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Downstreaming Industry Versus Industrialization?

Translator

Non Koresponden

Editor

Laila Afifa

25 May 2024 23:24 WIB

By: Fahmi Wibawa |  Executive Director of LP3ES, Lecturer at Faculty of Economics and Business, UIN Syarif Hidayatullah

Amidst the commotion surrounding the issue of downstreaming industry, which will be continued by the newly elected President following the result of the 2024 February 14th election, regulations in the industrial sector have been released in the form of Minister of Industry Regulation Number 6/2024. This regulation governs the Technical Consideration for the Import of Electronic Products. The issuing of this rule is due to the President's feeling unhappy with the 2023 trade balance, which has consistently shown a deficit. However, it is expected that with the down-streaming of key commodities, domestic industries will also be boosted due to downstream and industrial development, much like "one breath."

According to the Statistics Indonesia calculation, Indonesia's main industrial exports, including electronics HS85, machinery, and electrical components, have consistently experienced a deficit from 2014 to 2023 (as of March 2024). The highest deficit occurred in 2018, amounting to US$12.593 million, while the lowest deficit was in 2022, at US$6.886 million. This fact is disheartening, especially considering the claim that down-streaming has piled up our exports. According to President Jokowi, one of the outstanding achievements of down-streaming is that in 2022, nickel exports reached US$33.8 million or approximately Rp519 trillion (Kompas, February 6, 2024). Then who benefits from the added value of downstreaming if domestic industries are struggling? Because it is expected that downstream and industrialization should be aligned, not contradictory.

Down streaming Based On Industrialization

Indeed, downstream and industrialization should not be opposed because both are intended to strengthen the national economy. Down-streaming aims to add value to raw materials sold internationally, in the form of semi-finished or finished goods. The process of adding value requires domestic industries, so downstream also aims to boost domestic manufacturing industries to provide job opportunities for the nation's children.

With the same goal of maximizing added value, industrialization focuses more on the efficiency of raw material processing to achieve greater profits. Therefore, if raw materials are processed by industrialists, the price becomes exponentially higher, benefiting both the government (from tax collection) and the industrialists themselves. However, if industrialists are brought in from abroad, they will be the ones enjoying the added value, not the children of the nation who are the rightful heirs to Indonesia's natural resources.

The most important aspect of industrialization is its contribution to creating job opportunities. As production scales increase and grow, the demand for skilled labor also increases automatically. This means that if industrialists are imported for down-streaming purposes, their labor will also be imported from abroad. The phenomenon occurring in Morowali (where there are many foreign workers in the nickel smelter industry) can serve as a bad precedent for how downstream will be continued by the new government to be inaugurated on October 20, 2024, only adding to the benefits of foreign industrialists invited under the guise of down streaming.

Learning from China

There is never a shortage of words about China, a phenomenal country. The world was stunned after realizing that China's products flooded global markets, especially high-end manufactured products. China's success story is a testament to the strategy of downstreaming combined with industrialization, without opposing it.

China's manufacturing industry did not emerge overnight. China has experienced an increase in its manufacturing industry for over 35 years (Wen, 2024). Currently, China is capable of supplying 800 percent of the US's steel capacity and 50 percent of the world's supply; providing 60 percent of the world's cement; more than 25 percent of the world's vehicle supply; filing 150 percent more industrial patents than the US; and being the largest supplier of ships, high-speed trains, robots, tunnels, bridges, chemical fibers, machinery, computers, mobile phones, and so on.

From time to time, China has consistently produced significant and increasing output compared to other countries on the same graph above.

China has employed several relatively simple, gradual, and experimental approaches, including:

(1) Maintaining political stability by all means;

(2) Starting reforms from the bottom up, beginning with the agricultural sector;

(3) Promoting rural industries despite their primitive technology;

(4) Using manufactured products to upgrade into machine;

(5) Massive infrastructure development;

(6) Mixed ownership rather than privatization;

(7) Industrialization, which includes:

(a) Light industry to heavy industry;

(b) Labor to capital-intensive production;

(c) Manufacturing to financial capitalism;

(d) A country with the highest savings rate to a consumerist country with high welfare.

During the second phase (1988-1998), China experienced various improvements following the more focused phase 1 on rural areas. This phase involved massive production for labor-intensive light consumer goods by importing machinery; becoming the largest supplier and exporter of textiles in 1995, as well as the largest importer of cotton; the rural labor force increased by 30 percent in China (excluding migrant workers), rural industry output increased by 28 percent per year between 1978 and 2000, doubling every three years over 22 years (a 66-fold increase).

During phase 3 (1998-present), there has been an increase in consumption and production of coal, steel, cement, and other goods; there are 2.6 million miles of public roads, including expressways over 70,000 miles (46 percent longer than the US); 28 out of 30 provinces have high-speed trains (over 10,000 miles, 50 percent of the world's total high-speed rail).

Learning from China, the main and most important thing is the various economic incentives for domestic industries compared to inviting foreign industrialists through investment facilities. In this context, the issuance of Ministerial Regulation Number 6 of 2024 is quite relevant as the newly elected President prepares to continue the down-streaming.

Through this continued industrialization policy, at least, the industrial climate in Indonesia will be maintained, and existing manufacturing in Indonesia, such as Electronic Manufacturing Service (EMS) and Original Equipment Manufacturer (OEM), will be utilized in the following ways:

(1) Opening opportunities to increase the capacity of existing industries in Indonesia;

(2) Opening opportunities for cooperation with international brand holders who do

not have production partnerships with domestic production;

(3) Knowledge transfer;

(4) Increasing the number of domestic workers.

*) DISCLAIMER

Articles published in the “Your Views & Stories” section of en.tempo.co website are personal opinions written by third parties, and cannot be related or attributed to en.tempo.co’s official stance.



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