Industry Overview and Transition to Energy Efficient Economy
Indonesia has a well-diversified trading economy. Palm oil is the country’s largest export category, followed by coal (and other mining products), gas, agricultural products, electrical machinery and equipment and fishery products. Indonesia has realigned its trade strategy, focusing more on value-added industries (manufacturing and smelting) and infrastructure development, in addition to increase the production of core commodities for domestic consumption and to reduce its heavy reliance on imports.
In 2018, the Indonesian government launched the “Making Indonesia 4.0” movement, conforms with the era of digitalization, which facilitates the integration of information for the purpose of increasing productivity, efficiency, and service quality. The strategy aims at returning the industry net export rate to 10%; doubling the labour productivity rate over labour costs; and allocating 2% of GDP to R&D and technology innovation fields.
However, there are significant challenges facing Indonesia in the era of digitalization. In terms of innovation readiness, Indonesia ranked 66th out of 139 countries in the Network Readiness Index 2021, whereas similar countries scored better, like Singapore (7th), Malaysia (38th), Thailand (54th) and China (29th). Indonesia has the advantage of price but lags behind in terms of infrastructure and public use.
Indonesia also lacks readiness to explore and adopt digital technology that can drive transformation in the government, business models, and public lives. Statista Data of the Global Digital Competitiveness Ranking (2021), Indonesia ranked 53rd out of 63 countries. Adaptation, education, training, technology ecosystem, and integration of information technology are key factors that need to be addressed in order for Indonesia to take advantage of digital technology advancements for economic growth and improvement in the quality of life.
Other challenge is the development of human resources and business competition. The era of digitalization has an impact on the work pattern and potentially eliminate low-skilled jobs. On the other hand, the changing trading pattern, the provision of online-based services, and the use of cashless payments have rendered many conventional business models obsolete.
Climate Change and Transition to a Low-Carbon and Energy Efficient Economy
Indonesia represents the third largest tropical rainforest in the world (94.1 million hectares), and is home to the world’s largest tropical peatlands (14.9 million hectares) and mangrove forests (3.31 million hectares). These natural resources store vast amounts of carbon that mitigate climate change impacts, crucial to sustain the livelihood of Indonesians and support the country’s long-term development.
Sustainable development is facing numerous challenges relating to environmental degradation and depletion of natural resources, such as forests, water, and biodiversity. Climate change is likely to impact water availability, health and nutrition, disaster risk management, and urban development – particularly in coastal zones, with implications to poverty and inequality. Although the deforestation rate in Indonesia has decreased significantly compared to before 2000, forest cover is expected to decline from 50% of Indonesia’s total land area (188 million ha) in 2017 to around 38% by 2045. Damage to forest cover is expected to trigger raw water scarcity, especially in island regions that have exceptionally low forest cover such as Java, Bali, and Nusa Tenggara. Raw water scarcity has also begun to occur in several other regions due to the impact of global climate change, which is currently affecting most of Indonesia. Currently, the availability of water has been classified as scarce to critical in most areas of Java and Bali. It is estimated that areas with critical levels of water supply have increased from 6% in 2000 to 9.6% by 2045, covering the regions of southern Sumatra, West Nusa Tenggara, and southern Sulawesi.
Indonesia is one of the main global emitters of greenhouse gasses. Up to 60% of its total emissions, which have grown over time, are caused by deforestation, forest degradation and peatland conversion. Energy transition from fossil fuels to renewables is also a key pillar of Indonesia’s plan to decarbonise its economy. The National Energy Policy (Kebijakan Energi Nasional) launched by the Indonesian government in 2014 (Government Regulation No. 79/2014) sets a renewable energy target of 23% by 2025. Recent estimates by the International Energy Agency (IEA) show that Indonesia’s share of renewable energy sources such as hydro, geothermal, solar, and wind (excluded biofuel and waste) in total primary energy supply remains modest and the 23% target seems to be more challenging.
Growing evidence shows that FDI may have sizeable environmental impacts in host countries. It can affect a country’s footprint through different channels: by expanding the scale of economic activity (more productions = more emissions), by changing the structural composition of economic activity and by bringing new techniques of production in a reduction of emissions by helping diffuse cleaner or energy-saving technologies. The composition effect refers to changes in the industrial structure driven by FDI and its impact on emissions varies based on the type and level of specialisation of a country. The net impact of FDI on CO2 emissions depends on several factors, including the stage of development and the policy context. Under the right market conditions, FDI may also contribute to reducing emissions by financing renewable infrastructure. Investment in renewable energy is critical in the context of mitigating CO2 emissions, especially in emerging countries where the demand for energy is growing rapidly.
