Policies to Support the Development of Indonesia’s Manufacturing Sector during 2020–2024: A Joint ADB–BAPPENAS Report

Contents
Tables, Figures, and Boxes
Foreword
Acknowledgments
Contributors
Abbreviations
Overview
Part I: Structural Transformation and the Relevance of the Manufacturing Sector
	Indonesia’s “New Growth Normal”: The Need to Transform the Economy during 2020–2024
		Introduction
		The Need to Understand the Roles of Diversification, Sophistication, Complexity, and Structural Transformation
		Moderate Optimism for 2020–2024
	Indonesia’s Potential and Balance-of-Payments-Constrained Growth Rates: The Role of Manufacturing
		Introduction
		Indonesia’s Potential Gross Domestic Product Growth Rate
		The Components of the Potential Growth Rate
		A Shift and Share Analysis of the Change in Labor Productivity
		What Determines Indonesia’s Implied Labor Productivity Growth?
		Indonesia’s Balance-of-Payments-Constrained Growth Rate
		The Determinants of Indonesia’sBalance-of-Payments-Constrained Growth Rate
		Conclusions
		Appendix 2.1
		Appendix 2.2
		Appendix 2.3
		Appendix 2.4
		Appendix 2.5
	Manufacturing as the Engine of Growth
		Introduction
		Understanding the Role of Manufacturingin Development: Two Important Questions
		Manufacturing as the Engine of Growth
		The Empirical Literature on the Engine of Growth Hypothesis
		The Recent Deindustrialization Debate
		Appendix 3.1
		Appendix 3.2
	A Historical Note on the Difficult Transformation of an Oil-Rich Economy
		Introduction
		Indonesia’s Economy since the Mid-1960s: A Quick Tour
		Indonesia’s Incipient Industrialization
		The Effects of the Asian Financial Crisis of 1997–1998 on Indonesia’s ManufacturingSector
Part II: Indonesia’s Manufacturing Sector
	Indonesia’s Manufacturing: A Sectoral Overview
		Introduction
		Employment: Persons Engaged
		Value Added
		Labor Productivity
		Gross Exports
		Conclusions
		Appendix 5.1
	Indonesia’s Manufacturing: A Firm-Level Perspective
		Introduction
		Firm-Size Distribution of the Manufacturing Sector
		Productivity, Wages, and Agglomeration in Manufacturing
		Conclusions
	Indonesia’s Reform Packages, Incentives to the Manufacturing Sector, and Industry 4.0
		Introduction
		Reform Packages under the Jokowi Administration
		Review of the Existing Fiscal Incentives to Promote Manufacturing
		Manufacturing in the Age of Industry 4.0
		Conclusions: An Assessment of Reforms, Incentives, and Industry 4.0
		Appendix 7.1
	Constraints to Firm Growth: Evidence from Indonesian Manufacturing Firms
		Introduction
		Descriptive Evidence: Survey Data on Indonesian Firms
		Constraints to Growth of Indonesia’s Manufacturing Firms: An Empirical Assessment
		Conclusions
		Appendix 8.1
	Developments in Indonesia’s Participation in Global Value Chains
		Introduction
		Indonesia’s Participation in Global Value Chains: An Aggregate View
		Sectoral Rates of Global Value Chain Participation
		Level of Global Value Chain Participation
		Indonesia’s Comparative Advantages in Global Value Chains
		Contributions to RegionalGlobal Value Chains
		Conclusions
		Appendix 9.1
	Complexity, Global Value Chain Participation, and Upgrading in Indonesia
		Introduction
		The Resource-Based Nature of Indonesia’s Manufacturing
		Product Complexity of Indonesian Exports
		Product Complexity and Global Value Chains
		Pockets of High-Complexity Exports
		Indonesia’s Potential Exports
		Conclusions
		Appendix 10.1
Part III: Prospects for Fiscal and Monetary Policy Coordination to Support Growth and Industrialization in Indonesia
	How Can Fiscal and Monetary Policy Coordination Support Growth and Industrialization in Indonesia?
		Introduction
		Indonesia’s Sector Financial Balances
		Indonesia’s Domestic Private Sector Balance and the State of the Macroeconomy
		Flow-of-Funds-Based Interdependence of Monetary and Fiscal Policies
		Understanding Indonesia’s Macroeconomic Policy Mix
		Conclusions
		Appendix 11.1
	Indonesia’s Nonfinancial Corporate Sector, Financial Fragility, and Macroeconomic Policy Consistent with Faster Growth
		Introduction
		Foreign-Currency-Denominated Liabilities for Indonesia’s Corporate Sector
		Corporate Sector Financial Positions and Interest Rate Sensitivity in Indonesia
		Conclusions
Part IV: Growth during 2020–2024 and Recommendations to Transform Indonesia’s Economy
	How Fast Can Indonesia Realistically Grow during 2020–2024? Potential and Balance-of-Payments-Constrained Growth Rate Scenarios
		Introduction
		Potential Gross Domestic Product Growth Scenarios for 2020–2024
		Balance-of-Payments-Constrained Growth Rate Scenarios
		Conclusions
	Modern Industrial Policy
		Introduction
		Modern Industrial Policy
	Recommendations to Transform Indonesia’s Economy during 2020–2024
		Introduction
		Increase Potential and Balance-of-Payments Constrained Growth Rates
		Recommendations for the Manufacturing Sector
		Improve Coordination of Monetary and Fiscal Policies to Support Higher Growth
References