The Developing Economies

Volume 38, Number 4 (December 2000)

■ The Developing Economies Volume 38, Number 4 (December 2000)
■ B5
■ 105pp
■ December 2000

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Special Issue: Indonesia's Industrialization: Economic Crisis and Beyond

Introduction (31KB) / Takao Fukuchi and Yuri Sato

Indonesia's Recovery: Exports and Regaining Competitiveness (100KB) / Haryo Aswicahyono and Mari Pangestu


Thee Kian Wie, "The Impact of the Economic Crisis on Indonesia's Manufacturing Sector," pp. 420-53.

This paper discusses the impact of the severe economic crisis of 1997/1998 on Indonesia's manufacturing sector. After presenting an overview of the rapid industrial transformation which took place during the period before the crisis, the author discusses the impact of the crisis on the non--oil and gas industries. The analysis focuses on the crisis' impact on the output of these industries, the number of large- and medium-sized enterprises in them, capacity utilization in large- and medium-scale industries, small and cottage enterprises, capital investment, manufactured exports, and industry performance. The author concludes that a full recovery of Indonesia's manufacturing sector depends on the successful restructuring of the banking system and present huge corporate debt. Once the manufacturing sector has recovered sufficiently, priority should be given to improving its international competitiveness, particularly by developing its industrial technological capabilities.

Haryo Aswicahyono and Mari Pangestu, "Indonesia's Recovery: Exports and Regaining Competitiveness," pp. 454-89.

The paper looks at Indonesia's export competitiveness and the role of exports in economic recovery and sustaining growth in the more medium term. As with the other East Asian economies, Indonesia experienced an unprecedented decline in export growth prior to the financial crisis of 1997. Cyclical factors, especially a decline in prices and contraction of demand, are found to be the main factors underlying this trend. However, structural factors, such as increased competition from lower cost producers, low productivity, and low value added, also contributed to the problems. In order to increase exports and maintain competitiveness, in the short run it will be important to ensure macroeconomic stability, maintain real wage increases in line with productivity, overcome bottlenecks with trade financing, and utilize foreign direct investment and international networks. In the medium run it will be necessary to deepen the industrial structure by improving technological capability and deepen and broaden the human capital base.

Takao Fukuchi, "Econometric Analysis of the Effects of Krismon Shocks on Indonesia's Industrial Subsectors," pp. 490-517.

This article analyzed the different trends of production indices of eight manufacturing subsectors during the economic crisis period (July 1997- December 1998). All the indices declined until May 1998, but their recovery patterns markedly differed. The index of the agriculture-related subgroup (food and beverage, fertilizer, petroleum refinery) recovered quickly and reached a historically highest level in December 1998, while those of the other groups continuously declined. Therefore, the production index of the agriculture- related group was 82% higher than the pre-crisis level, while that of the light- industry group (textile, furniture, miscellaneous) was 10% lower and that of the heavy-industry group (cement, iron and steel, machinery) became less than half. The paper estimated equations for subsectors, conducted simulation experiments, and determined how different causes (noneconomic impact, rapid depreciation and shrinkage of imports, general economic trend, strong export activity, and others) affected the trends of subsectoral production and employment.

Iwan J. Azis, "The Nonlinear General Equilibrium Impact of the Financial Crisis and the Downfall of Manufacturing," pp. 518-46.

Based on a detailed mechanism of a constructed model linking explicitly the financial sector with the real sector, factor demand, and household income, this study analyzes the impact of manufacturing downfall on household income in Indonesia. After validating the model by applying sequential shocks (events) during the crisis, the study revealed that urban households were hardest hit in the episode. From a set of counterfactual scenarios, some non-monotonic trends were derived, showing that despite resulting in worse macroeconomic indicators, a further decline in selected manufacturing sectors could have brought higher incomes to most households than under the factual scenario. When compared with results from further shocks in all manufacturing sector, the macroeconomic indicators would have been better. Hence, a selected decline in the manufacturing sector is not always unfavorable when other sectors can step in. From a policy perspective, this would indicate the importance of inter-sectoral substitutions and policy trade-off.

Anggito Abimanyu, "Impact of Agriculture Trade and Subsidy Policy on the Macroeconomy, Distribution, and Environment in Indonesia: A Strategy for Future Industrial Development, " pp. 547-71.

The Indonesian economy has survived through a period of crisis owing to the performance of the agricultural sector. This study employs the computable general equilibrium (CGE) INDORANI model (single country) to simulate the impact of reducing trade distortions and government subsidies to the agricultural sector on the economy and environmental pollution. The results of our simulations indicate that both trade liberalization and government subsidies enhance GDP and real consumption but have a negative impact on the environment. To minimize environmental damage, trade policy directed toward agricultural inputs is more desirable than government subsidies for fertilizer, but this does not help poor farmers. Coupled with direct and targeted subsidies to poor farmers, trade openness seems to be a suitable policy for achieving both socioeconomic and environmental objectives. Further trade liberalization will be the key for future successful industrial development.

Yuri Sato, "How Did Indonesia's Crisis Affect Small and Medium-Sized Enterprises? From A Field Study of the Metal-Working Industry in Java," pp. 572-95.

This paper focuses on the impact of Indonesia's economic crisis on small and medium-sized enterprises (SMEs). It shows how the performance of SMEs during the crisis varied widely even in the same industrial subsector, and found that the factors most affecting performance have been market orientation and the linkages that the SMEs have formed with the buyers of their products. Well-performing SMEs were found to have utilized putting-out linkages with wholesalers which enabled them to switch to products having better markets. On the other hand, the SMEs which had subcontracting linkages with assemblers or contracting linkages with user-factories (with the exception of SMEs having export-oriented linkages) suffered badly in the crisis because of specificity of products with little room for switching. The paper also found that exposure to debt due to borrowing for investment has been another factor affecting performance, but that enterprise size has had no linear correlation with performance.