Kiki Verico: Manufacturing Growth Vital for Indonesia’s Economy


Manufacturing Growth Vital for Indonesia’s Economy

by: Kiki Verico, Ph.D., Adviser to the Finance Minister for industry and international trade and lecturer at the School of Economics and Business of University of Indonesia. The views expressed here are his own. (10/5/2021) РStatistics Indonesia (BPS) reported on Wednesday Indonesia’s economy contracted by 0.74 percent year-on-year (yoy) in the first quarter and by 0.96 percent quarter-on-quarter (which compares to minus 2.2 percent in the last quarter of 2020). The economy continued to recover from its worst contraction of 5.32 yoy in the second quarter of 2020. Some indicators show that the economy could achieve positive growth in the second quarter if significant progress is made in the fight against the pandemic through a faster vaccine rollout and stronger enforcement of health protocols.

Some indicators in the first quarter of 2021 demonstrate that Indonesia has been experiencing a supply-side recovery. The annual growth of exports at 6.74 percent was higher than that of imports at 5.27 percent. Furthermore, exports also increased annually from minus 7.21 percent while imports recovered from minus 13,52 percent in the fourth quarter of 2020. These recoveries confirm that the supply side of Indonesia’s economy has begun to awaken from its continuous low growth.

This is also reflected in several other indicators. Indonesia’s manufacturing PMI shows positive progress from 52,2 in January to 53,2 in March. The automotive industry has recovered, as car sales turned from an annual decline of 34 percent in January to growth of 10 percent in March. The electronics industry, in particular communication devices and computers, also made progress in March.

However, for its inflation indicator, labor-intensive manufacturing, such as clothing and footwear, remain weak due low demand for durable goods. Nevertheless, demand for clothing and footwear is expected to increase in the second quarter due to Idul Fitri celebrations. They may also achieve accelerated growth like automotive and electronic sales.

In sum, the manufacturing sector has improved during the first quarter of 2021 and may boost Indonesia’s economy to grow more this year. Data for the first quarter of 2021 confirms that the manufacturing sector has improved from minus 3,14 percent yoy in the fourth quarter of 2020 to minus 1,38 percent yoy in the first quarter of 2021. In addition to supply-side recovery, annual government expenditure representing counter-cyclical efforts to stimulate the economy also increased to 2,96 percent from 1,76 percent during the fourth quarter of 2020.

Looking at the performance of different sectors during the global pandemic, Indonesia’s economy can be likened to small cars pullinga big truck. These “small cars” are the sectors of health, social activities and information and communication technology, which have outpaced the overall economy. Meanwhile, the big truck is the manufacturing sector, which is growing at a below ¬≠average pace, Indonesia’s economy could grow faster once the manufacturing sector starts to recover and can run by itself.

Data shows that, since 2005, Indonesia’s manufacturing sector has been growing below overall economic growth. Though this growth is above the minimum economic growth needed to create jobs, it remains below its potential, This condition is also reflected in Indonesia’s external balance, both in current account (CA) and foreign direct investment (FDI) inflows. My estimation using the Hodrick-¬≠Prescott filter shows that Indonesia’s CA, which increased from 1998 to 2004, has been declining since 2005. A similar situation is also seen in FDI inflows, which have been growing below the potential since 2005.

Even before the pandemic, Indonesia’s manufacturing sector had been underpressure, particularly since 2005. The manufacturing sector is the key to economic development. The productive progress in the manufacturing sector in this first quarter is important for Indonesia’s persistent economic recovery. As expected, the Indonesian manufacturing sector continued to improve this year, and this is the game changer for Indonesia’s economic growth.

In April this year, BPS also released Indonesia’s input¬≠output (10) table of 2016. This table is useful to calculate, for instance, forward and backward linkages. My comparative linkage calculations for 10 2010 and 2016 show that some of Indonesia’s manufacturing products, sue h as tin ore, processed flour, processed wood, nonmetallic materials, other machines, and equipment experienced an economic transformation.

The manufacturing sector recovery also depends on a recovery of global production networks (CPNs). My calculation utilizing 15 selected macroeconomic indicators and Indonesia’s export destination shares shows that Indonesia’s manufacturing recovery follows the GPNsand involves China, Japan, South Korea and ASEAN. The necessary condition for these Asian manufacturing production networks lies in how these countries contain the global pandemic. Hereafter, the sustainable economic recovery fulfills the new normal life that applies to every country.

The CPN recovery mainly affects medium ­ to large­-scale manufacturing, while the micro­ and small­ size manufacturers need e-commerce platforms, The latter help micro and small manufacturing industries obtain more raw materials and spare parts. E-commerce platforms reduce both the offline meetings and search costs, making them a good fit for a pandemic situation that limits human physical movement, GPNs and e­commerce work hand-­in-hand to support a manufacturing recovery both at the global and national level.

Finally, the challenge lies with private consumption, which makes up the largest share of Indonesia’s gross domestic product (GD P), Since the pandemic, consumption has contracted more than the economy as a whole. In the first quarter of 2021, consumption contracted 2,23 percent, which was better than the fourth quarter of 2020 but remained weaker than the total economic performance. Consumption growth is a game changer for Indonesia’s economic recovery, but it is affected by how well the pandemic is contained.

In addition, Indonesia’s economic growth depends significantly on Java and Sumatra, which account for the largest countributions to Indonesia’s economy at 58,7 percent and 21,5 percent, respectively. In the first quarter of 2021, the economic growth of Java and Sumatra remained below total economic growth. Amid the global pandemic, both regions remain in deeper contraction than the country overall, The economic recovery of Java and Sumatera, therefore, will be another game changer for Indonesia’s economic recovery.

Continuous improvement in manufacturing, an increase in consumption and accelerated growth of Java and Sumatra must be achieved during the second quarter, and pandemic containment should be strengthened amid the increasing infection numbers in several countries, Indonesia must apply comprehensive efforts both in public health and economic policy going forward.