Value Chain Connectivity in Indonesia: The Evolution of Unbundlings

Abstract

This paper applies the conceptual framework of ‘unbundling’, proposed by Baldwin (2016), to assess the value chain connectivity in Indonesia. Indonesia is a geographically large country, and three different levels of unbundling co-exist. The first unbundling aligns with the industry-wise international division of labour in plantation agriculture, mining, and labour-intensive industries; the second aligns with where the task-wise international division of labour dominates mainly in machinery industries; and the third aligns with where face-to-face costs are reduced by the digital economy. We argue that the further upgrading of unbundling and the more effective use of advanced piecemeal technologies among different levels of unbundling will enable Indonesia to achieve rapid and equitable economic development. Overcoming distance is key for effectively using the mechanics of unbundling. We propose that three key elements are be promoted: enhancement of connectivity, development of the service sector, and improvement of the policy environment.

Tulisan ini menerapkan kerangka kerja konseptual dari fenomena ‘unbundling’, yang diperkenalkan oleh Baldwin (2016) untuk menelaah ketersambungan rantai nilai di Indonesia. Indonesia merupakan negara dengan wilayah geografi yang besar dan memiliki tiga tingkat pemisahan (‘unbundling’) yang hadir bersamaan. Unbundling yang pertama sejalan dengan spesialisasi pekerjaan internasional di perkebunan, pertanian, pertambangan, serta industri-industri padat karya; yang kedua, seiring dengan lokasi spesialisasi penugasan lapangan kerja internasional yang mendominasi—utamanya di industri permesinan; dan yang ketiga bersamaan dengan menurunnya biaya dari pertemuan langsung (face-to-face) yang hadir sebagai konsekuensi perekonomian digital. Kami berpendapat bahwa semakin tingginya proses pemisahan dan semakin efektifnya penggunaan teknologi secara bertahap pada berbagai tingkat unbundling yang berbeda dapat mendukung Indonesia mencapai pembangunan ekonomi yang cepat dan terdistribusi merata. Mengatasi masalah perbedaan jarak adalah kunci untuk mengambil manfaat dari mekanisme unbundling. Penulis mengusulkan tiga elemen kunci untuk dipromosikan: peningkatan konektivitas, pembangunan sektor jasa, serta perbaikan ekosistem kebijakan.

Keywords:

• international division of labour
• distance
• connectivity
• global value chains
• information and communication technology

JEL classification:

• F10
• F14
• O14

Notes

1 See Kimura (2018), for more a detailed explanation

2 Obashi and Kimura (2017) show that the penetration of the second unbundling widely differs even among ASEAN member states.

3 GAFA is an acronym for Google, Apple, Facebook, and Amazon.

4 BAT is an acronym for Baidu, Alibaba, and Tencent.

5 HS code 15 covers animal or vegetable fats and oils and their cleavage products; prepared edible fats; and animal or vegetable waxes. HS code 27 covers mineral fuels, mineral oils and products of their distillation; bituminous substances; and mineral waxes.

6 Zen, Khoirunnurofik, and Yudhistira (2018) conducted a questionnaire and found that the insufficient capability of soft and hard logistics infrastructure limits the scope of businesses, particularly in outer islands.

7 Including those living in the surrounding metropolitan region (known as Jabodetabek).

8 Some cities that are a part of greater Jakarta such as Bogor, Tangerang, and Bekasi have been growing more rapidly, albeit from a low base (MGI 2012).

9 SIJORI is an acronym using the first two letters of Singapore, Johor, and Riau Islands.

10 See Van der Eng (2015), Garnaut (2015), and Pangestu (2010) on natural resource-based industries and their implications in Indonesia.

11 See also Woo and Hong (2010).

12 See Obashi and Kimura (2017) for the correlation between the dynamics of the second unbundling and the changes in the number of exported product-destination/imported product–source pairs of machinery parts and components in ASEAN Member States.

13 13. See also Pangestu, Rahardj, and Ing (2015).

14 Suryadarma and Jones (2013) provide a comprehensive review on education in Indonesia.