Revisiting Sectoral Economic Strategy

Indonesia’s Sectoral Economic Development Strategy
and FTA Arrangement
Keywords: Sectoral targeting, FDI, FTA

Today’s Presentation:
Revisiting Sectoral Economic Strategy

Prayoga Wiradisuria
May 2008

Supervisor: Professor Shujiro Urata

Today’s presentation

Final analysis
and Conclusion

Formulation and
data analysis

Literature Survey
& Data gathering

Scoping and Assessing and Prioritizing Economic
Sectors: an Economics Perspective
focusing

Initial Literature
Survey
Last presentation was about:

Sectoral Economic targeting in a glance,
Topic selection
FDI and its spill-over effect

Chapter view

Chapter 1 – Introduction, Scoping, and Methodology

Chapter 2 – Sectoral Economy

Chapter 3 – FTA and Regional Integration in East Asia

Chapter 4 – Indonesia’s Key Sectors and FTA Strategy

Chapter 5 – Analysis and Summary

EXAMPLES OF PROACTIVE SECTORAL-TARGETING STRATEGIES
SUCCESSFULLY IMPLEMENTED BY EMERGING NATIONS

Country Key sectors Key comparative advantages

Malaysia • Infrastructure

Working Draft - Last Modified 2/8/2006 10:40:49 PM
Electronics
Palm oil • Availability of raw materials

Singapore Service
• Geographic location
High-value manufacturing

Printed
Tunisia Olive oil • Availability of raw materials
(olives)

3

There can be a set of forces, shaping sectoral economy
priority

High-level state interest
Socio-economic
(e.g., national security)
history/background

Economic indicators Sectoral Urgency of
(GDP growth,
Targeting/ reform
employment, trade,
Priority Consumer trend
FDI performance)

Political agenda/
Economic ideology
Competitive
advantage

DEFINITION AND RATIONALES OF SECTORAL TARGETING

Sectoral targeting is.. RATIONALES OF PRIORITIZING SECTOR FROM
ECONOMIC PERSPECTIVE

Identification by the state or • Mobilizes and focuses public resources (public funds,
region of activity sectors administrations, political decisions) on a limited number of

for priority resource projects or sectors to gain a favorable position relative to
allocation with the objective competitor countries
of accelerating economic • Identifies the fields of action that offer the most
development/growth productivity for public investment to prioritize state
intervention
• Enables more effective, transparent public communication
with international lenders, investors, and local economic actors

Printed
• Narrows the scope of state action so that sectoral
strategies can be defined in greater depth with long-term
continuity/consistency

Out of discussion scope for the moment:

• War of ideas between state intervention (Keynes) and Market mechanism (Hayek)
• Administrative segregation between Central and Regional Government

5

ILLUSTRATION OF GOVERNMENT POLICY Gov

Central
“AUTOMOTIVE & OTHER TRANSPORTATION” SECTOR

Local
Category Initiative / Government policiy Target

• Competitiveness of semiskilled workforce
Labor
Labor • Competitiveness of skilled workforce
• Secured sources of workforce

Capital
Capital • Efficiency of local finance systems (for SMEs)

• Electricity supply quality GDP Growth
Energy
Energy • Competitive cost of energy through FDI
• Access to energy resources spill-over
Natural
Natural • Secured access to local metal and chemical resources and Semi-skilled
Resources
Resources manufacturing industries and skilled
• Open access to the European Union market Employment
Customs and
Customs and growth
• Open access to the U.S. market

Printed
trade access
trade access
Export growth
Taxes and tax
Taxes and tax • Reduce corporate tax for domestic supporting spare-part industries
incentives
incentives Transfer of
technology
Special
Special • Establishment of special economic zones for Automotive industry
economic zones
economic zones
• Increase quality of transport infrastructures
Utilities
Utilities • Establish dedicated port for automotive export and import

Business
Business
• Local (provincial) stability
climate
climate
• Facilitation for supporting industries
• Administrative efficiency

6

APPROACH OF SECTORAL ANALYSIS

Approached by: Characteristics

1 Categorization of Economic Sectors Central Statistic Bureau Standard

2 Economic Impact Analysis GDP contribution Time series data
Cross-Sectoral
GDP contribution growth
Panel Data (if necessary)
Employment
FDI Main source:
Central Statistic Bureau
Export Central Bank
Ministry of Industry

3 Regional Competitiveness Regionalism trend impact analysis FTAs impact on
Assessment Regional positioning and trend analysis Economic Sectors
Absolute and relative export value and Exports Data (by country,
contribution by sector, time series)

Main source:
ADB, ASEAN,
4 Sector-focused Investigation Understanding the nature and characteristic Interviews
-Strengh & Weaknesses Literature study
-Potentials and challenges
Assessing historical government policies

1 2 3 4 CATEGORIZATION OF ECONOMIC SECTORS

Categorization dictates data availability and level of analysis
Sectors Include
Crop Paddy rice, wheat, cereal grains, vegetable, fruit, nuts, oil seeds, sugar cane, sugar
beet, plant-based fibers, other crops
Livestock Cattle, sheep, goats, horses, other animal products, raw milk, wool, silk worm,
Forestry Forestry

