The Indonesian Ministry of Industry admitted that 70 percent of the national
manufacturing industries are not ready for AEC1
. Moreover, according to Competitiveness
Industrial Performance (CIP) index from the United Nations Industrial Development
Organization (UNIDO) reported that in 2013, Indonesia’s manufacturing industries
competitiveness were ranked 42nd far behind Singapore in 7
th place, Malaysia in ranked 24th
,
and Thailand in 26th place (UNIDO, Industrial Development Report 2016: 199 – 200).
Low performance and competitiveness level in Indonesia’s manufacturing sector
emerged post-1998 Asia’s regional economic crisis which made the manufacturing sector fell
to “growth recession” (Rahardja, et.al. 2012: 3). Indonesia’s manufacturing sector was not
able to fully recover compared to other ASEAN member countries, such as Malaysia and
Thailand. The manufacturing industries in Indonesia are considered as a ‘backbone’ of the
national economy. This sector contributes around 25 percent to the national gross domestic
product (GDP), especially in non-oil industry. The manufacturing sector was on top of other
Indonesia’s leading sectors, such as agriculture, fisheries, and marine industries which
contribute 14 percent, as well as restaurants and hospitality areas that contribute 16 percent
to national GDP.
It is interesting to contrast the low performance and competitiveness of Indonesia’s
manufacturing sector with the plan for the ASEAN Economic Community (AEC). When fully
implemented, AEC will create a single market and production base which makes more
dynamic and competitive ASEAN with new structures and procedures support the realization
of its existing economic programs; fast-tracking regional integration in the priority sectors;
facilitating movement of business persons, talented and skilled labor; as well as to intensify
the institutional mechanisms of ASEAN (AEC Blueprint, 2008: 5).
The AEC implementation will encourage a competitive atmosphere in a regional
economic integration, and it can also stimulate higher intra-regional trade flow. Along with
these benefits, economic integration also has its disadvantages such as the limitation of
government authority in policies related to fiscal, monetary, and financial that can affect
national economic performance. Other than that, the implementation of AEC also opens the
possibility to create higher unemployment rate, and it can only turn a country into the market
for imported products from other nations due to its lack of national competitiveness
(Kementerian Perdagangan RI, 2011: 27).
Many assumed that implementation of the AEC in 2015 as a regional economic
integration creates a paradox for market participants. Theoretically, regional economic integration would open up and expand market access and services, along with the availability
of raw materials, capital, and investment which will influence the industrial structure and
encourage more capacity building to improve domestic industries competitiveness as well as
national purchasing power.
In this thesis, I review the effects of the ASEAN Economic Community (AEC) as one
process of a regional economic integration, with a goal to create a single market and
production base with free flow of goods, services, investments, capital, and skilled labor, in
particular on the Indonesian manufacturing industry (Hew, 2007: 2). Thus, the main research
questions of this thesis would be: is the Indonesian manufacturing industry ready for the
AEC?
In the present situation, only several Indonesia’s manufacturing sectors are willing to
fully-implemented AEC, and their products can compete with manufacture products from other
ASEAN member countries (Yogatama and Utami, 2014). However, the Indonesian
government believed that the national manufacturing industries would be ready by the time
AEC fully implemented because the government has set several measures to improve national
manufacturing sector level of performance and competitiveness through enhancing industrial
structures.
After a brief introduction to the thesis topic and research question in the first section,
the second section describes the institutional settings, namely the AEC and its ‘building blocks’
and the current performance of the Indonesia’s manufacturing industries. The third section is
the conceptual framework which describes how a regional economic integration may affect
the manufacturing sectors, as being suggested by Peter A. Petri2
. The fourth section assesses
the empirical findings whether Indonesia can meet the conditions for a positive effect of AEC
on manufacturing industries, especially to improve its investment climate and the removal of
Non-Tariff Barriers (NTBs). The last section serves as a conclusion as well as answering the
thesis research question.