Industrialization in Indonesia since the 1970s

Introduction: During the period from the latter half of the 1980s until just before the Asian currency crisis in 1997, Indonesia’s economic development had drawn expectations and attention from various quarters, along with Malaysia and Thailand within the same Association of Southeast Asian Nations (ASEAN). In fact, the 1993 report by the World Bank, entitled “East Asian Miracle: Economic Growth and Public Policy,” recognized Indonesia as one of the East Asian economies with the strong economic performance, i.e. sustained economic growth (World Bank [1993]). And it was the manufacturing industry that had been the driving force behind Indonesia’s economic growth during that period. Since the 1997 outbreak of the Asian currency crisis, however, the manufacturing sector in Indonesia has been mired in a situation that rules out the kind of bright prospects it had emanated previously. The Indonesian economy is still in the developing stage, and in accordance with the history of industrial structural changes in other countries, Indonesia’s manufacturing industry can still be expected to serve as the engine of the country’s economic development. But is it really possible in an environment where economic liberalization and globalization are forging ahead? And, what sort of problems have to be dealt with to make it possible? To answer these questions, it is necessary to know the current conditions of Indonesia’s manufacturing sector, and to do that, it becomes important to think back on the history of the country’s industrialization. Thus, this paper is intended to retrace and unlock the track of Indonesia’s industrialization up until the establishment of the manufacturing sector in its present form, with the ultimate goal being to give answers to the above-mentioned questions. Subject to an analysis in this paper is the period from the installment of President Soeharto’s administration onward when industrialization of the modern industrial sector2 moved into high gear. 　　　The composition of this paper is outlined below. Section 1 first shows why it is important to examine import substitution and export orientation, both of which are used as the measures of the analysis in this paper, in tracking the history of the industrialization, and then discuss indicators of import substitution and export orientation as well as statistical data and resources needed to develop those indicators. Section 2 clarifies the status of the manufacturing industry among all industries by looking at the composition ratio of the manufacturing industry in terms of value added, imports and exports. Section 3 to 5 cover three periods between 1971 and 1995 and make an analysis of import substitution, export orientation and changes in the industrial structure for each period. Section 3 analyzes the period from 1971 through 1985, when Indonesia pursued the import substitution policy amid the oil boom. Section 4 covers the period from 1985 through 1990, when the packages of deregulatory measures were announced successively under structural adjustment policies made necessary by the fall in oil prices. Section 5 examines the period from 1990 through 1995, which saw the alternate shifts between the overheating of the economy by sharply rising investment by both domestic and foreign investors in the wake of the liberalization of investment, trade and financial services, and polices to cool down the economy. Section 6, which covers the 1995-1999 period straddling the economic crisis, is designed for an analysis of the changes in production trends before and after the economic crisis as well as the changes in the industrial structure. Section 7, after summing up the history of Indonesia’s industrialization examined in the previous sections, discusses problems found in respective sectors and attempts to present future prospects for the country’s manufacturing industry.

Transformation of the Financial Sector in Indonesia

Introduction : The source and deployment of finance are central issues in economic development. Since 1966, when the Soeharto Administration was inaugurated, Indonesian economic development has relied on funds in the form of aid from international organizations and foreign countries. After the 1990s, a further abundant inflow of capital sustained a rapid economic development. Foreign funding was the basis of Indonesian economic growth. This paper will describe the mechanism for allocating funds in the Indonesian economy. It will identify the problems this mechanism generated in the Indonesian experience, and it will attempt to explain why there was a collapse of the financial system in the wake of the Asian Currency Crisis of 1997. History of the Indonesian Financial system The year 1966 saw the emergence of commercial banks in Indonesia. It can be said that before 1966 a financial system hardly existed, a fact commonly attributed to economic disruptions like the consecutive runs of fiscal deficit and hyperinflation under the Soekarno Administration. After 1996, with the inauguration of Soeharto, a regulatory system of financial legislation, e.g. central banking law and banking regulation, was introduced and implemented, and the banking sector that is the basis of the current financial system in Indonesia was built up. 　　　The Indonesian financial structure was significantly altered at the first financial reform of 1983. Between 1966 and 1982, the banking sector consisted of Bank Indonesia (the Central Bank) and the state-owned banks. There was also a system for distributing the abundant public revenue derived from the soaring oil price of the 1970s. The public finance distribution function, incorporated in Indonesian financial system, changed after the successive financial reforms of 1983 and 1988, when there was a move away from the monopoly-market style dominated by state-owned banks (which was a system of public finance distribution that operated at the discretion of the government) towards a modern market mechanism. The five phases of development The Indonesian financial system developed in five phases between 1966 and the present time. The first period (1966-72) was its formative period, the second (1973-82) its policy based finance period under soaring oil prices, the third (1983-91) its financial-reform period, the fourth (1992-97) its period of expansion, and the fifth (1998-) its period of financial restructuring. The first section of this paper summarizes the financial policies operative during each of the periods identified above. In the second section changes to the financial sector in response to policies are examined, and an analysis of these changes shows that an important development of the financial sector occurred during the financial reform period. In the third section the focus of analysis shifts from the general financial sector to particular commercial banks’ performances. In the third section changes in commercial banks’ lending and fund-raising behaviour after the 1990s are analysed by comparing several banking groups in terms of their ownership and foundation time. The last section summarizes the foregoing analyses and examines the problems that remain in the Indonesian financial sector, which is still undergoing restructuring.

