Indonesia is currently facing deindustrialization. This drastic decline in the industrial or manufacturing sector is evident from the closure of numerous manufacturing plants and the widespread wave of layoffs across the country.
Yet, the industrial sector, investment, and exports play a critical role in driving national economic growth.
If this issue is not addressed, it has the potential to cause negative impacts, such as an increase in unemployment and poverty, which could, in turn, lead to various other social problems.
This was highlighted during the Special Ramadhan Lecture “Reflection and Solutions” titled “Trade Liberalization, Import Loopholes, and the Impact of Deindustrialization,” held on Friday (Mar. 21) via UGM YouTube.
The lecture, organized by UGM’s Board of Professors, featured several speakers, including the Presidential Special Envoy for International Trade and Cooperation, Mari Elka Pangestu, a member of Indonesia’s National Economic Council (DEN), Arief Anshory Yusuf, economist and Rector of Paramadina University Didik Junaidi Rachbini, and ISEAS Singapore researcher Yanuar Nugroho.
Pangestu explained that Indonesia is currently facing the impacts of global economic dynamics, causing instability in the national economy.
Therefore, adjustments in economic strategies and policies are necessary to counteract these effects.
“Global changes are taking place, which require policy adjustments at the national level,” said Pangestu.
The former Minister of Tourism and Creative Economy (2011—2014) stated that Indonesia’s economy is relatively stronger than that of other countries.
She mentioned several global events affecting the economy, such as the wars in the Middle East, the Russia-Ukraine conflict, and tensions in the South China Sea.
Even Donald Trump’s election as President of the United States contributed to trade wars and increased tariff burdens.
“Economic growth in the U.S. is disrupted, and inflation will be higher due to rising tariffs, resulting in higher interest rates,” she explained.
According to her, this situation limits the instruments available to stimulate growth, while budgetary efficiency and reallocation in the national budget (APBN) will further restrict the room for stimulus.
However, she pointed out that the economic downturn in the U.S. could present opportunities for investment relocation.
For this to happen, efforts to strengthen the economy and achieve a 6-7% growth rate are needed, such as boosting exports and reinforcing cooperation with other countries.
“We need economic growth of 6% or 7%. The country must also avoid turmoil and maintain trust to prevent vulnerability to capital outflows and maintain a favorable business climate,” she stated.
Arief Anshory Yusuf assessed that deindustrialization is approaching Indonesia. The declining industrial or manufacturing sector, he said, reflects structural transformation and is one characteristic of a growing economy—one that initially centers on agriculture, moves to large-scale industries and eventually focuses on services.
“Deindustrialization is natural, but it can be problematic when it occurs prematurely,” said the Padjajaran University lecturer.
Problems arise when there is no momentum for higher growth. From an income perspective, Indonesia is still in a position to industrialize, but from a labor perspective, the country is on the verge of missing that momentum.
This could result in a lack of employment opportunities. For instance, if the downstream program focuses on resource-intensive sectors, it could become a trap for declining labor absorption.
“This becomes dangerous when the workforce enters stagnant sectors, resulting in increased competition and reduced incomes, especially in low-productivity service sectors, leading to the current economic conditions,” he stressed.
So, what can be done to address the dilemma of trade liberalization and deindustrialization? Economist and Paramadina University rector Didik Junaidi Rachbini suggested that an outward-looking approach is the solution.
He pointed to the flying geese model of industrialization, where Japan led the industrialization movement 40 years ago.
At that time, Indonesia’s income was higher than China’s. However, this has changed, with China now leading global industry, even surpassing Indonesia, while Vietnam is ahead of Indonesia.
“The key is in the industry. Even if the economy grows by 8%, but the industrial sector only grows by 3—4% and much of the trade remains informal, it will likely be difficult,” he said.
Therefore, he emphasized that investment, industry, and exports play a crucial role in fostering future economic growth. He also warned that deindustrialization could have negative effects, such as unemployment, which in turn could lead to other social issues.
Yanuar Nugroho stated that Indonesia’s unemployment rate has actually improved, but there is a negative trend at the beginning of 2025.
Structural unemployment has social implications, including poverty, widening social inequality, declining welfare and quality of life, increased social conflict, and other negative effects.
According to him, the government must implement short-term, medium-term, and long-term policy recommendations.
“In the short term, industrial zones and supporting infrastructure need to be revitalized. In the medium term, vocational education should be developed, and in the long term, investment in industrial research and innovation is crucial,” he explained.
Professor M. Baiquni, Chair of the Board of Professors of State Universities with Legal Entities (MDGB-PTNBH) for the 2024—2025 term, said that the Special Lecture exemplifies how academics and professors contribute ideas to provide solutions to national problems through a movement to ignite the nation’s conscience.
“The hope is that this will lead to deeper discussions on the policies to be implemented in the future,” said the professor.
Author: Lazuardi
Editor: Gusti Grehenson
Post-editor: Afifudin Baliya
Photograph: Bisnis.com