Indonesia is one of the emerging market economies of the world. With more than 270 million people, Indonesia is the world’s fourth-most populous country, with majority of population being Muslim.
From a Dutch colony, to the largest economy in Southeast Asia. The country has travelled quite a road.
You see, Indonesia is a fairly new country. After their independence, Indonesia was under the model of directed democracy. During this time, many problems occurred. The country was suffering economic crisis because of continuous war. Also, there were lots of rebellions and conflicts with the communist party.
In 1965, army coup happened with the support of communist party of Indonesia, but it failed. And then, the army general Suharto took control of the country with the support of the US.
After that, Suharto ruled the country for nearly three decades during which he took some economic expansion measures which were quite successful. He was able to put Indonesia’s economy back on track.
From 1968 to 1988 their economy grew with the average of 7% per year in terms of GDP. Also in less than 10 years, the inflation dropped from 660% to 19%. All of this transformed Indonesia into an Asian economic miracle. But even after this economic growth, it was still a dictatorship.
The political repression violence and corruption was very high. Then in the 90s, Asian crisis happened and the Indonesian economy collapsed. The Indonesian currency lost 80% of its value against the dollar and the country GDP crashed badly.
Because of this, people lost their jobs and social unrest increased. This led to mass protest against Suharto dictatorship. Then, finally after long protests and violence, Suharto resigned and Indonesia finally became a democracy. The country held its first election in 2004.
Since then, Indonesia has experienced a period of change; political openness, decentralization and more open economic policies.
Today, Indonesia is the world’s 15th largest economy in terms of nominal GDP. And also a member of the G-20.
Furthermore, Indonesia has made enormous gains in poverty reduction, cutting the poverty rate by more than half since 1999, to 9.78% in 2020.
Now when we talk about any developing nation, most of the times they follow a typical path for their economic development. Most of the countries transform from an agriculture based economy to industrial and service based economy. But this was not the case of Indonesia.
The country is quite rich with natural resources. Hence they had a huge reliance on commodities like oil, natural gas, coal and stuff. In the 2000s, commodity prices went up due to sharply rising demand in several emerging markets, especially China.
This was a very lucrative period for Indonesia as the country holds large reserves of crude palm oil, coal, gas, and copper. In the 2000s, this commodity boost managed to accelerate Indonesia’s recovery from the Asian Financial Crisis.
However, this higher price of commodities did not last very long. The reason for this was, some of the major buyers like China, started to reduce the imports, as a result of economic shift from manufacturing to services. And being a large commodity exporter, Indonesia’s export performance was heavily affected. And not only its export performance, but also overall economic growth is affected by commodity price fluctuations.
At the same time, non commodity exports also didn’t picked up. Even today, Indonesia’s manufacturing sector is still not a major contributor to the global value chain market.
So now you might be thinking, what is actually driving Indonesia’s economy.
Well, today one of the main driver of Indonesia’s economic growth is its large population of young workforce. This massive population creates a huge demand of consumer goods. This is a key driver of the country’s economic growth.
It is estimated that by 2030, Indonesia will have 135 million consumers. Along with this, the industrial and services sectors too are significant contributors to the country’s economy.
The industrial sector includes manufacturing of textiles, chemical fertilizers, electronic products, cement, rubber tires, clothing and shoes. Most of these are supplied to the American markets.
Also a significant proportion of production is handled by medium and small-scale privately owned enterprises which supply consumer goods.
Now if you talk about the service sector, then between 2010 and 2017, it grew at an average of 7.1% per year, which is much higher than the manufacturing and agricultural sectors at 4.4%. Even after this growth, the competitiveness and productivity levels of service sector are significantly lower than the other regional countries.
The growing middle class is also contributing to rapid urbanization of the country. This urbanization will help Indonesians to shift from low pay jobs to higher paying service and industrial jobs.
Now, we have to understand that the demographic bonus will not last forever. You see, most of the nations which experience economic and technological advancement, their fertility rate tends to decrease and this could happen with Indonesia too.
The world bank has forecast that by 2025 to 2030, Indonesia will reach the turning point. Yet if the economy fails to grow at 8% per year in the next decade, Indonesia could find it tough to reach the status of a high income economy.
Along with this, there are plenty of other things that could hold them back. Like the problems due to rising population and urbanization. Such as rising demand for electricity, clean water, and sanitation.
Also, the burden on public and private transportation will increase. The country already has world’s 3rd worst traffic rate.
Now, another major problem is their crippling infrastructure. You see, Indonesia is a huge archipelago that consists of more than 17000 islands with an end to end distance of 5000 km.
And this makes cost of transportation, logistics, power supply and communication networks very high. In recent years, consumption of electricity has increased by 7% annually yet Indonesia has failed to meet this grown demand.
The inadequate investments of the system resulted in increase frequency and duration of power outages. This has been proven costly to the local industries which lead to higher cost of manufactured products in the country.
Along with this, Indonesian laborers are not well skilled and labor laws too are not favorable. Because of this reason, investors prefer to go to other countries such as Vietnam.
Still the investment rate compared to GDP has actually increased, yet these investments are not helping the economy as expected and that is happening because the investments are focused on constructing high rises rather than infrastructure.
The returns of this kind of investments are less. Also, due to their bureaucracy, Indonesia’s rank and ease of doing business is low. Another leg puller is the natural disasters, particularly their capital city Jakarta, which is sinking due to rising sea level.
The city is only seven meter above sea level. The excessive groundwater drainage is making Jakarta sink about 5 to 10 centimeters each year and this sure is causing huge problems.
Now to sum it all up, we can say Indonesia has the opportunity to turn out as an economic powerhouse.
But the window of this opportunity narrows just 10 to 15 years from now. Indonesia is racing against time. Improving infrastructure and promoting higher GDP growth is a crucial factor to determine the future of Indonesia.
This will ultimately determine whether the country will be stuck in the middle-income trap or will be able to surpass it.