Industrial Development Targets According to Industrial Policy
Planning is essential. As the saying goes:
“A man who does not plan long ahead will find trouble at his door.” – Confucius, Chinese philosopher
Industrial development is no exception. Indonesia has several agencies whose function is planning. We have the National Development Planning Agency (Bappenas). We also have various Ministries, each conducting their own planning. The Ministry of Industry is no exception, maintaining numerous planning documents grouped under the umbrella of Industrial Policy.
Ministry of Industry Planning
These documents consist of multiple layers, from the most general (laws) to long-term plans (RIPIN) and medium-term plans. Some of the text in these documents is rather difficult to digest and uses fairly general language. There may be more specific implementing regulations, but those aren’t available on the page. If you’re looking for Ministry of Industry regulations, check jdih.kemenperin.go.id.
I admit I’m not great at parsing general language. Fortunately, several of these documents contain tables and figures that we can use as benchmarks. Some include performance indicators or targets for the Ministry of Industry. Now that’s something I can work with.
There are 5 PDF files at the Industrial Policy link, but not all contain quantitative indicators. I’ll skip Law 3/2014 (pdf) for now, as it’s too general and contains no indicators (though it’s still an interesting read if you’re into Indonesia’s industrial policy). I’ll also skip the Ministry of Industry Strategic Plan (Renstra) (pdf), enacted in 2015. I’m skipping the Renstra precisely because it’s too detailed for a short blog post.
First, let’s discuss RIPIN (pdf). According to RIPIN, there are 8 industrial development targets for Indonesia, with 4 milestones: 2015, 2020, 2025, and 2035 (RIPIN was enacted in 2015). RIPIN’s vision extends to 2035 – quite long-term. I illustrate this in Table 1.
Table 1. Industrial Development Targets 2015-2035
| No | Industrial Development Indicator | Unit | 2015 | 2020 | 2025 | 2035 |
|---|---|---|---|---|---|---|
| 1 | Non-oil & gas industrial sector growth | % | 6.8 | 8.5 | 9.1 | 10.5 |
| 2 | Non-oil & gas industry contribution to GDP | % | 21.2 | 24.9 | 27.4 | 30.0 |
| 3 | Industrial product export contribution to total exports | % | 67.3 | 69.8 | 73.5 | 78.4 |
| 4 | Number of workers in industrial sector | million people | 15.5 | 18.5 | 21.7 | 29.2 |
| 5 | Percentage of workers in industrial sector relative to total workers | % | 14.1 | 15.7 | 17.6 | 22.0 |
| 6 | Ratio of industrial sector raw material imports to non-oil & gas industrial GDP | % | 43.1 | 26.9 | 23.0 | 20.0 |
| 7 | Industrial sector investment value | Rp trillion | 270 | 618 | 1,000 | 4,150 |
| 8 | Percentage of industrial value added created outside Java | % | 27.7 | 29.9 | 33.9 | 40.0 |
Next is the National Industrial Policy (KIN) (pdf), enacted in 2018. KIN has identical indicators to RIPIN but with a shorter time horizon. In other words, KIN can be considered a direct derivative of RIPIN. See Table 2.
Table 2. National Industrial Development Targets 2017-2019
| No | Industrial Development Indicator | Unit | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| 1 | Non-oil & gas industrial sector growth | % | 5.2-5.4 | 5.4-5.8 | 5.7-6.2 |
| 2 | Non-oil & gas industry contribution to GDP | % | 18.4-18.7 | 18.6-19.1 | 18.8-19.4 |
| 3 | Industrial product export contribution to total exports | % | 76.8-77.0 | 77.3-77.5 | 77.6-78.0 |
| 4 | Number of workers in industrial sector | million people | 16.2-16.3 | 16.5-16.7 | 16.8-17.1 |
| 5 | Percentage of workers in industrial sector relative to total workers | % | 13.4-13.5 | 13.7-13.8 | 14.1-14.2 |
| 6 | Ratio of industrial sector raw material imports to non-oil & gas industrial GDP | % | 36.1-38.6 | 32.8-35.3 | 29.8-32.3 |
| 7 | Industrial sector investment value | Rp trillion | 325-350 | 395-420 | 480-500 |
| 8 | Percentage of industrial value added created outside Java | % | 28.4-28.5 | 28.8-29.0 | 29.4-30.0 |
We can see continuity between Table 2 and Table 1.
Are these targets realistic and well-targeted?
The 8 targets seem reasonably sensible. We naturally want high, equitable, and sustainable economic growth. It’s fitting for the Ministry of Industry to be tasked with boosting industrial sector growth. The government also wants to reduce dependence on commodity exports, as reflected in target 3. Target 6 aims to reduce the import ratio – good that they target the ratio rather than CIF value or other nominal measures.