Fishing Fishing
Mining Coal, oil, minerals
Food processing Produced meat, vegetable, diary products, sugar, other food products
Beverages Beverages and tobacco products
Wood Wood products, paper, publishing
Automobile Motor vehicles and parts
Other transportation Transportation equipment

Printed
Chemical Coal products, chemical products, plastic products, other material products
Machinery Machinery and equipment
Electronics Electronics equipment
Textiles Textile and wearing apparels
Metal Iron and non-iron metals
Leather Leather products
Utility Electricity, gas manufactures and distribution, water
Construction Construction
Services Public and private services

8

1 2 3 4 ECONOMIC IMPACT ANALYSIS

The Economic Sectors will then be measured against key economic
indicators for growth Static / cross-sectional

GDP 28
contribution
(%)* 17 Manufacturing
14 Agriculture

9 9 9 Ø Trade, hotel & Resto
6 7
1

Employment 23
contribution 19
Agriculture
(%)** 15
13 Manufacturing
7 8 Ø Mining
6 5 Services
4

Printed
Export 32
29
Contribution Manufacturing
(%)* 19 Mining
Agriculture
6 6 Ø
3 2 2
1

Agricultur Constructi Electricity Financial Manufact Mining Services Trade, Transport
e, on , Gas, & uring and Hotel, and ation and
Livestock, and Business Quarrying Restaura Communi
Forestry, Water Services nt cation
Fisheries Supply

*2006 data at 2000 base prices Source: Indonesian Center Statistic Bureau
**Hypothetical (data gathering in progress)
9

1 2 3 4 ECONOMIC IMPACT ANALYSIS

The Economic Sectors will then be measured against key economic
indicators for growth Dynamic / cross-sectional

GDP 2006* GDP Growth* FDI 2007** FDI Growth**
Sectors (IDR Billion) 2004-2006 (%) (USD Million) 2002-2007 (%)

Agriculture, Livestock, Forestry, Fisheries 261 6 1,385 201

Construction 112 17 1,590 324

Electricity, Gas, and Water Supply 12 20 1,090 1,111

Financial & Business Services 170 13 N/A N/A

Manufacturing 514 10 850 139

Mining and Quarrying 168 5 758 1,447

Printed
Services 170 12 373 -56

Trade, Hotel, and Restaurant 311 15 N/A N/A

Transportation and Communication 124 29 435 58

SECTOR Preliminary Situation Analysis
Electricity, Gas, and Water Supply Vastly under-developed capital-intesive sector but on the right track by
successfully inviting FDIs
Transportation & Communication Fast growing sector, focusing on largely driven by domestic consumption and
investment – less exposure ot foreign investment

*Source: Indonesian Center Statistic Bureau at year 2000 base prices
**Source: National Investment Coordination Board at current prices
10

1 2 3 4 REGIONAL COMPETITIVENESS ASSESSMENT

Regionalism trend: Indonesia participation in FTA’s and the impacts on
economic sectors (CGE approach)
FTA
China- ASEAN+ East East Ind- Ind- Ind-
Economic sectors ASEAN ASEAN 3 Asian* Asian** APEC China Japan* Japan**
Crop -0.09 -0.34 0.62 0.68 0.83 1.39 -0.36 0.07 0.21
Livestock 0.08 0.07 0 0.02 0.07 -0.13 0.01 0.13 0.16

Forestry -0.09 1.47 2.95 3.05 2.98 1.47 1.45 1.14 1.08
Fishing 0.14 0.24 0.32 0.43 0.43 0.33 0.11 0.24 0.24
Mining -0.61 -1.23 -0.44 -0.22 -0.23 -1.56 -0.99 -0.45 -0.47
Food processing -0.05 0.02 0.15 0.19 0.23 -0.07 0.05 0.24 0.27
Wood -0.18 1.71 3.44 3.59 3.5 1.68 1.76 1.23 1.16
Chemical -0.25 0.81 0.61 0.57 0.54 0.14 1.08 -0.35 -0.37
Automotive 1.53 1.65 -6.72 -6.6 -6.64 -6.74 0.23 -5.41 -5.45
Other transport means 8.41 -0.71 -1.29 -1.22 -1.28 -1.77 -5.01 0.86 0.83

Printed
Electronics 0.13 3.35 2.42 2.68 2.45 -0.44 4.78 0.84 0.69
Machinery 4.06 4.06 5.14 5.86 5.69 3.85 -0.4 1.51 1.36
Metal 1 -0.96 -2.68 -2.59 -2.72 -4.65 -2.44 -2.1 -2.21
Textile 0.93 0.98 -0.16 -1.36 -1.39 9.63 0.87 1.32 1.28
Leather -1.07 -5.22 -2.97 -4.04 -4.01 7.05 -4.18 6.64 6.6
Utility 0.45 0.66 0.3 0.3 0.27 0.16 0.33 -0.06 -0.08
Construction 1.07 2.65 3.29 3.29 3.31 3.73 2 1.57 1.58
Services 0.05 0.03 -0.75 -0.83 -0.85 -0.76 0.07 -0.25 -0.27

