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Thriving Industries in Indonesia Economy

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March 5, 2019

Indonesia Economy: Thriving Industries

The industrial sector is the sector that currently contributes most to Indonesia’s annual GDP growth. The two most important sub-sectors of industry are mining and manufacturing, both being major pillars of the nation’s economy since the 1970s, thus being engines of economic change and development during Suharto’s New Order regime. Although the manufacturing sub-sector has lost its momentum after the Asian Crisis of the late 1990s, it still constitutes the most popular sub-sector of Indonesia in terms of foreign direct investment (FDI), followed by the mining sub-sectors such as Coal, Oil, Automobiles, Electronics and Textile Products.

Manufacturing in Indonesia

Indonesia recently became the 10th-largest manufacturing nation in the world. It’s large manufacturing sector accounts for almost a quarter of the nation’s total GDP and employs over a fifth of Indonesia’s working age population (around 25 million workers). Put into perspective, Indonesia’s manufacturing sector is now larger than the manufacturing sectors of the United Kingdom, Russian and Mexico.
The latest Indonesia Nikkei Manufacturing Purchasing Managers Index (PMI) showed a slight improvement to a reading of 51.7 in May 2018, up from 51.6 in the preceding month (a reading above 50.0 indicates expansion, while one below 50.0 indicates contraction). The PMI index measures the activity level of purchasing managers in the manufacturing sector. The latest reading of 51.7 is also far above the average score over the past 12 months.

Mining in Indonesia

Although mining has always been an important sub-sector of industry in Indonesia, it gained renewed attention – both nationally and internationally – in the mid- and late 2000s when commodity prices rose significantly and when the country had more-or-less recovered from the Asian Crisis. Indonesia is currently a major producer of coal, copper, gold, tin and nickel. The country remains the leading global exporter of thermal coal. But apart from coal mining, investments in the mining sector have been limited in recent years mainly due to regulatory uncertainty which hurts the investment climate. In January 2009 a new law “Mining Law No. 4 2009” came into force with the aim of providing a conducive mining investment climate which is more environmentally friendly, foresees a larger role for domestic stakeholders and aims for more value-added processing within the country. As it also led to an increase in exports of raw minerals the government is making legal incentives to stimulate value-added processing industries, including a possible ban on the export of raw minerals from 2014 onward.
The mining industry provides substantial export earnings, employment opportunities and other economic activities. In 2011 the mining sector contributed around 12 percent to Indonesia’s GDP.

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