Business groups in Indonesia are warning that regulatory uncertainty surrounding labor policies is accelerating premature deindustrialization, a phenomenon in which developing economies experience a decline in manufacturing's share of gross domestic product at a much lower income level than historically observed in advanced economies.

The debate has revived long-standing concerns over Indonesia's industrial trajectory since the 1998 Asian financial crisis and the effects of "Dutch disease," a form of resource curse associated with commodity booms that many observers argue has affected the post-Reform Era economy.

During deliberations on the Manpower Bill with House of Representatives Commission IX, the Indonesian Employers Association (Apindo) argued that business uncertainty, including frequent changes to wage regulations, has contributed to premature deindustrialization before Indonesia's GDP per capita reaches US$12,000. Apindo noted that four revisions to government wage regulations over the past decade have complicated long-term business planning, particularly for labor-intensive industries, by making labor costs harder to predict.

Apindo also argued that the Manpower Bill should support industrialization efforts. The association highlighted that manufacturing's share of GDP has fallen from around 30 percent during the New Order era to about 19 percent today, while manufacturing growth has lagged overall economic growth. According to Apindo, deindustrialization has contributed to the rise of informal employment, which now accounts for around 60 percent of the workforce. High informality, it argued, has also contributed to Indonesia's low tax ratio of 9.31 percent. The association further pointed to signs of Dutch disease, noting that commodities still account for around 65 percent of Indonesia's exports.

In response, the Industry Ministry argued that perceptions of deindustrialization are partly driven by misunderstandings of GDP data compiled by Statistics Indonesia (BPS) between 2005 and 2025. The ministry explained that several subsectors previously classified under manufacturing in the 2000 Indonesian Standard Industrial Classification (KBLI), including water supply, sewerage and waste management, remediation activities, information and communication, and certain service activities, were reclassified into separate sectors under KBLI 2010.

The ministry also noted methodological changes in GDP calculations. GDP based on 2000 constant prices was calculated using producer prices, while GDP based on 2010 constant prices uses basic prices before government interventions such as taxes and subsidies. It further highlighted that manufacturing grew by 5.3 percent in 2025, slightly faster than overall GDP growth of 5.11 percent. However, the ministry acknowledged that growth in the working-age population outpaced manufacturing job creation, with the former increasing by 11.82 percent and the latter by 8.62 percent between 2021 and 2025.

Manufacturing growth, measured using 2010 constant prices, rebounded strongly after contracting by 2.93 percent in 2020, a steeper decline than the economy-wide contraction of 2.07 percent during the COVID-19 pandemic. The sector subsequently grew faster than overall GDP for the first time since 2011. Manufacturing growth in 2025 also exceeded 5 percent for the first time since 2012. Nevertheless, it remained below the 6.26 percent growth recorded in 2011 and the 5.62 percent expansion achieved in 2012.

Manufacturing's share of GDP at current prices has also shown some improvement, rising from a low of 18.34 percent in 2022 to 19.07 percent in 2025. This marks the first time the share has exceeded 19 percent since 2021. Even so, the figure remains below levels recorded throughout most of the 2010-2021 period, when manufacturing accounted for 19.24 percent of GDP in 2021. The broader trend remains downward from the 22.04 percent share recorded in 2010.

Historical comparisons show an even sharper contrast. Manufacturing accounted for 24.13 percent of GDP in 1995, 25.45 percent in 1996, 25.54 percent in 1997, and 26.23 percent in 1998. While changes in industrial classifications complicate direct comparisons, manufacturing's contribution to GDP during the late New Order and early Reform periods was substantially higher than in the 2010-2025 period.

The foundations of Indonesia's industrialization were laid during the oil boom of the 1970s, which provided the fiscal resources for import-substitution policies and the development of basic industries. When oil prices fell in the 1980s, the government shifted toward deregulation and export-oriented industrialization. However, industrial upgrading into higher-technology and more capital-intensive sectors did not fully materialize. Development remained concentrated in labor-intensive industries, while dependence on imported components and low research spending limited productivity gains.

Several factors contributed to deindustrialization during the Reform era. Decentralization fragmented industrial policy, while the commodity boom between 2003 and 2012 diverted investment toward extractive sectors such as coal and palm oil. Indonesia also continued to lag behind other newly industrializing economies in research and development spending, while facing increasing competitive pressure from manufacturers in China and Vietnam. The government's downstreaming strategy for natural resources represents an attempt to reverse these trends and rebuild industrial capacity.

Recent business indicators suggest the sector remains under pressure. S&P Global's Manufacturing Purchasing Managers' Index (PMI) fell from 50.1 in March to a contractionary 49.1 in April as production volumes weakened amid inflationary pressures linked to conflicts in the Middle East. Lower output subsequently led firms to reduce employment and purchasing activity while drawing down existing inventories. Although the PMI recovered to 50.0 in May, manufacturers continue to face rising raw material costs and supply uncertainties. Demand improved partly because customers sought to secure inputs amid concerns over future disruptions. However, employment continued to decline as companies adjusted production targets downward.

Manufacturing remains central to Indonesia's long-term development strategy, particularly as the country seeks to narrow the gap with emerging industrial competitors such as Vietnam while many advanced economies transition toward service-dominated growth. Reversing deindustrialization will be critical if Indonesia is to avoid the middle-income trap. Achieving that goal requires a coherent economic strategy that places industrialization at its core and prioritizes policies that strengthen productive capacity before expanding commitments that depend on a stronger fiscal and industrial base.