ASEAN integration priority sectors * removal of tariffs
** removal of tariffs and
agricultural subsidy
Source: Djoni Hartono, D.S. Priyarsono, Tien Dung Nguyen, Mitsuo Ezakil (2007)
11

1 2 3 4 REGIONAL COMPETITIVENESS ASSESSMENT

Sectoral positioning based on regional trade
Hypothetical Total volume of exports

600
Relative regional growth mapping “Fast-growing” “Flagship”
– Evolution of the share of 400

Indonesia’s exports relative

Growth in regional export market share (%)
200
to total regional exports

Mining and
75 Quarrying Agriculture,
– Evolution of Indonesia’s Livestock,
exports in absolute and % Forestry,
50 Fisheries
terms Electricity,
Gas, and
Water Supply
– Evolution of the volume of
Manufacturing
total regional exports 25
Services

Printed
15 Trade hotel and
Restaurant Financial &
Business
Services
10
Construction

Transportation
5
and
communication
“For investigation”
0

0 5 10 15 50 100 150 200

Growth in absolute value (USD Million)
12

1 2 3 4 SECTOR-FOCUSED INVESTIGATION

Sector-focused investigation (through interview and literature study)
Priority Sector
Selected Current condition* Expected*

Current strength
Current strength Sub-sector performance
Sub-sector performance Major government
Major government

Performance policy (historical or
policy (historical or
• The largest employer planned)
planned)
metrics
• Resilience against external shock (Asian
crisis: least affected, fastest to recovery • Cocoa TBD 1990 – Deregulation..
• Rise in commodity prices 1991 – Tax holiday..
• Increasing diversity of the use of • Palm Oil TBD 1993 – Export incentive..
agricultural products (demand push) 1997 – Economic crisis,
• Micro credit works in rural agriculture • Rice TBD high interest rates
• 20-100% gap between current 2000 – Export to EU..
productivity and potential 2002 – Port expansion..
2003 – Promotion of

Printed
“made in Indonesia”
Challenges
Challenges product
2006 – Tax break for
• Urgency to expand arable land
hypothetical investment in Cocoa, Palm
• Unfair WTO terms in global trade Historical overall performance
Historical overall performance
6 oil,…
• Still characterized by small farmers
5 Volume Future – Commodity
• Investment in R&D is lagging behind
4 production centers dev…
other countries
3 ….
• Infrastructure is not yet at optimum 2
Employment
level (irrigation, transportation, 1
electricity) 0
•… 2003 2004 2005 2006

*Data source: Interviews, Literature study
13

ILLUSTRATION OF GOVERNMENT POLICY Gov

Central
“AUTOMOTIVE & OTHER TRANSPORTATION” SECTOR

Local
Category Initiative / Government policiy

• Competitiveness of semiskilled workforce
F1 Labor
Labor • Competitiveness of skilled workforce
• Secured sources of workforce

F2 Capital
Capital • Efficiency of local finance systems (for SMEs)

• Electricity supply quality
F3 Energy
Energy • Competitive cost of energy
• Access to energy resources

F4 Natural
Natural • Secured access to local metal and chemical resources and
Resources
Resources manufacturing industries

Customs and
Customs and • Open access to the European Union market
F5 • Open access to the U.S. market

Printed
trade access
trade access

F6 Taxes and tax
Taxes and tax • Reduce corporate tax for domestic supporting spare-part industries
incentives
incentives
Special
Special • Establishment of special economic zones for Automotive industry
F7
economic zones
economic zones

F8 • Increase quality of transport infrastructures
Utilities
Utilities • Establish dedicated port for automotive export and import

Business
Business
• Local (provincial) stability
F9 • Facilitation for supporting industries
climate
climate
• Administrative efficiency

14

Overall Policy Summary

Priority Policy options
Category Sectors

F1 F2 F3 F4 F5 F6 F7 F8 F9

Flagship Sector 1

Sector 2

Sector 3

Fast Growing Sector 4

Printed
Sector 5

Central government-led facilitation Short-medium term
Regional government-led facilitation Long-term

15

Limitation and Further Study

LIMITATION FURTHER STUDY

• Difficulty of determining the appropriate • Deeper analysis for each sector
depth/granularity of sectors
• Further economic modeling can be used to
• Data might not be easily available (some forms justify the findings
of triangulation from substitute data might be
necessary) • Regional autonomy movement can influence
the dynamics of policy making as regions have
• It does not provide and attempt to get exact different interests and priorities
number. But it gives right sense of magnitude
• Sectoral priority can change over the time.

Printed
• Purely targets economics progress. It does not Further study is required to observe this issue.
mix with social, political, etc targets

• Tends to aligned with centralized perspectives.
It does not incorporate the impact of regional
autonomy movement to central policy making

• Increase in oil and commodity prices might
disrupt the data

16

Working Draft - Last Modified 2/8/2006 10:40:49 PM Printed
17
Thank you for listening and the suggestions

Revisiting Sectoral Economic Strategy

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