How the Macroeconomic Environment and Investment Climate Have Affected the Manufacturing Sector

The performance of Indonesia's manufacturing sector has lagged over the past decade. This is seen in the decline in growth after the Asian financial crisis, by the sector's decline relative to other sectors within the economy, and relative to countries in the region. This note documents the effects of the challenging macro and external environment on the profits of manufacturing firms, and on the uncertainty they face, and argues that these adverse conditions partially explain the stagnation of the sector in the past decade. The changes in incentives appear to have particularly affected labor-intensive sectors, with important consequences for job creation. Policies to promote growth in the manufacturing sector should aim at alleviating pressures on manufacturing costs by: (i) reducing rigidities in the market for labor; (ii) promoting competition in the market for services; and (iii) providing incentives for productivity enhancing technology adoption, while reducing profit uncertainty by; (iv) maintaining a low and predictable rate of inflation; and (v) keeping exchange rate volatility within reasonable limits.

Bibliographic Details

Main Authors:	Varela, Gonzalo, Ghosh, Swati, Rahardha, Sjamsu
Format:	Policy Note biblioteca
Language:	English en_US
Published:	World Bank, Jakarta 2012-09
Subjects:	ACCOUNTING, ADVERSE IMPACT, AGRICULTURE, ALLOCATIVE EFFICIENCY, BARRIERS TO ENTRY, BASIC METALS, BENCHMARK, BILL, BILLS, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKETS, CAPITAL STOCK, CAPITAL STOCKS, COAL, COMMODITY PRICE, COMMODITY PRICE BOOM, COMMODITY PRICES, COMPETITIVENESS, CONSUMERS, CPI, CURRENCY, CURRENCY SWAPS, CURRENT ACCOUNT, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT POSITION, DEBT, DEFLATORS, DEPOSIT, DEVELOPING COUNTRIES, DOMESTIC MARKET, DOMESTIC MARKETS, DOWNWARD PRESSURE, DRIVERS, DUTCH DISEASE, ECONOMETRIC ANALYSIS, ECONOMIC ACTIVITY, ECONOMIC CRISIS, ECONOMIC FLUCTUATIONS, ECONOMIC GROWTH, ECONOMIC INCENTIVES, ECONOMIC RECOVERY, ECONOMIC THEORY, ELASTICITY, ELASTICITY OF EXPORTS, EMERGING MARKETS, EMPIRICAL EVIDENCE, EMPLOYMENT, ENVIRONMENTS, EQUILIBRIUM, EQUIPMENT, EXCHANGE RATE, EXCHANGE RATE MOVEMENTS, EXCHANGE RATE UNCERTAINTY, EXCHANGE RATE VOLATILITY, EXPORT CAPACITY, EXPORT GROWTH, EXPORT GROWTH RATES, EXPORT MARKETS, EXPORT PERFORMANCE, EXPORTER, EXPORTERS, EXPORTS, EXPOSURE, EXTERNAL BALANCE, FEMALE LABOR, FEMALE LABOR FORCE, FINANCIAL CRISIS, FISCAL POSITION, FIXED EFFECTS, FLEXIBLE LABOR MARKETS, FOREIGN ASSETS, FOREIGN EQUITY, FOREIGN INVESTORS, GDP, GDP PER CAPITA, GENERAL EQUILIBRIUM, GLOBAL ECONOMY, GLOBALIZATION, GROWTH RATE, GROWTH RATES, HIGH INFLATION, HOLDING, IMPORT, IMPORTS, INCOME, INCREASING RETURNS, INCREASING RETURNS TO SCALE, INFLATION, INFLATION RATE, INFLATION RATES, INNOVATION, INSURANCE, INTERMEDIATE INPUTS, INTERNATIONAL ECONOMICS, INTERNATIONAL MARKETS, INTERNATIONAL SETTLEMENTS, INVESTMENT CLIMATE, INVESTMENT LEVELS, IRREVERSIBILITY, JOB CREATION, LABOR COSTS, LABOR FORCE, LABOR MARKET, LABOR MARKETS, LABOR PRODUCTIVITY, LABOR REGULATIONS, LABOUR, LEVERAGE, LIBERALIZATION, LOCAL GOVERNMENTS, LONG RUN EQUILIBRIUM,
Online Access:	http://documents.worldbank.org/curated/en/602901468044333851/How-the-macroeconomic-environment-and-investment-climate-have-affected-the-manufacturing-sector http://hdl.handle.net/10986/26717
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