© 2001 R. Luki Karunia Posted 8
June 2001 [rudyct]
Science
Philosophy Student Paper (PPs 702)
Graduate School, Institut
Pertanian Bogor
Indonesia.
Instructors:
Prof Ir Rudy
C Tarumingkeng, MF, PhD (Principal)
Prof Ir
Zahrial Coto, MSc, PhD
INDUSTRIAL
STRUCTURAL CHANGE IN INDONESIA:
A STUDY ON MANUFACTURING INDUSTRY IN THE 1980s
By:
R. LUKI KARUNIA
P 01600008 / EPN
E-mail: k.luki@eudoramail.com
ABSTRACT
Starting from 1984, Indonesia’s manufacturing sector
started to grow significantly, after being comparatively stagnant from 1972 to
1980. This phenomenon is interesting for many reasons: why did Indonesia’s industrial
growth accelerate in the mid-1980s?. The basic indicator of industrial
structural change is the contribution of manufacturing to GDP growth.
Indonesia’s industrial structural change just started in the 1980s, moving from
an agriculture country’s structure toward that of a more industrialized
country. In order to identify the process of structural change, the index of
structural change is used. The next indicator is the change in manufactured
exports as a percentage of total exports .
Because there is a strong correlation between the industrial growth and industrial structural change, the objective of this study is to analyze and explain the process of industrial structural change in Indonesia during the 1980s. Firstly, I will examine whether there really was a process of industrial structural change in Indonesia. If there was, when did the industrial structural change occur, what were the dimensions of industrial structural change in Indonesia, what kinds of industries were the driving force of manufacturing change, and what were the causative factors of the change, especially in manufacturing industry.
1. Background
Industrialization plays a critical role in the
process of economic development. In developing countries, industrial
development is considered necessary to achieve a high rate of economic growth,
to provide for the basic needs of the population, to create more employment
opportunities, to lead to an increasingly diversified economy and to give rise
to desirable social, psychological and institutional change (UNIDO, 1979).[1]
Consequently, development economists have shown
considerable interest in analyzing the relationship between industrialization
and economic growth. Far less attention has been paid to the analysis of
industrial structure and transformation in less developed countries. Industrial
economists have typically focused upon issues of a different range of
industrial issues, such as the structural change and industrial transformation
during the process of development (Kirkpatrick, Lee and Nixon, 1984)[2].
The basic hyporesearch is that, as per capita income rises, industrialization
occurs with a sufficient degree of uniformity across countries to produce a
consistent pattern of change (Ballance, 1982).[3]
The relatively rapid economic growth experienced by
the newly industrializing economies ( NIEs) of Asia (Hong Kong, Korea,
Singapore and Taiwan) and the four larger Association of South East Asian
Nation (ASEAN – 4 : Indonesia, Malaysia, the Philippines and Thailand) has been
a very important element in what several observers have referred to as this
change or transformation (Oshima, 1987).[4]
Although the degree of change and its implications are some times exaggerated,
it is clear that economic growth in these Asian economies has far outstripped
the world average.
Moreover, this growth has been accompanied by large
changes in the structure of economic activity in these countries with
manufacturing industry in particular becoming more important. Manufacturing has
been the region’s leading growth sector. The NIEs and ASEAN, including
Indonesia’s manufacturing sector are interesting, not only because of the pace
of industrialization but also because in each country manufacturing has
undergone a major transformation.
Indonesia, over the past 25 years, has been hailed
as one of the world’s most dynamic countries, together with the NIEs and other
ASEAN countries, as the shining light of the international economy (World Bank, 1993).[5]
In the mid 1960s, it was one of the poorest countries in the world with a per
capita income below that of many Africans and South Asian Countries, but by
1981, the country had moved into the ranks of what the World Bank calls, “lower
middle income” countries, with income per capita more than US $ 410.
Together with increasing income per capita, there
have been some important structural changes in the Indonesian economy.
Consistent with the general patterns of development elsewhere, the share of
agriculture to gross domestic product (GDP) has gradually decreased and the
share of modern sector industries, including manufacturing, has increased. The
most notable feature of sectoral growth has been the growth in the
manufacturing sector, which grew by 11 percent per annum in the 1970s and
1980s. In 1980, manufacturing accounted for 15 percent of GDP, 16 percent in
1985 and 20.5 percent in 1990.
There are two
indicators to measure the degree of industrialization, the contribution of
manufacturing value added to gross domestic product and the manufacturing value
added per capita. Figure 1.1 describes the share of manufacturing value added
to gross domestic product, comparing between several Asian countries.
