This chapter analyses the development of Indonesia's wood products industry, particularly the plywood industry, which from a small base emerged in the 1980s as one of Indonesia's major manufacturing industries. This account is of interest since it provides a good example of ‘export-substitution’, that is the enforced development of the wood products industry by limiting the exports of logs through prohibitive export taxes and subsequently by a partial and later by a total ban on log exports. However, because of the difficulties which the wood products industry, particularly the plywood industry, has experienced over the past decade, the question arises whether ‘export substitution’ provides the proper incentives to develop an efficient manufacturing industry.

INTRODUCTION

The following account outlines the development of Indonesia's wood products industry, particularly the plywood industry, which from a small base emerged in the 1980s as one of Indonesia's major manufacturing industries. This account is of interest since it provides a good example of successful ‘export-substitution’, that is the enforced development of the wood products industry by limiting the exports of logs through prohibitive export taxes and subsequently by a partial and later by a total ban on log exports.

As a result of this ‘export substitution’, by the early 1990s Indonesia had become the largest manufacturer of hardwood plywood in the world. The exports of wood-based products were even more impressive, as plywood exports increased from US$1 billion in 1985 to US$4 billion in 1992, while pulp and paper exports during the same period rose from US$28 million to US$400 million. As a result, during this period the wood products industry became the second most important contributor to the rapid growth of the manufacturing sector after the textile and textile products industry (World Bank, 1994: 24).

However, by the early 2000s the wood products industry experienced great difficulties because of the problem of accessing adequate raw material supplies, allegedly due to the rampant smuggling of logs, mainly to China. The industry most adversely affected by this smuggling is the plywood industry (Aswicahyono & Hill, 2004: 288–89). As of today this problem still besets the plywood industry. However, aside from this problem, this industry over the past few years has been experiencing strong competition from China's plywood industry.