Indonesia is the largest economy in Southeast Asia, both in terms of population (267 million people) and economic size with a GDP of $1.12 Trillion. Can this archipelago’s future economic growth match demographic youthful transition for the next few years with an average age of their citizens at 30.5 years? Studies have shown and Indonesia needs to expand their global value chain, as it has been proven to raise incomes and reduce poverty.
Indonesia’s short term history of exports as a share of GDP has not been very attractive, with a 17.3% decline from 2018. This was due to the country’s manufacturing slump, as Indonesia has what is considered a very weak Global Value Chain (GLC) with an over reliance on shipping commodities. The decline was in both relative and in real dollars, in that gross exports peaked in 2011 at $203 billion, then fell to $180 billion in 2019. Indonesia’s global market share in merchandise exports is now stagnating at around 0.9%, even though it has a youthful 3.5% of the global population.
Strong global demand in low cost manufactured goods from countries like Vietnam and Bangladesh have, in the past, brought finance, free trade, and growth into the global value chain. Indonesia watched it’s neighbor Vietnam expand global export market share by 1.3% of its GDP, while Indonesia’s has stagnated.
Indonesia needs to expand its Global value chain. Studies have shown that trade linkages to the global value chain (GVC) raise incomes and reduce poverty. The idea is that a country trades its comparative advantage (cheap and abundant labor) to gain what it lacks (capital and skills to produce higher value-added goods). Interestingly, the results indicate that being a seller in GVCs contributes more strongly to economic upgrading than being a buyer only.
Studies by the World Bank have found that global value chain integration increases domestic value added, especially if it’s on the product selling side, which holds across all income levels. These results highlight the importance of policy for economic upgrading through global value chain integration. The studies have shown the effects of global value chains can and will magnify the gains for domestic value.
Indonesia already has GVC accelerators forming with no cost to the government. Companies such as ShopTheGlobe are set up to provide robust help for global value chain expansion (with export trade for example), and it just takes a little time for local companies to find these types of vibrant improvements that would accelerate their export potential and then learn how to properly utilize them, while utilizing a open B2B like system, for companies that are already established and providing services in several Indonesia languages, could help both propel companies and income levels of the region.
A detailed analysis shows that the largest gains from global value chains are through integration as a seller or producer. The most important study observed that these gains drive economic expansions in even high and upper-middle income countries. We find that the domestic policy environment is indeed a major catalyst for the effects of GVC participation on domestic value added. It can act as either an obstacle or a facilitator for economic upgrading. GVCs should be a key element of any country’s export strategy.
For Indonesia to increase its export business it should: look at the success of Vietnam and open up more free trade, especially to all its small and mid sized manufacturers that make end products; allow more freedoms with less regulations; sell their products globally through established GVCs (such as ShopTheGlobe); and work to bring in more and improved global financing.