Low Competitiveness Blocks Development of Indonesia's Manufacturing Sector
Despite the fact that Indonesia reported the world's third-highest GDP growth in 2012 (behind China's 7.4 percent and Saudi Arabia's 7.1 percent), supported by rising consumption by a burgeoning middle class and significant increased foreign direct investment, the country's performance in terms of competitiveness is disappointing. It is cheaper to import products from countries that contain competitive businesses than to produce them in Indonesia.
According to the Global Competitiveness Index (published by the World Economic Forum) there are at least six issues that hamper Indonesia from becoming a competitive country. These are:
1. an inefficient government bureaucracy
2. widespread corruption
3. a poorly educated workforce
4. lack of quality and quantity of infrastructure
5. poor work ethics
6. restrictive labor regulations
Poor competitiveness is the major reason behind the decline of Indonesia's manufacturing sector in recent decades. During Suharto's authoritarian New Order government this sector had been a cause for national pride, but after the Asian Financial Crisis rocked the country's financial foundations, its contribution to the country's GDP or its exports declined drastically. Due to high logistics costs it is currently cheaper to import certain fruit products from China than to produce them in Indonesia.
Reduced domestic manufacturing in Indonesia also implies more demand for manufactured imports as Indonesia's per capita GDP has reached US $3500 and might touch US $5000 by 2014. This situation has resulted in a trade deficit starting from April 2012, a very unusual situation for the country that always had a trade surplus. For the whole year 2012, Indonesia posted a trade deficit of US $1.7 billion, while in recent years the country's trade surpluses ranged between an annual US $8.0 and $26.0 billion.
Lack of manufactured products also means that Indonesia remains highly dependent on exports of natural resources and thus susceptible to volatile global commodity price swings (a situation that is partly responsible for triggering the above-mentioned trade deficit). Moreover, as exports mainly constitute raw products the country also loses out on added-value. The government has been trying to alter this situation rigorously by banning shipments of various raw natural resources from 2014 onwards (forcing miners to build smelters within a time span of a few years only). But this sudden and dramatic change of course seems to have done more harm than good as it made many foreign investors and businesses nervous or shy away from Indonesia.
Some might label this policy as yet another example of short-sight decision-making by Indonesian lawmakers, who probably use this 'economic nationalism' to boost their popularity ahead of the 2014 elections.
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