In 2019, the food & beverage (F&B) industry made the largest contribution to the nation’s gross domestic product (GDP) and grew by an average of 7.78%, the highest growth among non-oil and gas industries. It is also the only non-oil and gas industry experiencing a trade surplus. In 2019, imports by this industry decreased by an average of 0.1%, while annual export growth averaged 0.7%.
The F&B sector was the largest employer of Indonesian workers outside the oil and gas sector in 2019. While around a third (36%) of workers in large and medium-sized F&B companies are female, they account for more than half of workers (56% in the food industry and 58% in the beverage industry) in micro and small enterprises (MSEs).
Intermediate goods are important for the F&B industry, and importing them increases both productivity and exports, but imports are politically unpopular among ministries governing the F&B sector. The Ministry of Agriculture seeks to reduce imports with the goal of supporting farmers and their welfare. The Ministry of Industry (MoI) aims to reduce reliance on imported intermediate goods for the F&B sector by strengthening upstream industries.
This paper shows how imports of intermediate goods benefit F&B industries in terms of output and employment. We estimate that among small and micro-sized F&B firms, increased imported intermediate inputs will lead to increases in output, value added, and wages, as well as improvement on intensive margins. These findings show why the government’s policy of discouraging imports to support Indonesian firms is misguided, potentially harming the industry it’s meant to help.
This paper offers six policy recommendations: First, MoI should review its import substitution policy in food production and provide a rationale for pairing import reduction targets with F&B industry growth. Second, the government should study the impact of trade on the F&B manufacturing. Third, the government should separate data on the palm oil industries from the F&B industries generally. Fourth, the government should improve data quality and ensure these data are available to the public. Fifth, the government should conduct a real-time evaluation of its Commodity Balance (Neraca Komoditas) policy and domestic downstream policies. Finally, MoI should consider evaluating its domestic downstream policies to pursue its goals with tools other than trade policy.