Indonesia should reshape its industrial strategy to become more closely integrated into global production networks and enjoy the long-term benefits of growing global trade, says a new study from the Asian Development Bank (ADB) and the Islamic Development Bank (IsDB).
The study, The Evolution of Indonesia’s Participation in Global Value Chains, notes that Indonesia’s participation in global value chains declined between 2000 and 2017. Forward linkages, where the country’s intermediate products are exported for use in the production of final goods elsewhere, declined from 21.5% of total exports to 12.9%, while backward linkages, or the share of foreign value-added in Indonesia’s exports, dropped from 16.9% to 10.1%.
“Indonesia’s limited participation in global value chains means it doesn’t benefit from global trade growth to the same extent as its Asian neighbors and isn’t benefiting from trade redirection resulting from trade tensions between the United States and the People’s Republic of China,” said ADB Vice-President for Knowledge Management and Sustainable Development Mr. Bambang Susantono at the launch of the study. “Globalization of production helps economies and workers overall. It also raises awareness of the environment and climate change, contributing to the achievement of the Sustainable Development Goals.”
“Value chains have facilitated the participation of developing countries in advanced production processes without having the necessity to develop entire production ecosystems,” said IsDB President Mr. Hajjar. “Value chains have also entered the digital space, creating opportunities and challenges for individuals, firms, and nations. Such participation in global value chains has increased income and spurred economic progress in many developing countries which is why the IsDB prioritizes assisting its member countries enter specific global networks.”
The study makes four recommendations to support Indonesia’s participation in global value chains.
Forging stronger links among domestic industries would help firms to innovate, expand, and offer greater value to companies overseas. This can be done through coordinating industrial policies and addressing governance bottlenecks to help firms thrive.
Infrastructure investment is critical in an archipelagic nation like Indonesia to ensure efficient transportation of goods and people and fast transmission of information. Reliable energy is also needed, particularly for capital-intensive manufacturing firms. Good infrastructure can also attract investment in global value chain-related firms.
To manage the impact of technological change, Indonesia should consider labor policies that encourage agricultural workers to shift to other sectors and to ensure workers can upgrade their skills to remain relevant to industry needs.
Finally, Indonesia should seek to develop its innovation capacity by attracting foreign direct investment in non-extractive and research and development industries, notably those that are closely linked to other sectors within the domestic economy.