Sjamsu offered two possible policy implications to this situation. First, the certainty in facilitating trade of intermediate inputs, particularly important for manufacturers that seek to use Indonesia as a production base or to tap into the growing domestic market. Second, public support in the form of an industrial policy focused on skills upgrading, better infrastructure for connectivity and a responsive service sector as well as better access to finance; all of which could help more firms to leverage imported intermediaries to create jobs and source more locally.
KADIN Indonesia - 2013
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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