Why a commodities boom is not lifting Indonesia's economy

Why a commodities boom is not lifting Indonesia’s economy

As investment pours into mining projects, the country’s once-mighty manufacturing sector is stagnating and shedding jobs.

A. Anantha Lakshmi and Diana Mariska

Six years since I last met her, Yvonne has changed. As a mother and a housewife, she has become far more open to opportunities for part-time work so she can help support her family. “I hope one day, there are more stable jobs in Cikarang,” she said. Her husband, an industrial engineer, lost his job two years ago when his company closed due to poor performance. Countless other factories in Cikarang, Indonesia’s largest industrial hub just east of Jakarta, have shut their doors over the past few years. Empty buildings, laid-off workers, and uncertainty have become common in the city’s manufacturing zone.

Yvonne’s situation is indicative of the manufacturing sector’s woes. Manufacturing’s share of Indonesia’s GDP has dropped from 28.6% in 2002 to around 18.3% as of 2023. Although it employed more than a fifth of the workforce in 2010, the share has also dropped, even as other sectors have performed well and manufacturing itself stagnated.

Fendi Barkey, a merchant at the industrial town of Subang in West Java, said that most of his customers were not factory workers but delivery drivers and middle-class housewives.

Official figures suggest annual GDP growth in the mining sector exceeded 5% in 2023, double the rate of the overall economy. While export figures have soared, the benefits for ordinary Indonesians have been limited. Commodity prices fluctuate hugely year-to-year, and the sector is capital-intensive, needing few workers for high output. Kilns, crushers, piles of coal — these are a far cry from the bustling assembly lines that defined Indonesia’s industrialization from the 1980s until recently. And non-economic and economic growth is fundamentally weaker than it was during the rapid phase of industrialization.

Economists point out that manufacturing creates more foundational jobs and value addition, while mining profits are concentrated among a few conglomerates. During the Trump era, the United States turned inward, increasing trade restrictions, and Indonesia did likewise. “If you try to control everything, you end up with less,” said a senior official at a leading Indonesian industrial association.

Smuggling of precious metals is rife. One former factory worker said that between 2017 and 2023, he had three jobs in electronics assembly, furniture finishing, and consumer goods. “Each time, the company closed or moved overseas,” he said. The electrical and electronics export sector shrank considerably, with multinational companies such as Panasonic and Toshiba shuttering operations.

Indonesia now depends on commodity exports for growth. According to World Bank data, the country exported over $300 billion of goods in 2023, of which more than half came from natural resource sectors such as palm oil, coal, nickel, and copper. Manufacturing exports, on the other hand, have stagnated.

This period coincided with a drop in domestic and international investment in manufacturing, uncertainties from changing policies, and competition from China and Vietnam as destinations for global businesses.

Even as the mining sector surges, inconsistent policies and local resistance complicate its prospects. The government has restricted exports of raw nickel and forced domestic processing, but this led to surges in prices — volatile as a result.

While commodity prices have boom-bust cycles, manufacturing delivers more stable growth. But tough trading conditions, delays in permits, ever-changing policies also make manufacturers less competitive. As Sukma Ananta from the Cikarang Association of Textile Exporters explained, “It is hard to plan when you don’t know what rules will be next month. There are too many changes, and no way to predict what will happen.”

In recent years, many Indonesian business leaders have called for a renewed push to revive manufacturing, but few have seen success. Many local textile, furniture, and electronics companies have shut down or moved operations entirely. The government has tried to reform labor laws and create incentives, but results have been mixed.

Auditors expect the share of manufacturing in GDP to fall further over the coming decade. Indonesia remains a leading exporter of palm oil, coal, nickel, and some metals, but a diversified economy built on manufacturing seems increasingly out of reach.

The challenges of cheap goods that come from China have become more acute. Imports have surged from China and other low-cost countries, squeezing Indonesian manufacturers further. Even for commodity-based industries, the profits from this boom are not widely distributed. A handful of powerful families and corporations control vast portions of mining wealth.

Finally, the pivot to commodities has not been wholly beneficial for jobs. The proportion of workers in manufacturing dropped from 22% in 2010 to just above 15% in 2023. Income growth for most workers has stagnated. “I used to earn enough to buy my own motorbike and support my family,” said Mr Radin, a 28-year-old former factory assembler. “Now, it is hard even to find consistent work. Maybe, if we invest in manufacturing again, we can make more.”