Indonesia’s Pathway to Progress: an ‘Advanced Nation’ by 2045

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JAKARTA (TheInsiderStories) – While struggling to overcome multiferous accumulated economic challenges, Indonesia is currently entertaining a tremendous dream of becoming an advanced country by 2045 – when the nation celebrates its 100th anniversary.

Having been classified a ‘middle-income country’ since the early 1990s, Indonesia will reortedly need some 30 years to escape what is called the ‘middle-income trap’ and move into the high-income group of countries, according to Bambang Brodjonegoro, Minister of National Development Planning of Indonesia.

Indonesia is currently categorized a ‘lower-middle income country’ with per capital GDP of US$ 3.600 (as of 2017). According to Organization of Economic Cooperation and Development (OECD) forecasts, it is expected to shift from a middle-income nation to a high-income, or advanced, country by 2045.

‘We aspire to become a high-income country. We are thus exploiting several scenarios, especially in terms of economic growth; we are most likely going for the baseline (scenario),’ Brodjonegoro said on Thursday, Nov. 2.

To be able to join the ranks of high-income countries by 2045, reaching a per capita income level of at least US$12,236, Indonesia needs to raise economic growth beyond the 5 per cent year-on-year (YoY) level.

If the current gross domestic product (GDP) growth rate is maintained (between 5 and 6 per cent YoY) it will take another decade to break out of the ‘middle income trap’ and become a high-income country. We have to admit that GDP growth in 2017 is projected at a bleak 5.1 per cent YoY.

Indonesia’s Real GDP Growth and Projections 

  2016 2017F 2018F
Real GDP (annual % change) 5.0 5.1 5.3
Consumer Price Index (annual % change 3.5 4.0 3.5
Current Account Balance (% of GDP -1.8 -1.7 -1.8

 Source: World Bank

‘We are more ambitious and we have to work harder than we used to. If a 6.4 per cent annual average growth rate is sustained up to 2045, we will graduate sooner, by 2034, and in 2045 Indonesia will be ranked number 4 in term of GDP size in nominal terms,’ he said.

At the same time the Indonesian population will number 350 million by 2045, with annual middle-class population growth at around 0.7 per cent. It is conceivable for Indonesia to become a major economy with a most powerful consumer class.

How can Indonesia achieve that?

A recent World Bank report revealed that Indonesia needs to implement six reforms in order to emerge from the middle-income trap: close the infrastructure gap, close the skills gap, well-functioning markets, access to quality service for all, improving social protection and natural risk management.

Brodjonegoro said the government is dividing its strategies into short, medium and long-term planning, for every 10 years until 2045.

‘For the first decade, our focus is on how to create structural reforms in the industrial sector (real sector) by shifting our economy from manufacturing into more value-added and processing activities,’ he said.

Indonesia’s manufacturing industry was estimated at Rp2,097.7 trillion ($283 billion) in 2016, contributing 21 per cent to the country’s GDP, up from 17.8 per cent of GDP the preceding year. However, this higher contribution of manufacturing to the economy is mainly the result of the declining roles of oil & gas, commodities, agriculture and mining within the Indonesian economy.

And in the next period, the government will stimulate economic growth based on innovation.  He said Indonesia can achieve these goals by boosting productivity, through the creation of technological innovations, such as was achieved by South Korea, which became an advanced country in just 15 years.

Over the final ten-year period, Indonesia’s economy will be modernized, with manufacturing contributing just 32-33 per cent to GDP. ‘To be an advanced country you have to be more industrialized,’ he noted.

As well as the manufacturing sector, services will be more streamlined, so that agriculture will become more productive.

‘Farmers will be no longer be the poorest group in Indonesia: we are going to transform farmers into entrepreneurs,’ he promised.

In order to achieve 5.1 per cent growth per year, the government also stresses the importance of boosting investment attractiveness, especially for foreign investors. Indonesia needs at least 5.3 per cent annual growth in its investment sector to support the country in becoming an advanced nation equal to Japan, South Korea and the U.S.

Thomas Lembong, Chairman of the Indonesia Investment Coordinating Board, confirmed he is quite confident about hitting the target, due to the fact that the government has rolled out a series of regulatory changes intended to encourage foreign investment and reduce the dependence of Southeast Asia’s largest economy on private consumption.

‘There’s no magic bullet or shortcut: you have to tackle each of the issues one by one. I think the key to succeeding is to go about it in a systematic fashion,’ Lembong said.

Indonesia has recorded an increase in realization of investment in the third quarter this year. Investment over the period was up 13.7 per cent to Rp176.6 trillion from the same period last year, at Rp155.3 trillion.

US$1: Rp13,500

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com