It is these two attributes of manufactured capital, reproducibility and trade ability, which provide 

policy makers with an alternative, more sustainable economic development pathway.  

Indonesia, after more than thirty years under the New Order government, still retains a natural 

resources intensive economy.  The ability to maintain high economic performance for such a 

long period is partly due to the scale of natural resources endowment.  This abundance of 

natural resources has enabled Indonesia to delay industrialization decisions longer than most 

countries (NRMP Report No. 54).  Concerns about Indonesia's future economic performance 

derive from its reliance on the oil and gas, and forestry (e.g., plywood) sectors.  These sectors 

will contribute significantly less to export growth within the existing long term planning period.  

Based on present estimates, Indonesia s production and consumption of oil will equate 1200 

million barrels a day by the year 2007 (MacKenzie 1997). Such forecasts need to be considered 

within the current set of technology or man made capital, as Caltex, for example, has noted 

further investment in new extraction technology would maintain supply above demand until the 

year 2015 by exploiting 50 percent of known reserves, compared with an estimated 25 percent 

using existing technology.  This is, however, no reason to delay industrialization as the respite is 

only temporary at best.  However, signs of pressure already exist in the non oil and gas sectors, 

with export growth falling from 15 percent in 1995 to 4.3 percent in the second half of 1996. 

Two strategies exist for industrializing the economy: i) import substitution, whereby industrial 

growth creates an expansion of domestically produced goods to replace imports of similar 

items; and ii) export oriented industrial growth that creates an expansion of goods destined for 

export markets.  Although similar objectives exist for both strategies, the policy instruments 

applied are markedly different under the two strategies. 

The industrialization strategy of import substitution employs policies and devices that artificially 

raise the level of profitability of industries targeted for rapid expansion.  Most of these policy 

devices are instruments of trade policy.  Typical examples include tariffs, import bans on certain 

commodities, quotas, import licensing, and export bans on raw materials. All these interventions 

widen profit margins for domestic producers, protecting them from price competitive foreign 

producers. The artificially induced high levels of profitability in the target industries cause 

investable resources to flow from non protected productive activities into protected industries.  

Part of the cost to society for protecting target industries is the output that is foregone when 

non protected productive activities shrink as a result of these resource flows.  Thus, an import 

substitution industrialization policy regime distorts the pattern of resource allocation in such a 

way that resources may, in fact, flow into activities in which the country does not naturally have 

a competitive edge. 

In addition to distorted resource use patterns, industrial expansion based on artificially high 

levels of profitability has two disadvantages.  First, because of the high profit margins they 

enjoy, producers in protected industries do not have any incentive to use society s scarce 

resources efficiently.  This typically results in low levels of efficiency in the protected industries, 

which, in turn, result in the target industry producers being unable to compete with foreign 

producers in international markets.  Because of this, goods and services produced by these 

selected industries can usually only be sold in the domestic market.  Import substitution 

industrialization is thus often referred to as an "inward looking" development and 

industrialization strategy.  The second disadvantage of import substitution industrialization is 

that the goods produced by protected industries are not competitive in world markets, and when 

the home country market becomes saturated, economic growth will slow and may cease 

altogether.  Thus, the growth stimulated by import substitution industrialization is not sustainable 

in the long run.    

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