Indonesia's competitiveness declined in the second half of the 1990s relative to other countries in Southeast and South Asia. The country now faces the real threat of de-industrialisation.

The government should redefine industrial strategy as the attainment of a common public-private vision of industrialisation. In close collaboration and formal partnership with the private sector, the government should formulate and implement policies at three levels:

1. Industry-wide policies aim to reduce country costs and enhance the transaction efficiency for business, including the necessary macroeconomic, regulatory and business environment, the physical infrastructure, and the educated and skilled labour force under which manufacturing firms can invest and grow.

2. At the sub-sectoral level, the government can support strategic initiatives and promotional activities in priorities industries, including trade and market diversification policies, industrial transformation programmes, industrial diversification and deepening, and the strengthening of industry associations.

3. At the firm level, the government should aim to increase manufacturing capabilities in a non-discriminatory manner in selected industries, including through the adoption of total quality and productivity programmes, technological upgrading, and investment in plant and industrial skills. For this purpose, a network of private-sector-led productivity centres, technical institutes and industrial extension services should be created.