8.3 Back-and-Forth Industrial Development
8.3.2 Impact of Natural Resource Booms
In the last fi ve decades, Indonesia has experienced two boom periods induced by price surges in natural resources. One was the oil boom of 1974–1982, which occurred as a result of OPEC’s decisions to raise crude oil prices in 1973 and 1978, and the other was the commodity boom of 2002–2011,which was driven by increasing demand in Asia’s emerging markets, especially China. During the fi rst boom period, Indonesia was in the fi rst half of the developmental regime, and during the second it was in the midst of post-developmental democratization. Th is section exam- ines the impact of these booms on industrial development in Indonesia under diff erent types of political setup.
Figure 8.7 shows Indonesia’s terms of trade since 1968. Th e colored periods indicate upward phases in terms of trade; these phases mostly overlap with boom periods. Th e improvement in the terms of trade started before the booms, while Indonesia was recovering from serious crises—the economic failure of the Soekarno regime in 1962–1966, and the Asian currency crisis followed by the fall of the Soeharto regime in 1997–1998.
According to the logic of the model, the rise in terms of trade can cause (a) deindustrialization in nonnatural resource industries, and (b) a quantitative expansion of low-processed natural resource industries. If
there is institutional support, however, investment can be diverted into (c) natural resource–processing industries and (d) nonnatural resource industries.
A salient phenomenon common to the two boom periods was the quantitative expansion of low-processed industries. In the oil boom, crude petroleum accounted for 82 % of Indonesia’s total exports in 1981–1982, the largest share recorded by Indonesia’s top export items (Fig. 8.6 ). Oil revenue reached 71 % of fi scal revenue at its peak in 1981, remaining above 50 % during 1974–1985 (Sato 2010 , p. 89). Th is struc- ture was typical in petroleum-exporting countries.
During the commodity boom in the 2000s, coal and crude palm oils (CPOs) leaped to the front as a new export leader. Indonesian coal, which is low-graded with low energy effi ciency and has hardly ever been regarded as competitive, dramatically increased production for export (mainly to China), and Indonesia overtook Australia as the world’s larg- est coal exporter. Indonesia also overtook Malaysia in 2006 as the world’s largest producer-exporter of CPOs. Booming resources were not limited
Fig. 8.6 Changes in the composition of resource-based, labor-intensive, and capital-intensive goods in Indonesia’s manufacturing industry, 1985–2000 (Source: Prepared by the author based on data from Hayashi ( 2005 ) using input–output tables)
6-a Manufacturing Production 6-b Manufactured Exports
2.2
3.9 5.7
5.2 6.8
9.2 9.8
13.2
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1985 1990 1995 2000
Capital-intensive
Labor-intensive
Resource-based
Oil & gas refinement
Total Mfg as % of total producon
(27%) (31%) (33%) (39%)
2.6 10.3
14.4
14.5
4.7 6.4 13.2
22.0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1985 1990 1995 2000
Capital-intensive
Labor-intensive
Resource-based
Oil & gas refinement
Total Mfg as % of total exports
(20%) (38%) (48%) (57%)
to coal and CPOs. Th e top 10 export items in 2011, the last and the peak year of the commodity boom, were dominated by low-processed natural resources, including the two items categorized as manufactured goods—that is, copper and unwrought tin (Table 8.3 ). Th e fact that 7 items, except traditional oil and gas, were new entrants in the top 10 in the 2000s (see Table 8.2 for a comparison) demonstrates how rapidly these minerals and primary commodities expanded their production and export quantities.
A distinct diff erence between the two boom periods was the trend in the manufacturing sector’s share of gross domestic product (GDP) (Fig.
8.8 ). During the oil boom, while the mining sector expanded drastically,
Fig. 8.7 Index of terms of trade in Indonesia, 1968–2013 (2010 = 100) (Source:
Prepared by the author based on data from Trade Index Numbers for Terms of Trade by BEC, IDE ( www.ide.go.jp/English/Data/Trade/index.html ))
0 20 40 60 80 100 120 140 160
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Oil Boom Commodity Boom
the manufacturing share in GDP continued to increase constantly. Th e manufacturing share declined substantially in the 2000s, even though the expansion of natural resource industries (i.e., mining and agriculture) was milder than it was during the oil boom. Th is indicates that Indonesia was deindustrializing. 13
Th ese booms took place in diff erent institutional settings. Th e oil boom occurred during Soeharto’s authoritarian developmental regime.
Th e government absorbed oil-export revenue from the state-owned oil company, Pertamina, into the national treasury. Th is revenue was then diverted through the fi scal channel into public investment in infrastruc- ture and capital investment in SOEs engaged in capital-intensive import- substitution industries (such as fertilizer, steel, and aluminum) and capital-intensive resource-processing industries (such as cement, paper, pulp, oil refi ning, and petrochemicals). It was also diverted through the
13 Th e argument depends on the defi nition of deindustrialization. Aswicahyono and Hill (2015) question the view that Indonesia was deindustrializing, by the reason that the manufacturing value added was still growing in absolute terms, though getting slower, and that its share in GDP was at the higher level than countries with similar per capita income.
