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Within the next two decades, Indonesia aspires to generate prosperity, to avoid a middle-income trap and to leave no one behind as it aims to catch up with high income economies. Realising these ambitious goals requires sustaining high growth and job creation, as well as a reduction in inequality. The report ‘Indonesia: Avoiding the Trap’, presented during the World Bank Development Policy Review on 23rd June 2014 at the Mandarin Oriental Hotel Jakarta, projects that unless the economy grows much faster than the current five to six percent, Indonesia will not escape from the so-called 'middle income trap'. This trap is experienced by many economies that initially grow fast but then stagnate for more than a decade.
After years of high growth, supported by the commodities boom from 2003 to 2011 and low global interest rates since 2009, Indonesia is now facing a slowdown in economic growth to a little over five percent. Ndiame Diop, World Bank Lead Economist, was a speaker at the seminar and he stated that there are some key areas to reform the economy further to achieve high quality growth of above six percent, such as redirecting public spending. He mentioned that Indonesia mostly spends its budget on energy subsidies, while the lowest budget is allocated for the healthcare sector.
"Indonesia has significantly improved the access to education. The challenge now is mostly to enhance the quality of the Indonesian education. There is a little training offered to employees and more modern training centers would help graduates obtain the skills to be competitive. However, on-the-job training is tied to the assurance that employers can retain trained workers at reasonable costs." Ndiame Diop said.
Insufficient infrastructure also constrains growth. Total infrastructure investment from the past decade by the central government, sub-national governments, state-owned enterprises, and the private sector, is less than four percent of GDP, about half of what is needed. The World Bank report estimates that Indonesia has lost at least one percent of economic growth each year over the past decade due to this low investment.
Phasing out massive fuel subsidy spending, which amounts to 2.6 percent of GDP and disproportionately benefits the affluent, would allow the government to spend more on infrastructure and other pressing needs such as healthcare, which is currently at only 0.9 percent of GDP. The reallocation of spending and improving efficiency at the provincial and district level would allow for more funds to go to infrastructure spending. Improvements in local government budget management would also help local service delivery for healthcare, sanitation infrastructure, and waste management.
Higher growth may help many segments of society, including the self-employed, through greater work opportunities. However, to ensure that prosperity is shared among all citizens, local governments need to improve their accountability in delivering better services, implementing an effective social security system, and enhancing the country's capacity for disaster risk management. Insofar as the country carries out the implementation of these reforms in the aforementioned areas, the World Bank is confident that Indonesia will be able to rise and avoid the middle-income trap.
KADIN Indonesia - 2014
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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