Perfecting the Catching-up: The Case of Taiwan's Motorcycle Industry

The final stage of the catching-up process has formidable hurdles. This paper examines the case of Taiwan’s motorcycle industry and shows how latecomers overcame the hurdles. In the early 1990s, the two largest motorcycle makers in Taiwan, Sanyang and Kwang Yang, had completed the catching-up process and became independent from Honda, on which they had technologically depended since the early 1960s. The requisite for independence was acquiring the capacity for product innovation. The two assemblers could cultivate technological capacity by investing abundant resources, which they accumulated in the protected market. It should be noted that although the market was protected and highly concentrated, it was also very competitive. Another condition was the solid local suppliers of parts and components. The local suppliers had also grown under the government’s industrial policies. However, their development beyond imitators can be attributed to their own initiatives.

Pakistani Migration to the United States:An Economic Perspective

The 9-11 attack on the US brought a set of changes in overseas migration from Pakistan. One such change is the sharp increase in remittances sent from the United States. The paper argues that the characteristics of remittances from the United States differ from those originating in the Middle East. Just as the overseas Pakistani communities are diversified, the nature and characteristics of remittances are heterogeneous, depending on where they come from and who sends them. While the importance of remittance flows from the United States is rising, not much academic attention has been paid to this issue because of a lack of data. To better understand the reasons behind the increase in US remittances, and in order to evaluate their sustainability, household surveys are necessary.

Border Trade and Economic Zones on the North-South Economic Corridor: Focusing on the Connecting Points between the Four Countries

The North-South Economic Corridor (NSEC), the road between Bangkok and Kunming, China, including the Laos route (R3B) and the Myanmar route (R3B), has been developed since 1998 following the GMS program. The region covering Yunnan Province in China, Shan State in Myanmar, Northern Laos and Northern Thailand has historical and ethnic closeness, and is a comparatively poor mountainous, boundary area. In the wake of the development of the NSEC, however, the region has started to show signs of change. Consequently, a review is to be carried out concerning the movement of people and cars, border trade and the situation concerning the progress of border economic zones at the five nodal border points in the four countries, and over three routes: R3A, R3B, and the Mekong River route.

Who Uses FTAs?

It is noted that utilization of AFTA is low by international standards. In order to clarify the reasons for such low utilization, this paper investigates what kinds of Japanese affiliates in ASEAN are more likely to use FTAs in their exporting, by employing unique affiliate-level data. Our findings are as follow. First, the larger the affiliate is, or the more diversified its procurements’ origins are, the more likely it is to utilize an FTA scheme in its exporting. Second, affiliates exporting actively to developing countries are more likely to use FTAs than those exporting to developed countries. Third, there are clear differences in FTA utilization depending on affiliates’ locations and sectors. These results afford a clue to the reasons for the low FTA utilization in East Asia.

The Iron and Steel Industry in Asia: Development and Restructuring

The paper examines the development and restructuring of the iron and steel industry in Asian countries. Studying countries that have integrated steelworks with large blast furnaces (South Korea, Taiwan, China and India) and countries without (Thailand, Indonesia and Malaysia), the paper shows the difference in the development processes across the countries and across time, and points to the diversity of the development experience of these countries. The paper argues that significant differences in steel production technologies in terms of initial investment and minimum-efficient scale, the changing role of the state, and shifting demand structures in the domestic steel markets of each country have been the important factors that led to the differences in the development path of the steel industry in each country.