These indicators appear quite ambitious, given the Ministry of Industry’s limited authority. Looking at some indicators, other agencies come to mind first. For employment and investment, issues like legal certainty, inconsistent local-level regulation enforcement, and similar matters seem more relevant to other agencies. It’s hard to achieve development equity (target 8) while still struggling with basic infrastructure such as energy, ports & logistics, and even education and healthcare in the regions. None of these fall under the Ministry of Industry’s purview.
In fact, the Ministry of Industry’s actual authority seems disconnected from most of the indicators above. Powers like setting the Indonesian National Standard (SNI) or regulating Local Content Requirements (TKDN) are difficult to link to national economic or industrial growth indicators. SNI adds costs that industries must bear, even for products that already have industry-recognized certifications. TKDN restricts supply chains, potentially increasing prices or reducing product quality, at least in the long run.
Perhaps indicators more aligned with TKDN or SNI would be things like “value added of domestically produced goods” or “consumer safety and satisfaction with SNI-certified products.” But connecting these two authorities to the 8 KIN targets seems difficult.
The Ministry of Industry also does various other things, such as subsidizing training for prospective industrial employees and developing small and medium industries. Check the Renstra for details.
My argument could well be wrong. Rather than speculating as I’ve been doing, the impact of policy on these indicators could be a thesis topic in economics (and probably other fields too). Many colleagues at the Ministry who are studying economics often ask me about thesis topics, and I always say “there are tons of topics for the Ministry.” But well, you know how it goes.
Anyway, the indicators are set. What we need to do is evaluate them. I tried to replicate Table 2 with current data. Unfortunately, I couldn’t fill in all the data. See Table 3.
Table 3. Actual Industrial Development Outcomes 2017-2019
| No | Industrial Development Indicator | Unit | 2017 | 2018 | 2019 |
|---|---|---|---|---|---|
| 1 | Non-oil & gas industrial sector growth | % | 4.85 | 4.77 | 4.34 |
| 2 | Non-oil & gas industry contribution to GDP | % | 17.88 | 17.62 | 17.58 |
| 3 | Industrial product export contribution to total exports | % | 81.7 | 79.9 | 81.6 |
| 4 | Number of workers in industrial sector1 | million people | 17.01 | - | - |
| 5 | Percentage of workers in industrial sector relative to total workers1 | % | 14.05 | - | - |
| 6 | Ratio of industrial sector raw material imports to non-oil & gas industrial GDP2 | % | - | - | - |
| 7 | Industrial sector investment value | Rp trillion | 274.8 | 222.3 | 147.9 |
| 8 | Percentage of industrial value added created outside Java3 | % | - | - | - |
Sources: BPS, Ministry of Trade, BKPM
1: BPS data only available through 2017, likely due to a change in definitions.
2: I couldn’t determine the exact definition. My own calculation yielded 60-70%, which doesn’t seem right. Probably my definition is wrong.
3: BPS data only available through 2015.
From Table 3, most indicators appear to have missed their targets, except for employment. Does this mean the Ministry of Industry has failed? Should it be shut down? Its budget reduced? Not necessarily. As I argued, it’s difficult to expect much from the Ministry of Industry’s current authority and budget alone, especially given current economic conditions.
Take investment as an example. Table 3 shows investment declining continuously. If this trend continues, RIPIN targets will obviously be unmet. But when investment weakens, do we point fingers at the Ministry of Industry? The Investment Coordinating Board (BKPM) would be among the first blamed. Those who believe investment is weak because of high taxes would ask the Ministry of Finance to revise fiscal policy. Others convinced it’s due to uncompetitive labor costs would push the Ministry of Manpower to revise labor laws. The government recently even planned the Omnibus Law partly because of investment concerns. So it’s hard to evaluate a Ministry using such broad indicators.
The Ministry of Industry seems to acknowledge that these trends aren’t ideal if Indonesia wants to become an advanced industrial nation by 2035. Perhaps that’s why there’s a 5th planning document.
The newest planning document is the Making Indonesia 4.0 Roadmap. Unlike other documents, this one has no legal standing (it’s not a Ministerial Regulation, Presidential Regulation, or anything else). But since it’s included in the Renstra and Industry 4.0 has been hugely hyped, I assume it’s the new plan from 2019 onward. Making Indonesia 4.0 targets 5 specific industrial sectors (unlike previous plans with many targets) and places even greater emphasis on improving human resource competency and attracting foreign investment.
What does the Making Indonesia 4.0 Roadmap contain? Since I’ve already written quite a lot here, I’ll discuss it in a future post. In the meantime, let’s hope this plan succeeds better than its predecessors.
Although it doesn’t have formal regulations yet, Making Indonesia 4.0 seems to be quite serious. Check out this Ministry of Industry ad on Tirto:
