Is Indonesia Facing Premature Deindustrialization?
Mohammad Nur Rianto Al Arif
(Professor at UIN Syarif Hidayatullah Jakarta / Secretary General of the Indonesian Lecturers Association (DPP ADI) / Board Member of IAEI / Board Member of the ISEI Jakarta Chapter)
When a country seeks to move toward a higher level of prosperity and welfare, there is an important phase it must pass through to strengthen its industry.
A solid economic structure, a diverse production base, and the ability to utilize technology and a productive workforce are key.
However, for Indonesia, this journey has not always been smooth. For some economists, an issue that once sounded distant is now becoming a reality: premature deindustrialization.
In the past, Indonesia’s industrialization was a vital asset for economic development. From the 1970s to the 1990s, the industrial sector’s contribution to Gross Domestic Product (GDP) rose dramatically, from less than 9 percent in the early 1970s to more than 25 percent in 1996.
This was a milestone showing that Indonesia was on the map of successfully industrializing developing countries.
Even in the early 2000s, shortly after the 1997–1998 Asian financial crisis, the share of industry did not immediately collapse as drastically as in some neighboring countries.
However, since the beginning of the new millennium, the trend has gradually changed. What several economists call "premature deindustrialization" marks an era when the economic structure no longer reflects strong industrialization or even begins to drift from its expected path.
What is meant by deindustrialization here? Simply put, deindustrialization occurs when the industrial sector’s contribution to GDP declines significantly over the long term, along with a reduced role of manufacturing as the main driver of economic development.
Data frequently cited show this trend: manufacturing’s contribution to national GDP, which once peaked in the past, now stands at around 17.39 percent in the third quarter of 2025.
This figure is relatively stagnant and below the level once considered a sign of strong industrialization.
The declining contribution of manufacturing is not merely a statistic but an early symptom of deindustrialization.
Manufacturing growth that consistently lags behind overall economic growth indicates that the sector is losing the momentum essential for long-term development.
The Indonesian Employers Association (APINDO) has also recorded that since 2014, the proportion of manufacturing to GDP has fallen from about 21.3 percent to around 17.39 percent in 2025.
This condition reflects the weakening role of manufacturing, which should serve as a major engine for job creation and domestic value added.
On the other hand, the government, through the Ministry of Industry (Kemenperin), rejects the claim that Indonesia is experiencing deindustrialization.
The government maintains that manufacturing grew above the national economic growth rate in the July–September 2025 period.
Based on data from Statistics Indonesia (BPS), the manufacturing sector as a whole grew by 5.54 percent in the third quarter of 2025, slightly down from 5.68 percent in the second quarter of 2025.
According to data processed by Kemenperin, manufacturing’s contribution to national GDP reached 17.39 percent, up from 16.92 percent in the previous quarter.
In addition, World Bank and United Nations Statistics data show that Indonesia’s Manufacturing Value Added (MVA) reached USD 265.07 billion in 2024.
The government also highlights positive export trends in manufactured products, including an increase in non-oil and gas exports in December 2025 of more than 11 percent year-on-year, particularly for machinery, electronics, and chemical products.
Nevertheless, claims that Indonesia’s manufacturing sector is “healthy” often clash with realities on the ground.
Several indicators raise concerns. First, although manufacturing growth is positive, it often trends below overall economic growth.
This means manufacturing is no longer the primary engine of national growth as it was during the earlier industrialization period.
Second, signs of contraction have appeared in several Purchasing Managers’ Index (PMI) readings that fell below 50 in 2025, indicating shrinking manufacturing activity.
Third, large-scale layoffs increased sharply in the first half of 2025, including in the industrial sector, raising concerns about the sector’s declining labor absorption.
Fourth, business confidence in industrial growth sometimes appears driven more by short-term fiscal policies or economic stimulus than by long-term structural competitiveness.
There is even a narrative that many companies are now focused more on survival than expansion.
Global uncertainty, including tariff agreements with the United States, has also made industries hesitant to invest.
The issue becomes more complicated as the industrial base, once labor-intensive, increasingly shifts toward resource commodities such as palm oil, nickel, and other minerals, which do not absorb as much labor as traditional manufacturing.
This shift directly affects the quality of economic growth and income distribution.
Indonesia’s premature deindustrialization has not occurred by chance. Several interconnected structural factors are involved.
First is dependence on primary commodities. Since the early 2000s, Indonesia has benefited from a global commodity price boom often associated with the Dutch Disease.
Commodity trading became more profitable than manufacturing, leading capital and investment to flow into the primary sector rather than manufacturing.
Second is competitiveness. Production costs in Indonesia are often higher than in neighboring countries such as Vietnam or Thailand.
Relatively high energy, logistics, and administrative costs push manufacturing investors to look elsewhere.
Lengthy licensing processes and unexpected costs make investors reconsider investing in Indonesia.
Third are labor and technology issues. Problems in increasing productivity and industrial labor absorption remain significant.
Research shows an anomaly in which higher efficiency is negatively correlated with employment absorption in manufacturing. In other words, rising efficiency does not necessarily translate into greater job creation.
Fourth is inconsistent industrial policy. Business groups and analysts argue that domestic industry protection policies are often loose, and the investment climate has not fully supported sustainable labor-intensive industrial growth.
If this phenomenon continues, the impact on Indonesia’s economy will be broad.
First, job growth will slow. Traditional manufacturing has long been a major employer, including for high school and vocational graduates.
A declining role will reduce formal employment opportunities and increase dependence on the informal sector, which tends to offer lower wages.
Second, GDP growth will become more vulnerable. An economy increasingly dependent on commodities is more exposed to global price fluctuations rather than driven by high-value production.
Third, income distribution may stagnate. Without a strong industrial base, growth will not significantly strengthen the middle class, which forms the backbone of stable consumption.
Data show that the middle class has stagnated or even shrunk in recent years.
Finally, there is the risk of falling behind in innovation and technology. Modern manufacturing is closely linked to technological innovation and productivity gains.
If this base weakens, Indonesia’s ability to compete in the global value chain will decline further.
Addressing premature deindustrialization is not simply about reversing statistical trends; it requires structural transformation.
First, bold and consistent industrial policies are needed. The government must formulate and implement policies that prioritize labor-intensive and high-tech industries, increase domestic value added, and not focus solely on resource commodity exports.
Second, improving human capital through education and skills development is crucial. Workforce capacity must meet the demands of modern industry, including digital technology, automation, and green industry. Strengthening vocational education should be a priority.
Third, domestic competitiveness must improve. Reducing production costs through better infrastructure, regulatory simplification, and incentives for manufacturing investment can help improve the investment climate.
Fourth, fiscal and monetary policy synergy is essential. Fiscal policy should support long-term manufacturing investment, not merely short-term stimulus to ease economic shocks.
Indonesia’s premature deindustrialization issue is complex. Officially, the government still denies that the country has entered this phase, pointing to several positive indicators.
However, many analysts see deeper structural trends showing a weakening manufacturing base.
Is this a warning that came too late? Many experts would likely agree that the signs have been visible for more than a decade.
Yet time has not completely run out—if the right, innovative, and consistent policies are enforced.
Indonesia has a large workforce, a vast domestic market, and significant technological and innovation potential.
But without a strategic revival of manufacturing, the country risks being trapped in stagnant, low-quality economic growth. Ultimately, the vision of Golden Indonesia 2045 may drift further out of reach.
This article was published in Kompas on Wednesday, February 25, 2026.