Restoration of micro data of John Lossing Buck's survey and analysis of the inverse relationship between yield and farm size in rural China in the 1930's

A large scale Chinese agricultural survey was conducted at the direction of John Lossing Buck from 1929 through 1933. At the end of the 1990’s, some parts of the original micro data of Buck’s survey were discovered at Nanjing Agricultural University. An international joint study was begun to restore micro data of Buck’s survey and construct parts of the micro database on both the crop yield survey and special expenditure survey. This paper includes a summary of the characteristics of farmlands and cropping patterns in crop yield micro data that covered 2,102 farmers in 20 counties of 9 provinces. In order to test the classical hypothesis of whether or not an inverse relationship between land productivity and cultivated area may be observed in developing countries, a Box-Cox transformation test was conducted for functional forms on five main crops of Buck’s crop yield survey. The result of the test shows that the relationship between land productivity and cultivated areas of wheat and barley is linear and somewhat negative; those of rice, rapeseed, and seed cotton appear to be slightly positive. It can be tentatively concluded that the relationship between cultivated area and land productivity are not the same among crops, and the difference of labor intensity and the level of commercialization of each crop may be strongly related to the existence or non-existence of inverse relationships.

The size distribution of all Cambodian establishments

This paper presents empirical evidence on the size distribution of all Cambodian establishments in the nonfarm sector for 2009. Small- and large-scale establishments account for the largest share of employment, pointing to a “missing middle” that is commonly observed in developing countries. The analysis provides little evidence for Zipf’s law because Cambodian industry is characterized by a more dense mass of small establishments than the Zipf distribution would predict.

Firm dynamics in the Cambodian garment industry: firm turnover, productivity growth, and wage profile under trade liberalization

The international garment trade was liberalized in 2005 following the termination of the MFA (Multifibre Arrangement) and ever since then, price competition has intensified. Employing a unique firm dataset collected by the authors, this paper examines the changes in the performance of Cambodian garment firms between 2002/03 and 2008/09. During the period concerned, frequent firm turnover led to an improvement of the industry’s productivity, and the study found that the average total-factor productivity (TFP) of new entrants was substantially higher than that of exiting firms. Furthermore, we observed that thanks to productivity growth, an improvement in workers’ welfare, including a rise in the relative wages of the low-skilled, was taking place. These industrial dynamics differ considerably from those indicated by the “race to the bottom” argument as applied to labor-intensive industrialization in low income countries.

Commercialization of agriculture in the Himalayas

Increased market integration and commercialization of traditional agriculture in the Himalayas is part of a development strategy towards growth and better standard of living. More than 97 percent households depend upon agricultural and allied activities for livelihood which constitutes 30 percent of the household income. Given the importance of commercialization of agriculture to improve the productivity, per capita income and thereby the standard of living in the Himalayas, we examine the factors affecting the commercialization of agriculture on the basis of primary survey data. The results reveal that the land size, gender of the household head, livestock assets, ethnicity, education and location are important determinants of commercialization. Although commercialization of agriculture is considered as stimulated private-sector activity, public policy is essential to facilitate driving forces viz., trade and market reforms, rural infrastructure, and the institutional framework for legal and contractual arrangements between farmers and processors.

Ex ante bargaining and ex post enforcement in trade credit supply: theory and evidence from China

If payment of goods is easily default, economic transaction may deeply suffer from the risk. This risky environment formed a mechanism that governs how economic transaction is realized, subsequently how trade credit is given. This paper distinguished ex ante bargaining and ex post enforcement, then modeled that bargaining power reduces trade credit ex ante, and ex post enforcement power and cash in hand of buyer can enhances both trade amount and trade credit in a presence of default risk. We modeled this relationship in order to organize findings from previous literature and from our original micro data on detailed transaction in China to consistently understand the mechanism governing trade credit. Then empirically tested a structure from the theoretical prediction with data. Results show that ex post enforcement power of seller mainly determines size of trade credit and trade amount, cash in hand of buyer can substitute with enforcement power; Bargaining power of seller is exercised to reduces trade credit and trade amount for avoiding default risk, but it simultaneously improves enforcement power as well. We found that ex post enforcement power consists of (ex ante) bargaining power on between two parties and intervention from the third party. However, its magnitude is far smaller than the direct impact to reduce trade credit and trade amount.

Chapter 5 Product Differentiation versus Geographical Differentiation: Evidence from the Pork Processing Industry in China

This chapter attempts to identify whether product differentiation or geographical differentiation is the main source of profit for firms in developing economies by employing a simple idea from the recently developed method of empirical industrial organization. Theoretically, location choice and product choice have been considered as analogues in differentiation, but in the real world, which of these strategies is chosen will result in an immense difference in firm behavior and in the development process of the industry. Development of the technique of empirical industrial organization enabled us to identify market outcomes with endogeneity. A typical case is the market outcome with differentiation, where price or product choice is endogenously determined. Our original survey contains data on market location, differences in product types, and price. The results show that product differentiation rather than geographical differentiation mitigates pressure on price competition, but 70 per cent secures geographical monopoly.