Entrepreneur Reveals Indonesia Has Slipped into Deindustrialisation; Here's the Culprit

Jakarta, CNBC Indonesia - An entrepreneur has said that Indonesia is currently experiencing deindustrialisation, where the manufacturing sector is no longer the main pillar of the domestic economy.

Bob Azam, head of the Labour Affairs division at the Indonesian Employers Association (APINDO), said the contribution of the manufacturing sector to Indonesia’s economy or gross domestic product (GDP) has been declining and currently no longer reaches 30%.

In advanced economies such as Japan, with an economy growing roughly 8% per year, the manufacturing sector’s contribution is more than 30%. So here we see a correlation between the manufacturing sector’s contribution and high growth, according to Bob in his presentation at a hearing with the Working Committee on the Labour Bill of Commission IX of the Indonesian House of Representatives on Tuesday, 19 May 2026.

This shows that from 2005 to 2025, Indonesia’s manufacturing sector has grown consistently below GDP growth, so the manufacturing sector’s contribution has gradually declined over time, he added.

Bob continued that Indonesia once recorded manufacturing sector growth of 30% before the reform era. Since then, its contribution has continued to decline. It is currently only 19% of GDP.

“It used to be 30% before the reforms, now it may be as low as 19%. This is because manufacturing sector in Indonesia grew at an average of 4% per year, compared with GDP growth of 4.98% per year,” he continued.

“Even excluding the palm oil industry (crude palm oil/CPO), the contribution of Indonesia’s manufacturing sector would be only 16%.”

“This shows the evolution of the manufacturing sector’s share of GDP—now 19%. If the CPO is excluded, it’s only 16%,” he explained.

He also cited other signs that Indonesia is undergoing deindustrialisation, such as formal-sector workers being increasingly squeezed and many moving to the informal sector.

“The impact of deindustrialisation is reflected in the shrinking number of formal workers. Currently, 60% of Indonesian workers are in the informal sector. The formal sector, especially manufacturing with its long supply chains and added value, is also shrinking, and taxpayers who typically come from formal labour are diminishing, causing the tax base ratio to fall—to below 10%, around 9.31%,” he said.

As a result, many do not feel the annual wage increase because many informal-sector workers do not receive a living wage.

“This indicates the phenomenon we have observed in recent years where the regional minimum wage (RMW) has continually risen above inflation, yet workers’ real incomes have fallen. This is because income growth for informal workers is well below inflation. So the informal sector is expanding, and their incomes, which are below inflation, are not properly controlled,” he said.

Next is the middle-income trap that persists, where the Indonesian economy remains heavily dependent on human capital (SDM).

“The Indonesian economy is increasingly dependent on human resources. Indeed, our number of human resources is large, but Indonesia faces increasingly significant challenges,” he said.

Even though Indonesia possesses abundant natural resources, it does not make society more prosperous; rather, it leaves the people, especially the lower-middle class, increasingly miserable.

Bob revealed that Indonesia is currently experiencing the Dutch disease phenomenon, where income surges from one sector, usually natural resources, trigger a decline or weakening of other economic sectors, such as manufacturing.

“There is also the Dutch Disease phenomenon, that large natural resource wealth does not make us better off, but rather exposes us to economic and social issues,” he said.

Additionally, legal certainty problems cause many companies difficulty in expanding, leading to greater deindustrialisation.

“Why is deindustrialisation happening? Among other things, legal certainty is an issue. We are experiencing fluctuating regulations. For example, government wage regulations have changed four times in ten years. This certainly makes it difficult for labour-intensive industries to make long-term contracts, because they struggle to estimate labour costs, which are the major cost for labour-intensive industries,” he concluded.