Why Indonesia's Economy Matters and Its Unexpected Growth _ Indonesian Economy _ Econ

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Here we are with Indonesia's own bullet trains top speed of 350 kilometres per hour , the first in Southeast Asia In recent decades , Indonesia has captivated global attention as a shining star in Southeast Asia , firmly establishing itself as a highly successful and rapidly industrialising economy , much like its predecessors the Asian Tigers , Hong Kong , Singapore , South Korea and Taiwan .

Although Indonesia's economy grew with impressive speed during the 19 eighties and 19 nineties , it experienced considerable trouble after the financial crisis of 1997 which led to significant political reforms .

Today , Indonesia's economy continues to grow at an average rate of 5% positioning it as an upper middle income country and eagerly pursuing its ambition to attain high income status by 2045 .

While Indonesia is still a part of the developing world , it has a rich and versatile past in the economic as well as a cultural and political sense .

This resource rich archipelagic nation is the largest country in Southeast Asia , with 270 million people spread across thousands of islands that stretch from the Indian Ocean to the Pacific .

It is the world's largest Muslim majority state , its third biggest democracy and its fourth most populous country , with 52% of its population being young .

For many years , this mighty nation remained the world's largest invisible economy , shrouded in obscurity .

The last time it occur and politics grabbed .

The world's attention was during the chaos of the 19 nineties , when a crony capitalist system crumbled amidst the Asian financial crisis marking the end of the 32 year long dictatorship of Suharto .

But now it is again in the spotlight with playing a strategic role between America and China .

Unlike India and other emerging markets , it is adapting to a new world order in which globalisation and western supremacy are in retreat beneath the hoods of cutting edge electric vehicles , EVs and on apps used by hundreds of millions of customers , Southeast Asia's largest economy is rapidly becoming even more visible .

Indonesia is the seventh largest emerging market by GDP at purchasing power parity , and it's projected to surpass Germany and Russia by 2024 its economy is transforming rapidly .

Indonesia has a young population and is quickly urbanising , fueling growth in incomes Between now and 2030 Indonesia is expected to see an influx of an estimated 90 million additional consumers with significant spending power .

A source of dynamism is digital services , which are helping to create a more integrated consumer market , with over 100 million people collectively spending $80 billion a year on everything from EPAs apps for on demand trucking .

This growth in Indonesia's consuming class is stronger than in any economy in the world , apart from China and India .

One reason the Indonesian economy is gaining attention is that it has more than 1/5 of the world's nickel , a vital ingredient in the batteries that power electric vehicles .

The only other country with similarly vast reserves is Australia .

Additionally , Indonesia ranks as the world's third largest source of cobalt , another vital input as the west China and India increase subsidies to attract investment at home .

Indonesia sees an opportunity this abundance of essential resources for the global energy transition is expected to drive an economic revival and accelerate further growth .

But Indonesia's natural resources are not the only factor that might spur faster growth .

Jakarta , the capital , has become one of Southeast Asia's most successful incubators of new technology companies .

This , in turn , raises hopes that Indonesia's challenging geography it's a vast archipelago of thousands of islands can be overcome through digitization .

Indonesia's digital economy ranks first among other ASEAN countries .

The gross merchandise value MV of the digital economy , which represents the value of goods sold through customer to customer or eCommerce platforms , has risen from $41 billion in 2019 to $77 billion in 2022 .

It is predicted to continue to rise to $130 billion in 2025 .

This rapid growth of Indonesia's digital economy , occurring during a pandemic , serves as a testament to the adaptability , hard work and resilience of the Indonesian people as a whole .

The sustained increase in the value of our digital economy relies on a few key factors .

Government led digitalization , the progress of micro small and medium enterprises , M , SME , S and a thriving start up ecosystem as many outsiders assume that Indonesia is a typical Asian manufacturing exporter driven by its growing workforce or a commodity exporter driven by its rich endowment of natural resources .

However , the reality is that it is domestic consumption rather than exports and services rather than manufacturing or resources which are propelling growth .

In 1990 when Malaysia had similar income levels to Indonesia today , Malaysia's exports as a proportion of its GDP were approximately twice as high as Indonesia's are now .

This means that Malaysia relied more on exports for its economic activity compared to Indonesia .

Surprisingly , the resource sector's contribution to the economy has actually declined since 2000 , despite booming resource prices .

Mining and oil and gas now account for only 9% of Indonesia's nominal GDP , which is less than advanced economies like Australia , 16% and Russia 15% .

Indonesia has become increasingly attractive to foreign investors , with the youngest population in the region where 26% of the people are under 15 .

It boasts a massive consumer market .

Furthermore , Indonesia has maintained a cautious approach in its diplomacy for a long time .

This makes it a good choice for both Chinese and Western investors , capitalising on its relative lack of global attention , its strategic location size and abundant resources position it as a critical player in the rivalry between superpowers .

