Can manufacturing revive growth in Indonesia?

A strong manufacturing sector would go some way to reviving the economic fortunes of Indonesia. However, the challenges are formidable, and unless more progress is made on liberalising the labour market and improving the country’s infrastructure, the struggles of the manufacturing sector are likely to continue. Developing a strong manufacturing sector is important for two reasons. First, it is relatively easy to increase the productivity of low-skilled workers by taking them out of agriculture and putting them to work in factories using machines that require only basic training to operate. Second, for those already in manufacturing, labour productivity typically rises faster than in other sectors. After a difficult start to his presidency, Jokowi has begun to make some progress on pushing through much-needed reforms aimed at improving the business environment and opening up the economy to foreign investment. However, Jokowi has continued to shy away from the other big reforms that are crucial to developing manufacturing. Overall, we are not holding out much hope of a manufacturing renaissance in Indonesia. Indeed, the poor prospects for the sector mean the economy will struggle to get anywhere close to meeting Jokowi’s 7% growth target. We think growth will remain stuck at 5%.