Source: Key Indicators, ADB,
1984, 1995
This figure shows that the level of Indonesia’s
industrialization is lower than other Asian countries. In 1982, the
manufacturing share was only 11.9 percent, much lower than the share of
Thailand (22.6 percent), the Philippines (26.7 percent) and Malaysia (19.2
percent). The closets share is of India (18.6 percent). However, starting from
1984, the manufacturing sector started to increase significantly, after
comparatively stagnant growth from 1972 to 1980. Manufacturing
share of GDP increased from 11.9 percent of total GDP in 1982 to 16.7 percent
in 1986 and reached 20 percent in 1990.
The second indicator to measure the level of
a country’s industrialization is manufacturing value added per capita. (figure
1.2). In terms of manufacturing value added per capita,
Indonesia is also below some ASEAN countries. In 1980, Indonesian manufacturing value added
per capita was only US $ 18.3 comparing with US $ 302 for Malaysia, US $ 225
for Thailand and US $ 464 for the Philippines.
Source: Key Indicators, ADB, 1995
However, since 1982, the
manufacturing value added per capita has increased significantly, from US$ 18.3
to US$ 72.8 in 1984, US$ 164 in 1990, after the stagnant growth before.
Therefore in
the Indonesian case, both manufacturing output growth and manufacturing value
added per capita were stagnant during the 1970s, but starting from the early
1980s, they grew impressively. This phenomenon is interesting to study more
deeply; why did the Indonesian industrial growth, indicated by the increased of
manufacturing share in GDP and manufacturing value added, suddenly began in the
mid-1980s.
According to United Nations
Conference on Trade and Development
(UNCTAD)[6] in
1982, there is a strong correlation between the output growth of the industrial
sector and industrial structural change. This research was done for the
countries of the Organization for Economic Cooperation and Development (OECD)
during the 1970s. Because of this correlation, it is important to study more
deeply about the process of industrial structural change in Indonesia.
2. Objective of the Study
Based
on the background above, there was a significant increase of industrial output
and value added during the 1980s. Because there is a strong correlation between
the industrial growth and industrial structural change, the objective of this
study is to analyze and explain the process of industrial structural change in
Indonesia during the 1980s. Firstly, I will examine whether there really was a
process of industrial structural change in Indonesia. If there was, when did
the industrial structural change occur, what were the dimensions of industrial
structural change in Indonesia, what kinds of industries were the driving force
of manufacturing change, and what were the causative factors of the change,
especially in manufactured exports growth.
3. Theoretical Framework
3.1. The Dimensions of Industrial Structural Change
Industrial transformation or structural change is
normally interpreted as a process whereby the share of industry in general, and
of manufacturing in particular, in total economic activity is increased (John
Weiss, 1988).[7]
According to Devine (1979)[8]
industrial structure can be defined as the relative importance of individual
industries or groups of industries within an economy. Finally, the basic
definition, from economic dictionary, “ is a stage in development that consists
of shifting the contribution of growth from agriculture into manufacturing”. It
is variously measured by the contribution of manufacturing growth to GDP
growth, or by industrial exports as a percentage of total exports.
John Weiss (1988)[9]
describes the industrial structural change in developing countries based on
research done by United Nation Industrial Development Organization (UNIDO, 1983[10]
and 1984[11]
). UNIDO surveyed the industrial transformation that has taken place in
developing countries since 1960. In many developing countries growth of
national income and manufacturing output since 1960 has been high by most
standards of comparison, in relation to historical rates in these countries
before 1960, in relation to rates currently achieved by developed economies,
and in relation to the growth performance of the developed economies at earlier
stage of their industrialization.
Having noted
the broad magnitude of manufacturing growth in developing countries, it is
important to consider the impact of this growth for manufacturing itself. The
first important statistical measure of structural change at the macro economic
level is an increase in the share of manufacturing in gross domestic product.
The next indicator of structural change is whether
there has been a shift in the composition of output produced with in
manufacturing. In particular, whether developing countries have moved from import
substitution industrialization to export orientation or moved from the
production of light consumer goods with relatively simple technologies and no
significant economies of scale to the production of intermediate and capital
goods. In this context, structural change within manufacturing can be defined
as a shift away from “ light , relatively labor intensive industrial
activities, toward heavy, “ more capital
intensive ones.
The final indicator of structural change is the
shift in the composition of exports from heavy reliance on the exports of
primary commodities to more manufactured exports.
Mohammed A and Hall Hill (1985)[12]
examined the developing and changing structure of South East Asian countries,
manufacturing industries. With a few exceptions, manufacturing has been the
region’s leading growth sector for all ASEAN countries. The ASEAN manufacturing
sector is of interest not only because of the pace of industrialization but
also because in each country manufacturing has undergone a major transformation.
In this research, they identify some general
indicators of structural change. The first is a simple index of structural
change, defined as:
I =
∑ (Ai2 - Ai1) for all Ai2 > Ai1
Where
Ai1 refers to the share (percentage) of industry i in total
manufacturing value added. The numbers 1 and 2 refer to time periods. The value
of the index ranges from 0 (no
changes) to 100 (complete changes). They calculated the index for ASEAN
countries and several other countries.