Table 8.3 The top 10 export items of Indonesia, 2011 Item Value ($bil) % of total
1 Coal 26 13
2 Natural gases 23 11
3 Palm oil 17 8
4 Crude petroleum oils 14 7 5 Natural rubber 12 6
6 Copper ores 5 2
7 Palm kernel oil, copra 3 2 8 Petroleum oil products 3 1
9 Copper* 3 1
10 Unwrought tin* 2 1 Top 10 items 107 52 Total exports 204 100 Note: Items with an asterisk is manufactured goods.
* is processed resource-based goods
Source: Prepared by the author based on data from International Trade Centre, Trade Map.
fi nancial channel, in the form of state bank-subsidized loans, into invest- ment and working capital in a wide range of manufacturing industries in the private and SOE sectors. Under these state-led institutions, (a) dein- dustrialization did not take place, because (b) a quantitative expansion of the oil industry, (c) investment in natural resource–processing indus- tries, and (d) investment in nonnatural resource industries progressed con- currently. Th e process of industrialization, however, involved costs of state intervention in sustaining less competitive industries and supplying prod- ucts with lower quality and higher prices compared to potential imports.
Fig. 8.8 Rise and fall of Indonesia’s manufacturing shares of GDP, 1970–2014 (Source: World Bank, World Development Indicators, and BPS Indonesia)
0 10 20 30 40 50
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Authoritarian Developmental Regime (Soeharto Regime)
(%)
Agriculture, Fishery, Forestry
Mining
Manufacturing Democracy
Service
Transion Period
Oil Boom Commodity
Boom
Th e commodity boom of the 2000s, in contrast, occurred during an economic democratization, with little to no state intervention. Th e fall of President Soeharto in 1998 had triggered a fundamental institutional change from authoritarianism to democracy, and from power centraliza- tion to decentralization. In the context of industrial development, there were signifi cant changes in at least three aspects. First, centralized insti- tutions that had been established by the regime for pembangunan were dismantled. Bappenas was no longer the headquarters of national devel- opment; the Ministry of Finance assumed a unifi ed budgeting function;
and Bank Indonesia was ensured its independence by the new Central Bank Law (Law No. 23/1999). Top-down decision-making had come to be seen as old-fashioned, so the national development programs did not set any numerical targets during 1999–2004.
Second, there were no longer any state-led institutions in place to absorb the revenue of the boom and to divert it into investment. Since the booming sector was dominated not by a single SOE but mostly by private companies of all sizes, revenue could not fl ow directly into the state treasury as it did during the oil boom. In a sort of laissez-faire setting, it was natural for local private investors to look for quick-earn- ing, low-risk businesses—particularly in the exploitation and export of booming natural resources in low-processed forms—rather than invest- ing in processing.
Th ird, the development of regional Free Trade Agreements(FTAs) low- ered trade barriers, not only for the outfl ow of natural resources but also for the infl ow of low-priced manufactured goods, especially from China.
As a consequence of these settings, Indonesia’s industrial development moved backward from Stage III, where it had spent most of the 1990s, to Stages I and II. Its natural resource industries regressed to Stage I, while its nonnatural resource industries regressed to Stage I, or barely held on in Stage II, owing to an increasing dependency on imports. Th us, unlike during the oil boom when import substitution progressed, dur- ing the commodity boom, (a) industrialization regressed, (b) the quan- titative expansion of the booming sector commonly occurred, and (c) investment in natural resource–processing industries, and (d) nonnatural resource industries was stagnant.
Th e diff erence in institutional settings that aff ected the industrial performance under the booms, however, does not extend to a dif- ference between authoritarianism and democracy. During President Susilo Bambang Yudhoyono’s second term (2009–2014), the gov- ernment changed gear and moved toward policy interventionism. In 2011, it formulated its 15-year economic development plan 14 ; at the plan’s launch, the president stated that ‘an invisible hand’ of the mar- ket was important but ‘a visible hand’ of the government was also indispensable in accelerating balanced economic development. Th e excessive slant toward low-processed natural resource exports suggests that the government rediscovered the need for ‘developmentalism under democracy’. Th e government coordinated with the business community and local governments in formulating the long-term eco- nomic development plan; started the strategic invitation of foreign investment (including Unilever for palm oil-based oleochemicals, Barry Callebaut for cacao processing, POSCO for blast-furnace steel, and Japanese automobile manufacturers for the national Low-Cost Green Car program); introduced export substitution policies (e.g., banning the export of raw mineral ores, obligating mineral min- ing companies to invest in refi ning, and introducing a progressive export-tax exemption that has higher rates on CPOs and lower rates on processed palm oils); and provided tax incentives for investment in natural resource–processing industries, labor-intensive export indus- tries and capital-intensive industries. From 2012, when international commodity prices dropped and Indonesia’s export value fell sharply, manufactured goods such as motor vehicles, plywood, footwear, and fatty acids and fatty alcohols (oleochemical products processed from CPO) once again appeared among the country’s top 10 export items (Sato and Damayanti 2015 , pp. 177–81). It is likely that Indonesia will soon enter a third wave of industrialization, if appropriate insti- tutional arrangements are in place to support reindustrialization (Table 8.1 ).
14 Th e Master Plan for Acceleration and Expansion of Indonesia’s Economic Development 2011–2025.