Thread by @Trinhnomics

So wrote an op ed 👇🏻 (which is more like my begging Indonesia to reconsider its policy regarding manufacturing & FDI) on the fact that Indonesia needs to wake up & was very excited by news of Pres Jokowi announcing reforms (Jan?)

So far, the push by Indonesia is to move inward👈🏻

https://twitter.com/Trinhnomics/status/1176649806250274817

Allow me to explain. For example, the president aims to END PETROCHEMICAL IMPORTS in the next 4 years. So? Barito soars 200% on strong demand for plastics & pricing power. Basically, it's making Indonesia more of a captive market for domestic firms vs OPENING UP MARKETS👈🏻

The president wants to reduce petroleum imports (Indonesia exports crude & imports refined oil). It also imports a lot of manufactured petroleum (PLASTIC!)

So the president wants to MOVE UP THE VALUE CHAIN by basically ENDING IMPORTS. Yep. True story.

Domestic players rejoice👇🏻

Indonesia also wants to MOVE UP THE VALUE CHAIN w/ nickel so how do you do that?

Usually, people export the raw stuff & process elsewhere. So what does the gov do? It wants to BAN EXPORT OF NICKLE ORES, starting in 12 days.

Why? Wants people to process inside Indonesia 👈🏻👈🏻👈🏻

What do all these things have in common?

a) Turning inward for mode of production by outright banning imports (and also exports) to MOVE UP THE VALUE CHAIN
b) Further shelters domestic players from global competition & turns the economy inward (from a low level of participation)

Here are the questions:

What are Indonesia natural endowments? Clearly, the president sees natural resource as one and continues to push policy to help move up the value chain of natural resources (oil & iron ore).

But I think LABOUR is Indonesia's most competitive factor 👈🏻👈🏻

Indonesia's competitive edge (if I have to make an advert for that economy, btw, pretty easy pitch):

*4th most populous & largest ASEAN economy
*Working age population rising, unlike elsewhere in Asia
*Plenty of scope for further urbanization
*DEMAND not an issue now & future👈🏻

In a double Ds world (worsening demographic trends & heavy indebtedness) INDONESIA DOES NOT HAVE EITHER:

Least leveraged in emerging Asia & EM
Very young population 🤗💥.

Okay, that is the easy bit. Foreign investors (both portfolio & FDI salivate at yield & growth potential!!)

But MARKET ACCESS is important too. Investors have choices, even if somewhat desperate for yield & growth. And Indonesia does not offer market access that others do, such as Vietnam. And also the emphasis has been on natural resource vs labor as key to growth. Look at this chart.

This chart shows investors voting with their feet (FDI for manufacturing, and I show growth) in the past 5 yrs. They want to go to Indonesia but they DON'T as much. Manufacturing FDI growth DECLINED (meaning jobs & sticky capital) b/c of lack of incentives relative to say Vietnam

Let's look at this chart. To the right is the LAGGARDS of absolute export market share & to the left is WINNERS of market share. Vietnam gained the most thanks to FDI inflows. Taiwan too btw. So is Japan.

Why? B/c Vietnam emphasizes manufacturing & sees LABOR as the way to grow.

Let me show u in a chart this more concretely. Gross exports in USDbn in 2018.

Vietnam more than DOUBLED gross exports from 2011 to 2018 (7 years) & on par with Thailand & Malaysia.

Indonesia DECLINED in gross exports (& so DECLINED IN EXPORT MARKET SHARE), meaning more inward