The second identification is the increase of
manufactured exports as a percentage of total exports and also the change in
the composition of manufactured exports from heavy reliance on the export of a
primary commodity to more manufactured exports. Within manufacturing itself, it
is a change from of natural resources intensive exports and labor intensive
exports manufactured exports toward more technology and capital intensive
manufactured exports.
The final investigation is the changing of
manufactured output composition. They
would expect the process of industrialization to be accompanied by a shift from
light industries – simple and labor-intensive consumer goods toward
intermediate and capital goods. In all cases, the shift from light industries
to heavy industries is apparent, but there is considerable variation between
countries.
3. 2 Trade and Industrial Approach
Analysis
This approach is not only widely accepted in
the field of academic analysis based in principle on the concept of comparative
advantage, but is also closely related to the policy debates on the developing
economies such as inward looking versus outward looking or import substitution
versus export promotion.
Ohkawa and Kohama (1989)[13]
have identified a simple framework of phases and their shift from traditional
product exports to import substitution and then export orientation. The series
of shift from one phase to another was empirically observed through the entire
process of industrialization in East Asia although some modifications in the
sequence were made for individual countries.
According to Ohkawa and Kohama, in a normal path of
development manufacturing growth rate of output (Ym) is sustained to be greater
than that of GDP (Y). Therefore, its share (Ym/Y) has a long term trend of
increase. This share percentage is often used as a simple indicator of
industrialization.
The changes in the share (Ym/Y) have their
own significance in the industrial transformation when they are used with
output growth rate (G) with a weighted growth rate for manufacturing GYm.Ym / Y
= ∆ Ym/Y and for agriculture GYa.Ya / Y =
∆ Ya/Y.
For a normal path of
industrialization, starting with the initial condition Ya/Y > Ym/Y and a
process of GYa < GYm, the difference of the weighted growth rate between
agriculture and manufacturing tends to narrow to a point where the difference
eventually disappears, implying that the sectoral contribution to the GDP
growth rate is equal between agriculture
and manufacturing (∆ Ya/Y = ∆ Ym/Y ) and marking the point where the economy achieves
its initial phase of preparation for accelerating further industrialization.
After arriving at this point, the economy will be characterized by a sustained
path of ∆ Ym > ∆ Ya, if
the driving force of industrialization continues.
Ohkawa and Kohama clarified the relationship
between the approach of trade structure and the domestic industrial structure.
There is a conceptual difference in the method of approach. The former aims to
identify phases at certain intervals or segments of a long term process by
distinguishing changing of comparative advantage, while the latter one intends
to clarify the long term trend of structural transformation by distinguishing
changing of efficiency and labor productivity.
3.2.1 Revealed Comparative Advantage
The revealed comparative advantage (RCA) index used
in order to see the country’s product export competitiveness in the world
market. The revealed comparative advantage is defined as:
RCA
= [ (Xi / X) / (Xiw / Xw)]
where,
i, indicates value of certain industry, X: total industry value, and W denote
the world market.
RCA
> 1: performance of exported commodity i of a country experienced
backwardness compared to export performance of the world
RCA
> 1: export of commodity i from a country increases relatively compared to
the world market, so the share is also increasing
3.2.2 Efficiency and Productivity
The simple indicator to measure efficiency
is the index of efficiency, determining the ratio of intermediate inputs to total
outputs. The
smaller the figure, the more efficient the industry is; the larger the figure,
the less efficient is.
Included in the input groups
are (1) raw materials (2) other materials (3) fuels electricity and gas (4)
industrial services received (5) rent of building, machinery, and equipment,
(6) non-industrial services received.
Included in the output groups are (1) value of goods produced (2) value
of electricity sold (3) value of industrial service rendered (4) gross income
from resale (5) increased stocks in semi finished goods and (6) received from
non industrial service rendered.
Labor productivity is measured as output per
person (total industry value added divided by total labor), assuming that the
quantities of other factors employed are constant.
3.3 The Source of Manufacturing Growth
Although there are general similarities in the rise
of industry in every country’s pattern, there are important differences among
them in timing and sectoral composition. The methodology developed by Chenery
(1979)[14]
for this purpose is based on a algebraic decomposition of the growth of each
sector into four factors which are identified as (a) domestic demand effects,
(b) export expansion effects, (c) import substitution effects and (d) effects
of technological change. Without a formal
model, any observed change in the composition of demand or other economics
aggregate can be defined as a structural change.
3.4 The Product Cycle Theory
The product cycle hypothesis is examined by
distinguishing between the basic product with relatively simple technology from
the mature product with relatively more technology and capital intensive. The
early stage of the product cycle is indicated by the role of natural resources
and unskilled labor intensive domination in the manufactured export
composition.
