Indonesia’s Manufacturing Sector Stagnates, Raising Deindustrialisation Concerns

Indonesia’s manufacturing sector has remained between 19% and 20% of gross domestic product for over twenty years, prompting concerns about deindustrialisation as the country continues to rely heavily on commodity exports, economist Lili Yan Ing highlighted in Depok.

Manufacturing Share Declines Since Early 2000s Peak

According to World Bank data cited by Lili Yan Ing, secretary general of the International Economic Association, Indonesia’s manufacturing sector reached its peak contribution to GDP at 31.9% in 2002. Since then, it has steadily declined to about 19% in 2025.

This trend suggests a contraction in industrial activity relative to the overall economy, raising questions about the country’s industrial trajectory amid broader economic shifts.

Export Dependency on Commodities Persists

Lili pointed out that more than 60% of Indonesia’s exports remain concentrated in natural-resource-based commodities, including coal, palm oil, nickel, bauxite, and aluminium.

This export profile has remained largely unchanged since the early 1960s, when nine out of the top ten export goods were also natural-resource intensive. She remarked that despite over eight decades of independence, Indonesia’s export reliance on low value-added commodities persists.

Implications for Employment and Economic Transformation

With around 60% of Indonesia’s population of working age, the stagnation in manufacturing poses challenges for job creation and employment quality, Lili warned.

Expanding higher value-added manufacturing is associated with creating more productive and better-quality jobs. The economist emphasised that moving away from deindustrialisation is critical for maintaining and improving employment opportunities.

Domestic Policy Barriers to Industrial Expansion

Lili identified certain domestic policies that could hinder industrial development, such as local content requirements and non-tariff barriers. She suggested these may impede trade and limit the growth potential of manufacturing industries.

She advocated for reforms to align policies with goals of increasing industrial productivity and competitiveness rather than restricting market access.

Focus on Productivity Gains From Investment

The economist stressed that attracting investment alone does not guarantee industrial advancement unless it is translated into productivity improvements. She stated it is important to assess “how much of that investment is turned into productivity gains,” rather than just the volume of capital entering the country.

Government Role in Supporting Rather Than Competing With Industry

Lili proposed a clearer delineation between government and private sector functions, where the state facilitates a conducive environment for businesses rather than competing against them.

According to her, a productive government role focuses on creating conditions favourable for private-sector growth, ensuring public sector involvement complements rather than crowds out industrial activity.

Outlook for Indonesia’s Industrial Development

Given the longstanding pattern of manufacturing stagnation and commodity dependence, future efforts in Indonesia will likely centre on policy measures to enhance industrial productivity, reform trade barriers, and strengthen private-sector development dynamics.

How these efforts translate into reversing deindustrialisation trends and expanding Indonesian manufacturing’s share of GDP remains a key issue for analysts and policymakers going forward.