Journal of the Asia Pacific Economy Vol. 13, No. 4, November 2008, 426–450
Indonesia’s industrial policy reforms and their environmental impacts
Budy P. Resosudarmo
∗
and Milda Irhamni
Economics Division – RSPAS, The Australian National University, Canberra, Australia Received 9 January 2008; final version received 25 February 2008
The fast growth of the manufacturing sector in Indonesia during the 1970s and 1980s and its relatively steady growth during the 1990s and early 2000s
were argued to be the result of the kind of industrial policy reforms that were implemented. However, another important development since the early 1970s
has been the rapidly deteriorating quality of environmental conditions in the country. Thus, the purpose of this paper is to analyse how industrial policy
reforms have impacted on the environmental performance of industry, as well as to describe whether the introduction of industrial environmental policies
has reduced industries’ environmental impact.
Keywords: Industrial policy; environmental policy; economic development JEL Codes: L52; Q58; O14
1. Introduction
During 1970–97, Indonesia was able to achieve average annual economic growth of approximately 7, with the manufacturing sector one of the driving forces behind
this. In 1997, the economic crisis hit Indonesia, followed by a major political crisis, causing Soeharto, then president, to step down in 1998. The resulting impact on
national economic performance was significant. Economic growth in 1998 was around negative 13.1 and in 1999 the economy grew positively by only 0.8.
Economic growth improved after 1999, reaching and remaining at around 5 since 2003; i.e., 5 in 2004, 5.7 in 2005 and 5.5 in 2006 Resosudarmo and
Kuncoro 2006; World Bank 2007a.
The manufacturing sector in Indonesia started to grow significantly, at around 13 annually, in the 1970s. During the 1970s, the oil booms along with nationalist
sentiment induced a more significant government role in developing this sector. The enactment of investor-friendly laws at the end of the 1960s – Law No. 11967
on Foreign Investment and No. 61968 on Domestic Investment – stimulated
∗
Corresponding author. Email: budy.resosudarmoanu.edu.au
ISSN: 1354-7860 print 1469-9648 online
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2008 Taylor Francis DOI: 10.108013547860802364752
http:www.tandf.co.ukjournals Downloaded By: [University of TokyoTOKYO DAIGAKU] At: 08:51 27 November 2008
Journal of the Asia Pacific Economy 427
foreign and domestic investors to start setting up many private manufacturing enterprises in the 1970s Hill 2000. Although both private and government en-
terprises contributed to the growth of the manufacturing sector during this period, contributions of government enterprises were probably still more dominant. In the
1980s through to the early 1990s, further significant improvements for the private sector in the investment and trade regime induced further rapid development of
private enterprises, so that the domination of state enterprises was significantly reduced. Most manufacturing exports in this period were conducted by private
enterprises. Exports and private sectors thus started to become the backbone of economic growth so that by the end of the 1980s, the manufacturing sector con-
tributed around 19 to the national gross domestic product GDP and around 50 to total exports Hill 2000; World Bank 2007b.
In the late 1990s, the role of the manufacturing sector in the economy remained significant in spite of being one of the areas most affected by the crisis. By the
early 2000s, the manufacturing sector contributed around 25 to GDP the largest contributing sector and around 70 to total exports Dhanani 2000; Ramstetter
2000; Aswicahyono and Feridhanusetyawan 2004.
Observers have argued that the rapid growth of the manufacturing sector during the 1970s and 1980s and its relatively steady growth during the 1990s and early
2000s were the result of the kind of industrial policy reforms implemented in Indonesia, in particular several policies to reduce the ‘anti export bias’ Woo et al.
1994; Hill 2000; Aswicahyono and Feridhanusetyawan 2004.
Another important development in Indonesia alongside economic and manu- facturing growth since the early 1970s has been the rapidly deteriorating quality
of the physical environment Thee 2002; Resosudarmo 2003; Resosudarmo and Napitupulu 2004. For example, Table 1 shows that by the mid-1990s, the quality
of air in several areas was among the worst worldwide. This table also indicates the significant contribution of industries in the manufacturing sector to diminishing
environmental quality, i.e. development of the industrial sector was accompanied by the poor environmental performance of industry.
The main objectives of this paper are, first, to assess how industrial policy reforms broadly defined have impacted on the environmental performance of
industry in Indonesia; second, to characterise how industrial policies have been modified, if at all, to lessen their environmental impact; and finally, to draw some
lessons for other developing countries from the Indonesian case.
2. Industrial policy reforms