The second stage is characterized by the
sharp increase of industrial product output and industrial product export such
as consumer electronic, steel, and spare parts of motor vehicles. Changing to
the export of more technologically advanced products and human and capital
intensive products, as well as service sectors, characterize the last stage.
3.5 Classification of Industrial Activities
An industrial classification system is a
device for grouping similar production activities into industries. It is
fundamental for the study of the industrial structure of an economy. Many
countries, including Indonesia, have developed their own standard industrial
classification (SIC) in order to promote uniformity and comparability in
official industrial statistics.
The United Nations, however, has prepared an
international standard industrial classification (ISIC). The ISIC divides
production activities into four levels of aggregation. There are major
divisions (identified by one digit
code), divisions (two digit code), major groups (three digit code) and groups
(four digit code), (United Nations, 1971)[15].
At the highest level of aggregation, production
activities are grouped into nine (9) major divisions, defined as follow:
1 Agriculture, hunting, forestry and fishing
2. Mining and quarrying
3. Manufacturing
4. Electricity, gas and water
5. Construction
6. Wholesale and retail trade and restaurant and
hotels
7. Transport, storage and communication
8. Financing, insurance, real estate and business
service
9. Community, social and personal services
In
international statistical compilations, the industrial sector is generally
defined to cover not only manufacturing, but also mining, construction, and electricity,
gas and water. The focus here, however, is only in the manufacturing sector
(major division 3).
According
to Indonesian Central Bureau Statistic, major division 3 is divided into:
31. Manufacture of food, beverages and tobacco
32.
Manufacture of textile, garments, and leathers
33. Manufacture of wood, bamboo, rattan, willow and
the like, including furniture.
34.
Manufacture of paper and paper products, printing and publishing
35.
Manufacture of chemical, petroleum, coal, rubber and plastic products.
36. Manufacture of non-metallic mineral products,
except products of petroleum and coal.
37. Basic
metal industries.
38.
Manufacture of fabricated metal products, machinery and equipment.
39. Other
manufacturing industries.
This is the main industrial
classification that is used in my research.
4. Methodological Approach
This study will be carried out using
qualitative methods on the basis of statistical data, focussing on industrial
structural change in Indonesia’s industrial development. From the background above,
we know that there is a change in the growth of manufacturing share to GDP
(more rapid and continuous) after the stagnant growth in the 1970s. Because
there is a strong correlation between industrial growth and industrial structural
change, I will examine whether there really was a process of industrial
structural change in Indonesia.
In order to study the
process of structural change, I will use three basic indicators of industrial
structural change. Firstly, I will look at the contribution of manufacturing
growth to GDP growth, by using the Ohkawa and Kohama approach. Secondly, I will
examine the change in manufactured value added composition, by using the index
of structural change. The index of structural change will show us what kinds of
industries was the driving force of industrial structural change. Finally, and
the core of my research, I will determine the change in manufactured exports as
a percentage of total export and also the change in manufactured export
composition itself. What were the causative factors behind the manufactured
export growth?
References :
-
Ariff, Mohhamad and Hill Hall ( 1985 ), Export Oriented Industrialization, The ASEAN
Experience, Allen & Unwin, Sydney, Australia.
-
Balance, R
(1982), The International Economy
and Industrial Development : The Impact of Trade and Investment on Third World Brigthon,
Sussex
-
Chenery, H.B, (1979), Structural Change and Development Policy, World Bank Oxford
University Press.
-
Devine,P. J, Lee N, Jones R & Tyson W.J (1979), An Introduction to Industrial Economics,
3rd Allen & Unwin, London
-
John Weiss
(1988), Industry in Developing Countries
; Theory, Policy and evidence, Croom helm, new York
-
Kirkpatrick, Colin and Nixson F ( 1983 ), The Industrialization of less Developed
Countries, Manchester University Press, Manchaster
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Ohkawa, K and Kohama, H, ( 1989 ), Lectures
on Developing Economies: Japan’s Experience and its Relevance” , Tokyo
University Press
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Oshima, Harry T ( 1987 ), Economic Growth in Monson Asia ,
University of Tokyo Press, Tokyo.
-
UNIDO ( 1979 ), World
Industry Since 1960: Progress and Prospect, United Nations, New York.
-
UNIDO ( 1983 ), Industry
in a Changing World, United Nations,
New York.
-
United Nations (1971), Indexes to the International Industrial Classification of All Economic
Activities, United Nation Statistical Papers, Series M, No.4, Rev.2 add 1.
-
UNCTAD (1982), Trade
and Development Report 1982, New
York, UNCTAD/TDR/2/Rev.1
-
World Bank (1993), East Asian Miracle : Economic Growth and Public Policy, Oxford
University Press, New