This photo shows a general view of a traffic jam on major roads leading to downtown Jakarta on May 8, 2024, as a thin haze of pollution hangs over the city’s skyline.
Bay Ismoyo | Afp | Getty Images
Indonesia’s rise as an emerging economy is the latest of Asia’s success stories.
However, the country’s Finance Minister Sri Mulyani Indrawati has warned that annual GDP growth of 5%, higher than the global average of 2%, “is not enough to [Indonesia] to achieve the substantial progress’ required to become a high-income nation.
Indonesia’s ambition is part of what it calls “Golden Vision 2045,” a grand plan aimed at turning the country into a skilled, high-wage workforce and a way to reduce poverty rates by the time it celebrates its 100th birthday.
“To continue our journey [as a middle-income country aspiring to be a high-income country] … of high growth based on high productivity, we need to invest more in human capital,” the finance minister told CNBC’s “Squawk Box Asia” in an interview that aired last week.
An International Monetary Fund country report published in August highlighted that the ambition for Indonesia is to “increase added value by moving up the value chain from raw goods, create a skilled population ready for the digital age and accelerate growth infrastructure and institutional reform to support balanced, green and equitable growth’.
Despite the change in political power earlier this year, Indonesia’s ambitions remain. More than 200 million voters in the world’s most populous Muslim country went to the polls in February, ending a decade of President Joko Widodo at the helm with the election of former general and defense minister Prabowo Subianto.
The new administration will take over in October for a five-year term. Incoming President Subianto promised to continue the effort to make Indonesia a high-income economy.
The economic reforms passed by the outgoing president will make it easier to achieve Indonesia’s grand vision.
“Widodo has implemented a bunch of economic reforms, the most notable of which is making it easier to hire and fire new workers. And land use rights have also been reformed,” Gareth Leather, senior economist at Capital Economics, told CNBC.
“Indonesia is still doing some things wrong. The infrastructure is not great. Corruption is still a problem. But they are moving in the right direction,” he said.
Indrawati hopes to avoid the “middle-income trap” — a state of economic development where developing economies stagnate at middle-income levels and are unable to move up the ranks of high-income countries. Major political reforms, he believes, will help Indonesia overcome this. “Many government efforts, including our fiscal budget, are allocated significantly to education, health and [the] social safety net,” he said.
The IMF’s findings agree with the finance minister. The Washington-based foundation said that achieving high-income status will require “broad and lasting structural” reforms, while ensuring the economic stability that has already been built.
A report published in July by the Lowy Institutean Australian-based business think tank noted the gains already made, stating that the digitization of social welfare programs in the country, as well as subsidized food and energy initiatives, “have coincided with a significant reduction in poverty, with less than 10 % of the country’s 279 million inhabitants live below the international poverty line by 2023″.
“It will never be the next China”
Tax and labor reforms, which make it easier for businesses to hire and fire workers, are also a strategic part of Indonesia’s economic engineering.
“They are helpful steps in the right direction,” Leather said.
“Under the old system, if you wanted to fire a worker in Indonesia, you had to pay them up to 60 weeks of severance pay. That’s a lot more than anywhere else. If you’re a manufacturing investor looking for a place to set up shop in Asia and see how rigid the workforce is, it could turn you away.”
Leather feels “relatively optimistic about Indonesia,” though “it’s never going to be the next China,” he told CNBC. “If it continues to grow at 5-6% over the next decade, that’s a decent return,” he added.
Indrawati, meanwhile, remains cautious.
“A lot of work still needs to be done,” the minister said, adding that much had been achieved “despite Covid and geopolitical fragmentation.”
A key objective is for Indonesia to remain politically non-aligned through its economic policy, despite growing war pressures in Ukraine and Gaza. “Despite geopolitical tensions and fragmentation, Indonesia can nurture its domestic [growth]and must be “opportunistic” in boosting demand in the chip industry and electric vehicle battery production, the finance minister said.
