Economic Openness for Economic Transformation

All developing countries in Asia that had graduated from middle-income to high-income countries experienced the economic transformation from primary producer to secondary intermediate input and machinery producer. Data shows that Japan and Republic of Korea experienced high economic growth above 10% per annum with a lower than 10% annual inflation rate for several years amidst their economic transformation process. Japan experienced this economic growth and inflation rate pattern between 1960 and the 1970s, and Republic of Korea experienced it between the 1980 and 1990s. China has been holding it since early 2000 and is now at the border of the high-income level. The data shows that Indonesia has never been in this pattern. Learning from these three countries, Indonesia, a developing country with around four thousand USD per capita, needs to pull its economic growth with the manufacturing sector as the game changer. Economic transformation must increase the manufacturing industry to grow higher than total economic growth by at least 1.5 higher. It will increase total economic growth from an average of 5% per annum to 7.5%, of which manufacturing grows about 10%. Within 20 years, this growth will increase the share of formal activities by 1.5 from 40% to 60%. It will increase the manufacturing proportion from 20% to 30%. The latter was the share of manufacturing per GDP in 2003, exactly twenty years ago. This chapter discusses how Indonesia accelerates its economic growth by revitalizing the manufacturing sector.