Manufacturing in India and Indonesia: performance and policies

Abstract

Since the global financial crisis of 2008, the world has been riveted by China's rapid growth and its contribution to the global recovery. But less attention has been paid to India and Indonesia – Asia's two other giants – which also displayed resilience during the crisis and show promise of sustaining this performance. Also remarkable are their geographical, historical and cultural proximity; notwithstanding their differences, these two countries are alike in many respects and face similar challenges, as reflected in their emerging policy priorities. China's large size and rapid growth may have absorbed the attention of Indian and Indonesian policy makers, but this paper argues that a comparative approach to the issues that both countries face can yield interesting insights and provide potential solutions to their development challenges.

Keywords:

• Manufacturing
• industrial development
• India
• Indonesia

Acknowledgements

Senior Associate and Chair in Southeast Asian Studies. Van Tran, Junior Fellow, provided research assistance. I am grateful to the three anonymous referees for their thoughtful and helpful responses.

Notes

¹Indonesia and India have a total Muslim population of about 380 million; the Middle East, North Africa, Europe and the Americas have about 370 million (Pew Research Center 2011).

²If languages reflect ethnic diversity, then India and Indonesia are remarkably diverse. The Indian constitution recognises 22 languages, 30 are spoken by more than a million native speakers each and 122 are spoken by more than 10,000 native speakers each (2001 Indian Census). While virtually every Indonesian speaks Bahasa, more than 700 languages are still used in different parts of the country.

³Indonesia proclaimed independence on 17 August 1945, although the Dutch did not recognise this until 27 December 1949. See <http://www.indonesia.go.id/en/indonesiaglance/geography-indonesia>.

⁴In 1990 international Geary–Khamis prices, India's per capita income in 1949 was $624 and Indonesia's was $763 (Maddison 2008).

⁵The other leaders of the non-aligned movement were Nasser of Egypt, Tito of Yugoslavia and Nkrumah of Ghana.

⁶India's gross national income per capita in 2011 was $1,410, compared with Indonesia's $2,940; India's GDP per capita in 2011 was $1,489 ($3,652 in PPP terms) whereas Indonesia's was $3,495 ($4,668 in PPP terms).

⁷For comparisons of India and China, see Bardhan (2010), Gulati and Fen (2007), Smith (2007), and Winters and Yusuf (2007). For a comparison of China and Indonesia, see Hofman, Zhao and Ishihara (2007). For a comparison of India and Indonesia, see Lankester (2004) andThee ( 2012).

⁸Author's calculation, using Povcal <http://iresearch.worldbank.org/PovcalNet/>.

⁹The elasticity of poverty reduction and GDP was –0.26 for Indonesia (for 1984–2010) and –0.12 for India (for 1978–2010), using an estimate of $1.25 per day (in 2005 PPP terms) for the head-count poverty rate and GDP at constant prices in local currency units (author's estimates, based on data from the World Bank's World Development Indicators, available at <http://data.worldbank.org/data-catalog/world-development-indicators>).

¹⁰No country has developed since 1950 without industrialisation (Szirmai 2009). The experiences of Japan, South Korea, Taiwan and now China demonstrate that manufacturing can increase labour productivity by an extraordinary amount. Such increases are not automatic, however, and rely on a country's policies and institutional environment.

¹¹The median ages of the populations of India and Indonesia were 25.1 and 27.8, respectively, in 2010 (UNDESA 2011).

¹²The numbers taken were for the probabilistic median.

¹³The Lewis turning point is when agriculture and informal services cease to have surplus labour and the real wage of unskilled labour rises rapidly. Agriculture includes fisheries, and ‘informal services’ includes wholesale and retail trade; hotels and restaurants; and community, social and personal services.

¹⁴It increased from 12.3% to 13.9% between February 2005 and August 2012 (BPS 2012).

¹⁵It declined from 12.2% in 2004–05 to 11.4% in 2009–10 (Government of India 2012): 212 (tables 9–11).

¹⁶India's OTRI for manufactured imports is 13.1%, compared with Indonesia's 3.9% (World Bank 2012a). Data are for 2009, the latest year for which updates are available. The trade barriers that Indonesia faces in export markets are roughly twice as high in aggregate as those it imposes at its own borders, whereas for India they are only half as high.

¹⁷See also Berg and Miao (2010) and Nouira, Plane and Sekkat (2010).

¹⁸See statement by Montek Singh Ahluwalia, Planning Commission Deputy Chairman, on 16 July 2012, available at <http://www.moneycontrol.com/news/economy/india-wontmeet-361trillion-infra-investment-target-montek_731016.html>. For the approach paper to the Twelfth Five Year Plan, see Government of India (2011). A final target has yet to be issued.

¹⁹The India Infrastructure Finance Company Ltd can finance projects itself or re-finance banks and other financial institutions.

²⁰Infrastructure sub-sectors permitted to have 100% FDI are power, aviation, construction and development, industrial parks, telecommunications, and special economic zones.

²¹The IIGF appraises the viability and risks of projects, structures the guarantees, and charges the PPP operator a fee for covering the government's obligations.

²²India's land-acquisition law dates back to 1894, but it was amended in 1962 to include the acquisition of land for companies involved in a ‘public purpose’.

²³A draft of the bill can be seen at <http://rural.nic.in/sites/downloads/general/LS%20Version%20of%20LARR%20%20Bill.pdf>.

²⁴See <http://hdr.undp.org/en/statistics/>.

²⁵UNDP (2011) defines expected years of schooling as ‘the number of years of schooling that a child of school entrance age can expect to receive if prevailing patterns of age-specific enrolment rates persist throughout the child's life.

²⁶UNDP (2011) defines the mean years of schooling as ‘the average number of years of education received by people 25 years and older’.

²⁷See <http://www.oecd.org/pisa/>.

²⁸See <http://www.timeshighereducation.co.uk/world-university-rankings/>.

²⁹See <http://www.arwu.org/index.jsp>.

³⁰The paid-in minimum capital requirement is the amount an entrepreneur needs to deposit in a bank.

³¹Note that in 2001, India ranked 71^st and Indonesia 88^th out of 91 countries.

³²A less charitable explanation involves the ability of businesses to bribe officials tasked with implementing the law.

³³Of course, bills are revised frequently to obtain a majority vote in parliament, but the process is controlled by the executive and not by the legislature.