The Ministry of Industry Denies Indonesia is Experiencing Deindustrialization

The Ministry of Industry Denies Indonesia is Experiencing Deindustrialization
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The conversation around Indonesia’s potential early deindustrialization is heating up once again. Concerns have been raised due to a three-month contraction in the country’s Manufacturing Purchasing Manager’s Index (PMI) and the declining contribution of the sector to the nation’s gross domestic product (GDP). Despite this, the Ministry of Industry (Kemenperin) offers a contrasting viewpoint, rejecting the notion that Indonesia is heading into deindustrialization.

Kemenperin spokesperson, Febri Hendri Antoni Arief, pushed back on the claims. According to Febri, the term deindustrialization is not applicable to Indonesia current situation, as the manufacturing sector is still growing positively.

“We believe it’s not accurate to label the current state of the manufacturing industry as deindustrialization,” he said in a statement on Thursday (October 3, 2034).

Drawing from data by the Central Bureau of Statistics (BPS), Febri emphasized that Indonesia’s non-oil and gas processing sector showed year-on-year growth of 4.63% in the second quarter of 2024. This figure is higher than the growth observed in the same period last year.

For Kemenperin, this steady growth reflects the resilience of the national manufacturing industry. Even during the pandemic, manufacturing managed to maintain a positive growth rate of 4%-5% year-on-year. Febri also pointed out that the manufacturing sector’s contribution to GDP, while still below the 21% mark from a decade ago, is recovering to around 19%.

“From our perspective, it’s not accurate. We’re seeing major investments in various sectors, particularly in nickel downstreaming, which has surged by as much as 3,000% during President Jokowi’s administration,” Febri added.

He further highlighted the role of palm oil downstreaming, which has significantly boosted manufacturing value-added (MVA). In 2023, Indonesia’s MVA reached US$255 billion (Rp4,119 trillion), marking a 36.4% annual increase. This was a significant rise from US$187 billion the previous year.

“So, it’s not appropriate to say that the manufacturing industry is undergoing deindustrialization, or even early deindustrialization,” Febri reiterated.

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He also noted that the shift from manufacturing to services in developing countries is often due to structural changes. According to Febri, “This shift happens when per capita income reaches a certain level. It’s important to consider how manufacturing growth aligns with population trends in developing countries.”

Contrary to Kemenperin’s view, Deputy for Economic Affairs at the Presidential Staff Office, Edy Priyono, argued that early deindustrialization has indeed been a persistent issue. He explained that Indonesia’s manufacturing sector has been struggling with competitiveness, and this problem predates recent concerns. Speaking at a National Seminar hosted by Indef on Thursday (October 3), Edy pointed out that this trend has been ongoing for over two decades.

Edy stated that Indonesia has been grappling with early deindustrialization since 2001. Over the last 23 years, the manufacturing sector’s contribution to GDP has steadily declined, while other sectors, like services, have not experienced significant growth.

“The real issue isn’t just deindustrialization—it’s that we’ve lost competitiveness before reaching a mature industrial stage,” Edy explained. He noted that in developed countries, economic transitions from agriculture to industry and then to services occur naturally. However, in Indonesia, the manufacturing sector’s role in GDP has been shrinking, suggesting a premature decline.

Edy also referenced the country’s recent PMI data, which has remained in contraction for three consecutive months, with September 2024’s figure standing at 49.2. While the service sector is expanding, Edy argued that this growth doesn’t necessarily translate into improved welfare, presenting challenges for Indonesia’s future economy.

In light of these developments, Edy emphasized the need for urgent attention to strengthen Indonesia’s manufacturing sector, ensuring the country remains competitive in the global economy.