International economic engagement can support Indonesia’s industrial upgrade
By: M. Rizqy Anandhika
This op-ed was published on The Jakarta Post on 16 June 2023.
Indonesia’s aspiration to be a high-income country by its 100th birthday in 2045 demands bold new approaches to industrial transformation and development. High-income countries are characterised by their ability to produce a diverse range of sophisticated products and services. To reach this level, access to foreign and domestic goods, services, skills, technology and know-how is necessary – through being open to foreign trade and investment and by being well-integrated into regional and global value chains.
At present, Indonesia seeks to develop many goods and services itself and is gradually opening to international trade after the COVID-19 pandemic. While the Omnibus Law on Job Creation made some positive steps on reforms to investment policy and business licensing, current challenges are still present, including the hard-to-see non-tariff barriers and services restrictions. These aspects of the trade environment permeate the Indonesian economy and make it hard for Indonesian businesses to access high-quality goods and services from overseas.
Accordingly, Indonesia’s participation in global value chains is low and has actually fallen during the past two decades. Asian Development Bank data reveals that the share of foreign countries’ imports in Indonesia’s exports – a measure of how much Indonesia uses foreign inputs to locally produce and export value-added products – was 11 per cent in 2020, down from 14 per cent in 2000. Similarly, the share of Indonesia’s value-added products in foreign countries’ exports was 21 per cent in 2020, more or less unchanged from 20 years ago (19 per cent in 2000). Indonesia’s exports increasingly comprise mining products and other commodities. In 2021, four of Indonesia’s top-10 export products were raw materials, making up almost 50 per cent of Indonesia’s total exports. This data shows Indonesia has become more dependent on exports of raw materials and less focused on a diverse range of sophisticated products – the opposite of what has happened in high-income countries.
Indonesia can take steps to reverse this. One such step was taken during the B-20 Summit in Bali in November 2022, when Indonesian President Joko Widodo and Australian Prime Minister Anthony Albanese discussed possible cross-border commercial partnerships to increase the access of Indonesian electric vehicle (EV) battery manufacturers to Australian lithium. While Indonesia has abundant domestic nickel supplies for EVs, 40 per cent of the global supply of lithium is in Australia. A cross-border partnership that allows Indonesian EV manufacturers to gain easier access to Australian lithium is likely to support Indonesian competitiveness and efforts to produce more sophisticated EV batteries in Indonesia.
Indonesia could make similar moves to access foreign technology and human capital. The production of sophisticated products relies as much, if not more, on know-how, services and skills as it does on raw materials. Consider the latest high-tech hand phone or aircraft: to be internationally competitive these need research and development, design and other knowledge-based inputs, often sourced from multiple countries spread across the globe.
A focus on services and skills to support industrial transformation, rather than on commodities, will also increase resilience. Commodities can be depleted within a decade while adaptive, acquired skills can be transferred to a younger workforce and continuously upgraded.
Furthermore, a skills perspective to upgrading and diversifying products and services supports cross-government and business coordination and a more holistic, inclusive development approach. Broader skills-based approaches mean that education systems need to deliver industry-ready technical skills and knowledge through vocational and other forms of training, including from international partners and skills providers. The success of Malaysia in the 1980s shows just how important industry-led TVET education is with a strong focus on the fields of engineering, trade and services to upgrade its industrial capability.
On skills, there is a connection with Australia that illustrates a proactive, positive approach taken by the Indonesian Government. The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) between the two countries places a strong emphasis on mobility and skills exchange. It specifically helps Indonesian businesses, large and small, to address their skills gaps with more predictable levels of access to Australian skills and education providers. This use of international agreements to stimulate skills and education exchange, in support of a broader upgrade of manufacturing and industrial capability, could be replicated going forward with other trade and investment partners.
The success of the G-20 in 2022 demonstrated Indonesia’s finesse in continuously advancing global economic and political dialogue. The G20 laid the foundation for Indonesia’s role as ASEAN Chair this year and the recent ASEAN summit in Labuan Bajo with the theme ‘The Epicentrum of Growth’. To achieve its aspiration to be a high-income country by 2045, Indonesia should leverage these international engagements for easier access of foreign goods and services inputs, skills, technology and know-how for the greatest benefit of its businesses. Think of it as investing for the decades ahead.
M. Rizqy Anandhika is an economist with the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) Economic Cooperation Program, Katalis. The views expressed in this article are his own and do not reflect the views of the Indonesian or Australian governments.
