ASYDPritIPB - Food Processing and Value Chain Development in Indonesia

<div>Transformations in the Indonesian food processing sector are driven by a growing economy (the largest in South East Asia) and changing food consumption patterns. The substantial domestic market has hitherto been the key driver for the food industry, with export potential remaining underdeveloped. The manufacturing sector (excluding oil and gas) contributes around 20% of Indonesia’s total gross domestic profit (GDP), and is valued at around AU$200 billion, with food, beverage and tobacco processing consistently the main contributor, at around 37% of total manufacturing. The sector has also been expanding rapidly. Despite recent fluctuations, sectoral growth has averaged 10% per year over the last decade, outstripping other manufacturing subsectors.</div><div><br></div><div>Food processing is also a major source of employment within Indonesia, increasing from 2.93 million in 2010 to 4.26 million people in 2013; a remarkable rate of 15% annually. Significantly, much of this growth in employment has come from micro enterprises (employing fewer than five employees) and small enterprises (employing fewer than 20), which together contribute to more than 76% of the total employment in food processing. Medium and large enterprises, however, are responsible for an estimated 83% of the total output value in the sector. The sector, therefore, is extremely diverse internally, and this makes coherent policymaking challenging.</div><div><br></div><div>The food processing sector has also experienced strong growth in investment, including foreign direct investment (FDI), which has even outstripped domestic investment in recent years. Some of this investment has been stimulated by policy settings that favour domestically produced products in the local market. In 2014, the food processing sector was responsible for 13% of total domestic investment (behind only investment in utilities) and 11% of total FDI (behind only mining), much of this being in palm oil processing.</div><div><br></div><div>Despite these positive indicators, Indonesia’s participation in global food value chains remains marginal. It contributes around 1% of total global exports, much less than smaller but similarly endowed regional neighbours like Thailand and Malaysia. Processed food exports are dominated by palm oil products, but Indonesia is also developing export competitiveness in products such as processed seafood, intermediate cocoa products and instant noodles. An increasingly important indicator of competiveness in the global market is the degree to which a sector is integrated into regional and global production networks, and the Indonesian food processing sector remains poorly integrated by global standards. The foreign content of Indonesia’s food exports was only 4% in 2010, compared to 23% in Malaysia, 12% in Australia and 35% in Taiwan.</div><div><br></div><div>Indonesian trade policy has been generally protectionist, and this is particularly true for food products due to particular political sensitivities. Protection has increasingly assumed the form of non-tariff barriers, such as licence and permit requirements, pre-shipment inspections, labelling requirements, local content requirements, and export restrictions. Indonesia’s embrace of such protectionism contrasts with much lower rates of food protectionism in Malaysia and Thailand, where food products have become more internationally competitive.</div><div><br></div><div>Indonesia faces difficult political choices in developing a coherent policy framework for food production and food processing, but enhanced integration with regional and global value chains is likely to provide important growth opportunities for the food processing sector in the future.</div>