ASIATODAY.ID, JAKARTA – Indonesia’s manufacturing sector is flashing increasingly serious warning signs, raising concerns over the country’s long-term economic competitiveness as regional rival Vietnam continues its rapid industrial ascent.
Data released by S&P Global showed Indonesia’s Manufacturing Purchasing Managers’ Index (PMI) fell to 46.9 in June 2026, remaining well below the 50-point threshold that separates expansion from contraction. The reading points to a continued decline in factory activity and underscores mounting pressure on one of the country’s most critical economic sectors.
According to economist Prof. Didik J. Rachbini, the weakening PMI is more than a short-term business cycle. It reflects deeper structural problems that have eroded Indonesia’s industrial competitiveness despite the economy posting 5.61 percent GDP growth in the previous quarter.
“The manufacturing sector has been weakening for years. Economic growth is increasingly driven by government spending rather than a vibrant industrial base,” Rachbini argues on July 4, 2026.
The comparison with Vietnam is becoming increasingly difficult to ignore.
Vietnam’s economy is expanding by around 8 percent, powered by decades of consistent industrial policy, export-oriented manufacturing, and an investment climate designed to attract high-quality foreign direct investment.
In July 2026, the World Bank upgraded Vietnam to upper-middle-income country status after its Gross National Income (GNI) per capita reached approximately US$4,970, exceeding the required threshold.
Rachbini argues that Vietnam’s success is not accidental but the product of long-term policy consistency. Over the past three decades, Hanoi has steadily integrated its economy into global manufacturing supply chains while promoting technology transfer, industrial upgrading, and domestic innovation.
Indonesia, by contrast, has lacked a sustained industrial strategy, he says. Businesses continue to face regulatory uncertainty, complex bureaucracy, rising production costs, and investment incentives that remain less competitive than those offered by regional peers.
He also links Indonesia’s weakening consumer purchasing power to the prolonged slowdown in manufacturing. As industrial expansion loses momentum, fewer productive jobs are created, reducing household income and domestic demand. The result, he says, is a vicious cycle that continues to suppress industrial growth.
Rachbini notes that Indonesia once demonstrated the effectiveness of structural reform. During the 1980s and 1990s, sweeping deregulation and export-oriented industrial policies helped the economy expand by 7–8 percent annually, while manufacturing growth reached double digits.
He believes similar reforms are urgently needed once again.
Meanwhile, Vietnam has moved beyond competing solely on low labour costs. The country is increasingly entering what many analysts describe as “Đổi Mới 2.0″—a new phase of development focused on innovation, advanced manufacturing, technology-intensive industries, and higher value-added production.
Unless Indonesia undertakes bold structural reforms, strengthens industrial policy, streamlines bureaucracy, and creates a more competitive investment environment, Rachbini warns the country’s manufacturing decline could become a broader economic challenge.
“If current trends continue, Vietnam is well positioned to escape the middle-income trap, while Indonesia risks remaining trapped in moderate growth without a strong industrial foundation,” he concludes. (AT Network)
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