t is indisputable that Indonesia has been grappling with deindustrialization over the past decade: The plummeting of manufacturing contribution to the gross domestic product (GDP) ratio from 27 percent in 2004 to 18 percent in 2022 and the slowing down of the investment-to-GDP ratio from 34 percent in 2013 to 27 percent in 2022.
Compared with China, one of the world’s fastest investment and manufacturing-driven economies, Indonesia’s manufacturing- and investment-to-GDP ratios appear significantly lower, almost half that of China’s.
Contrary to the perception that China’s strength lies in its low-cost labor, the reality is that China heavily invests in productive assets, particularly advanced manufacturing equipment such as machines, vehicles and appliances. This investment strategy has catalyzed exponential growth in value-added goods and the accumulation of technological “know-how”. As a result, China has achieved remarkably low unit economics in advanced manufactured goods, including solar panels and electric vehicle (EV) batteries, primarily due to extensive “learning by doing”. This approach has led to an “industrial boom”, propelling China’s productive economy forward.
In stark contrast, approximately 75 percent of Indonesia’s investments are channeled into non-productive assets like buildings and other static infrastructure. Consequently, Indonesia’s incremental capital-output ratio (ICOR) has remained steady at around 5-6.5 over the last decade.
This trend reflects Indonesia’s shift from a producer to a consumer in certain strategic industries despite having abundant natural resources. Indonesia’s reliance on imports, which amount to about US$200 billion annually, with approximately 30 percent coming from China, clearly illustrates this issue.
Many speculate that China’s investment and manufacturing-driven economy may slow down in the coming years. On the contrary, according to Pettis (2023), to achieve 4-5 percent annual GDP growth, China might need to aggressively expand into other countries’ investment and manufacturing sectors, including, most strategically, Indonesia.
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China’s contribution to global investment is projected to increase to 38 percent over the next decade. As the largest manufacturing country globally, China is expected to augment its share in global manufacturing output to 40 percent in the next 10 years.
