Jakarta, IO – Indonesia must continue to transform its economy if it is to achieve the status of a developed country. To realize this dream, the Government has made various breakthrough efforts, as it requires high economic growth and a move away from “business as usual”.
According to the National Development Planning Agency (Bappenas), if Indonesia can maintain annual economic growth rate of at least 6 percent annually from 2025, it can escape the middle-income trap and become a developed country by 2045, with a per capita GNI of US$20,000. This means that Indonesia’s GDP in 2045 will reach Rp44,099 trillion (per constant price, using 2010 as the base year). By comparison, Indonesia’s GDP (per constant price) in 2022 was still Rp11,710 trillion.
To reach a final stage, the non-oil and gas processing industry sector is expected to contribute more to the national GDP. The growth of this sector needs to be maintained at an average of 7.5 percent, from 2025-2045. Subsequently, it will exert a positive impact on job creation, economic added value, export value, state revenue and income level.
To achieve high industrial growth targets, the Government has pursued transformations in social, economic and governance spheres. On the economic front, the downstream processing of natural resources is a key component that has been continuously implemented. This is expected to encourage domestic and foreign direct investment in the primary and secondary sectors. Domestic investment will be focused on the mining industry, while FDI will concentrate on the base metal industry (Danareksa, 2023). Downstreaming will also lead to higher state revenues through both tax and non-tax contributions. Downstreaming of natural resources is one of the key pillars in strengthening and deepening the national economic structure. There are at least three reasons why this is crucial.
First, it will build a stronger industrial structure, with higher added value. This will support the exports of products with a higher level of complexity, thereby integrating Indonesia more tightly into Global Value Chains. Second, the creation of higher value-added industries also supports industrial capacity and capability in meeting demand for semi-finished and finished goods, which are still widely imported. Third, the development of higher-added-value industries will lead to the establishment of a local value chain with support industries from other regions, resulting in more inclusive growth.
Bolstering downstreaming in the future can be further directed towards more complex products, synchronized with global demand and availability of endowment. In addition, policies to guarantee the availability of raw materials by regulating the volume of raw materials exports and accelerating downstreaming will spur economic transformation and strengthen our industrial structure.
Gradually, the downstreaming program has succeeded in improving the national export structure. This aside, the direction of the downstream policy is in line with future green industry development trends. One of the current focuses is the downstreaming of metals and minerals. In line with the increasingly high demand for downstream metal products, copper and nickel are commodities with enormous potential to be developed. Downstreaming also provides more extensive investment opportunities in the manufacturing industry. Investors will find it easier to access raw materials, if they set up a business in producing areas.
Furthermore, core competency-based downstreaming has a vital role to play in carrying out economic structural transformation. This must be designed based on the principles of sustainable industrialization. Through downstreaming, Indonesia, which has abundant natural resources, will be able to achieve quality economic growth.
To support the acceleration of natural resource-based downstream industries, the Government has devised an investment roadmap to guide related projects until 2040, revolving around eight priority sectors and 21 industrial products. These designations are based on Indonesia’s potential and advantages as a resource-rich country, as well as the potential for large market demand in the future. The total investment required is US$545.3 billion.
Downstreaming will also accelerate job creation and the establishment of new players in the industrial value chain; for example, the involvement of micro, small and mid-sized enterprises (MSMEs). Inclusivity in the Indonesian industry will support productivity and self-reliance in society, which will erect a stronger and more sophisticated economy. Potential commodities for downstreaming are scattered across various regions in Indonesia. Each region has its own unique potential and advantages, and this will constitute its core strength.
Industrial downstreaming will deepen and strengthen the industrial structure, based on excellence and core competencies. This in turn will increase the share of manufacturing in national GDP. In order to achieve this, contributions from each industrial sub-sector in various provinces are needed, especially those located outside Java. According to Figure 5, each region in the economic corridor has industrial priorities based on its respective regional competencies. It is hoped that these priority industries can become a locomotive that powers and accelerates industrial growth in the regions.
Although industrial downstreaming is believed to exert a major impact on economic growth acceleration through structural transformation, it also poses several challenges, including:
1. Ensuring a sustainable supply of raw materials
Sustainable supplies of raw materials are critical to the success of downstreaming. To secure this, production of natural resources in the upstream sector needs to be ramped up, so industries can obtain sufficient raw materials locally.
2. Development of connectivity infrastructure
Providing and utilizing infrastructure connectivity is a challenge in industrial development. Downstreaming, which connects the upstream to downstream sectors, needs efficiency in building a resilient domestic supply chain. The existence of an integrated infrastructure is important for the sustainability of the industry.
3. Providing skilled workers with specific expertise
Industrial downstreaming requires skilled workers who have specific expertise. It will be difficult for industries to meet this need by themselves. Thus, the Government needs to build more quality educational and training facilities, to create a competent workforce that meets industry needs.
4. Financing and investment
Downstreaming requires massive investments. Thus, the Government needs to step up efforts to create a conducive investment climate in order to court more investments, not only in the downstream side but also upstream (commodities).
5. Market certainty and market access expansion
One of investors’ considerations before they decide to invest in certain industrial sector is market certainty. Thus, in line with an industrial development that produces competitive downstream products, the Government needs to establish stronger international cooperation on trade to expand market access globally.
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Downstreaming is a long-term endeavor, one that is expected to transform Indonesia’s economic structure from one based on low value-added activities to higher ones. This requires policy consistency coupled with harmonization across diverse sectors, in order to ensure that downstreaming can be carried out optimally to move Indonesia’s economy up the value chain.