Policy Review: Can Indonesia Get Cured from the Dutch Disease?

The boom in the natural resources sectors hinders the development of other sectors

Indonesia Export Duty of Mining and Comodities to Rise in March 2019
Coal mining (Image credit : APBI-ICMA)

JAKARTA (TheInsiderStories)— While Indonesia is pushing to boost its manufacturing sector, the country is apparently being trapped by the Dutch Disease situation.

The administration of President Joko Widodo is making a push to boost the nation’s manufacturing sector and initiated the so-called fourth industrialization revolution or Industry 4.0. The program is a name for the current trend of automation and data exchange in manufacturing technologies.

The government has set an ambitious target through a roadmap that aims to make the manifacturing sector able to push the nation’s economic growth by 1-2 percent per year. Growth is targeted at a range 5-7 percent in 2018-2030 in this roadmap and the manufacturing industry is expected to contribute to around 21-26 percent of the nation’s GDP by 2030.

However, the country is apparentlt being trapped in a condition called the Dutch Disease, which refers to a condition when the boom in the natural resources sectors hinders the development of other sectors and appreciates the real exchange rates. In the end, the currency appreciation hurts the productive and tradable sectors such as manufacturing and agriculture sectors.

The term was first coined by The Economist in 1977 to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959.

Nearly similar to what happened in Netherland back then, Indonesia’s manufacturing sector is currently trapped in the stagnation since 1997 after the Asia financial crisis hit the nation hard. The manufacturing sectoe growth in the GDP tends to decrease from 6.26 per cent in 2011 to 4.74 per cent in 2017.

Looking at the current condition, it looks like the nation to face a rocky road to achieve its ambitious target within its roadmap to improve the ratio of net export to GDP from 3 percent to 5-10 percent and create 7-19 million employment in both manufacturing and non-manufacturing sectors by 2030.

The country is still heavily depend on the natural resources. Indonesia’s exports have grown by 16 per cent per annum or almost tripled from US$7 billion to $200 billion during 2004-2011, but it was largely contributed from the commodities boom driven by the high levels demands from China and India.

The mining products contribution to the total exports also jumped from 5 percent in 2000 to 18 percent in 2013. In 2016, the natural resource was largely contributed to the non-tax state revenue of Rp90 trillion and 7.2 percent of GDP in 2016.

The natural resources export help Indonesia to gain 6-7 percent economic growth under President Susilo Bambang Yudhoyono, but it discourages the governments to maintain sustainable and equitable growth from the manufacturing industries.

The portion of the manufacturing sector in Indonesia to the exports significantly decrease from 59 percent in 2000 to 41 percent in 2013. But it heavily relies on the resource-rich industries and only half-finished product with the low technology.

Not only it hurts the manufacturing sector, the high dependency on the natural resources exports also hurt total exports in the low commodity price’s era. Indonesia suffered first-time trade balance deficit in 50 years in 2012. The exports revenue decrease by 4.4 percent per year from $203 billion in 2011 to $176 billion in 2014.

It was not the first time Indonesia suffers Dutch Disease. The country also suffered similar problem during the 1970s and 1980s when depends on the oil and gas as much as 80 percent of the country’s total annual exports and 70 percent the central government’s revenues during the decade.

Unfortunately, although it is likely a bumpy road for Indonesia to boost its manufacturing sector, the government must be seriously implementing the Making Industry 4.0 roadmap, otherwise the countrt will lose its competitiveness against other countries, especially the regional peers in Southeast Asia.

The government should also assure the sustainability of this roadmap since there is no guarantee the current president will be re-elected next year and continue the program. In many cases, the governmebt program tends to change when the country’s leader is changed.

Email: fauzulmuna@theinsiderstories.com