To boost growth, Prabowo must reignite Indonesia’s manufacturing sector, adopt green technologies
WITH Indonesia’s Constitutional Court rejecting challenges from the two losing candidates at the Feb 14 election, the path is finally clear for president-elect Prabowo Subianto and his deputy Gibran Rakabuming Raka to begin the long process of forming a new government.
This new administration, which will take office in October this year, will have many pressing tasks to deal with, such as navigating geopolitical uncertainties in the Pacific Ocean, attracting greater foreign investment and boosting the domestic manufacturing sector.
Tellingly, Prabowo’s first overseas trips as Indonesia’s next leader were to China and Japan, two major investors and trade partners that have been competing for large infrastructure projects in Southeast Asia’s largest economy.
China is the second-largest investor in Indonesia, after Singapore, and has been investing heavily in everything from nickel smelters to electric vehicles.
Japan – the fourth-largest investor in Indonesia and the third-largest trading partner – has been a major investor in the nation’s manufacturing sector over the years.
Bold targets
Prabowo has promised to achieve annual growth of 7 to 8 per cent under his leadership, as he continues the push for the country to reach developed status by 2045.
However, over the past five years, despite massive spending on infrastructure development and strong commodity prices, gross domestic product growth has stagnated at 5 to 5.5 per cent.
The International Monetary Fund has forecast that Indonesia will experience 5 per cent growth for this year and 2025. The World Bank’s prediction is not too far off, at 4.9 per cent growth for both 2024 and 2025.
The question, then, is how will Prabowo ignite economic growth, and what are the policies that will help to drive this growth?
With global geopolitical tensions expected to intensify in the coming years, most economists
Prabowo has promised to achieve annual growth of 7% to 8% under his leadership, as he continues the push for the country to reach developed status by 2045.
are of the view that additional growth will have to come from domestic demand and increased consumption spending.
Indonesia will need to attract significant foreign investments, especially from Western economies, to fuel growth.
Hence, much will depend on how Prabowo will achieve the delicate balance of maintaining strong ties with both the US and China. Given his military background, perhaps he will be more adept at wooing both Asian and Western
investors as he strives to improve Indonesia’s defence capabilities.
At several dialogue sessions since the election, Prabowo argued that under his leadership, Indonesia will pursue a more open foreign policy and fair trade over free trade. Hidden in that statement is a desire to protect vulnerable sectors from imports that in the past have severely affected local industries.
Imports and exports
While the focus has been on reducing imports, it is worth noting that Indonesia’s exports have also declined in the last few years, due to falling manufacturing output and President Joko Widodo’s move to ban the export of raw minerals.
According to the Coordinating Ministry for Economic Affairs, the total value of exports in 2023 amounted to US$258.8 billion, down 11.3 per cent from the previous year. Imports over the same period reached US$221.9 billion, down 6.6 per cent from 2022.
To boost exports, Indonesia will have to attract investments, both at home and from abroad, in key sectors such as manufacturing, energy, agriculture, finance and education.
To create jobs and boost exports, Prabowo’s government will need to address the impact of the “deindustrialisation” of the economy since 2002, following the fallout from the Asian financial crisis.
Indonesia’s industrial landscape has in fact been hollowed out, evident in the declining proportion of manufacturing industries to the overall economy since 2002, based on data from the Cabinet Secretariat.
This decline has affected production output and employment, leading to a fall in the value added by the manufacturing sector. In the last 15 years, Indonesia’s proportion of manufacturing to GDP has been among the lowest in Southeast Asia – contributing only 18.3 per cent in 2023, compared to 27.8 per cent in 2008.
To reverse this trend, the new government will have to prioritise investments in the manufacturing sector by easing certain import restrictions. More importantly, it needs to improve the quality of the workforce through education and skills upgrading.
Indonesia can no longer compete in low-end, labour-intensive industries, given the rise of regional players such as Vietnam and Bangladesh. To revive the manufacturing sector, the government will need to foster a conducive environment for innovation and entrepreneurship.
This will also entail investments in green technology and renewable energy; in artificial intelligence and greater automation; and a reduction in highly polluting industries. It will also mean improving the quality of the country’s human capital and increasing productivity.
According to the World Economic Forum, with countries across the world competing for the estimated US$5 trillion needed in investments to transition to sustainable growth, the race is on for govern ments and private corporations to capture a piece of this enormous pie.
Thinking outside the box
To succeed, the new government must develop and design a new bold industrial policy. Indonesia is rich in natural resources, but it lags in innovation and research.
This is an area where the Prabowo government must think outside the box, and partner with global companies and academic institutions in order to move towards a low-carbon economy.
With just five months to go until Prabowo is sworn in, Indonesia seems poised to enter a new transformative era, one characterised by sustainable growth, low-carbon industries and a higher quality of life.
The challenge for the country’s new leaders is to grasp the emerging opportunities before the ship sails.