Increasing Domestic Value Added: Modernizing the Economy

An essential component of the catching-up process is the examination of the country’s integration within global and regional supply chains, as well as the identification of its specific areas of production specialization. If there is any country in the global economy in which the Prebisch-Singer hypothesis can be proven or disproven, it is Indonesia. The hypothesis posits a relative, long-term decline in the price of primary commodities in comparison to manufactured goods. This phenomenon can be attributed to the fact that an increase in income levels gives rise to a more rapid and substantial surge in demand for manufactured goods compared to that for commodities. In summary, it can be stated that with rising incomes, there is no increase in food consumption; however, this can be reflected in consumer goods at a faster rate. The long-term macroeconomic effect is that industrialized and advanced countries benefit from improving terms of trade, whereas countries that specialize in natural resources and raw materials must export more to maintain the same level of importation of manufactured goods. Given that approximately 60 percent of Indonesian exports are derived from commodities, the country has experienced a number of instances where revenues from natural resources and raw materials have declined, followed by periods of expansion in these markets that have generated significant revenues for the public budget.