Indonesia has a tradition of not taking sides in global conflicts that goes back to the 19 fifties .

It wants to stay neutral and is looking to attract investments from both China and the United States .

This stance has transformed Indonesia into an arena where Chinese and American digital companies investors engage in direct competition .

For instance , in the field of batteries , CATL , a major Chinese company , is investing $6 billion in a project .

At the same time , President Jokowi is also trying to attract Tesla to invest in Indonesia .

Since president Joko Widodo , or Jokowi , was elected in 2014 , he has made substantial investments in infrastructure .

The government has built 16 new airports , 18 new ports , 2100 kilometres of toll roads and 36 out of 61 dams have been completed .

This made Indonesia more competitive in the global economy .

According to the I MD Competitiveness Index , Indonesia's ranking has climbed from 44 to 34 making a 10 point increase , the highest in the world .

Competitiveness isn't solely influenced by GDP and productivity .

It hinges on efficient infrastructure , strong institutions and policies that promote sustainable value creation .

In 2014 , just before Jokowi's first term in office , Indonesia banned the export of unrefined ore .

It allowed Indonesia to process raw materials domestically .

It helps to surge foreign investment , especially in metals processing , and force foreign investors to invest in Indonesia .

It has provided the most obvious boost to growth in recent years .

The investment extends beyond metals processing to manufacturing on the island of Java , home to half the population .

A South Korean battery firm , LG Energy Solution , and Hyundai , a car maker , began building Indonesia's first EV battery cell plant late last year .

The government wants Tesla to follow and has offered the company land for a big factory in Central Java .

This raises questions about Indonesia's economic growth as it is largely centred around Jakarta .

The GDP per capita in Indonesia's capital has reached approximately $19,000 per person .

However , in Central Java , which is relatively close to Jakarta about 230 kilometres away , the GDP per capita is significantly lower , standing at less than $3000 per person .

Moreover , in more distant and remote islands of Indonesia , the economic conditions are even worse with lower income levels than in Jakarta or Central Java .

However , the digital revolution is helping to reduce economic inequality in Indonesia .

It's making things better by reducing rules and giving investment rewards .

The E-commerce explosion is letting people from many different places take part in the digital economy .

You can buy nearly anything through Indonesian e-commerce .

Now .

The fastest growing cities are the middle sized ones , with more than 2 million people except Jakarta .

These cities , like Medan , Bandung and Surabaya , have had an average yearly growth of 7.5% over the last five years .

Jakarta's growth was a bit lower at 6.3% but Jokowi has bigger ambitions .

Indonesia's economic output has grown by a respectable 5% a year since the Asian financial crisis , well above the global average of 3.6% .

But its expansion has been overshadowed by faster growing economies .

China's GDP grew by an average of 8.7% a year , India by 7% and Vietnam's by 6.3% .

The president first won election on a pledge to raise the growth rate to 7% .

That will not happen , so why is Indonesia stuck with a 5% growth rate during Suharto the two decades before the Asian financial crisis .

In 1997 to 98 Indonesia's average annual economic growth rate was slightly higher than 7% .

However , it was lower after the crisis , mostly due to the inability of Indonesia's manufacturing sector to grow as fast as it did before the crisis .

During Susilo Bambang Yo yo's SBY presidency from 2004 to 2014 , Indonesia managed to recover from the crisis , primarily benefiting from the mining boom and favourable monetary policies of several developed countries , particularly the US .

Nonetheless , growth didn't reach 7% hovering just above 5.5% annually .

In 2014 .

Joko Widodo Jokowi succeeded SBY as the president of Indonesia .

His ambition is to bring Indonesia's economic growth back to at least the pre crisis level of above 7% annually .

By the end of his presidency , Jokowi and his cabinet implemented various policies to boost the Indonesian economy .

They reduced the country's fuel subsidy to increase government spending on infrastructure , aiming to remove the significant bottleneck hindering Indonesia's economic growth .

Furthermore , his government aimed to enhance national economic competitiveness promote exports and attract more investments .

While these efforts show that Jokowi and his economic team addressed several challenges in the Indonesian economy , they fell short of achieving the 7% growth target .

The main problems with the current growth is diminishing return on investment .

A significant portion of Indonesia's existing infrastructure is of poor quality , and the country lacks essential components such as roads , ports , airports and power generation .

Resources building and maintaining infrastructure are also particularly challenging due to Indonesia's geography and the frequent occurrence of natural disasters like floods , earthquakes , volcanic eruptions and tsunamis .

As a result , transportation and energy costs are high , which discourages foreign investment in the country .

Foreign direct investment FD I makes up a relatively small portion of the total investment , averaging 2% of GDP over the past decade .

This figure is lower than that of most Asian peers such as Vietnam , with 6.6% of GDP , Malaysia with 3.5% and Thailand with 2.5% .

Since FD , I typically results in significant productivity improvements and positive impacts on other parts of the economy .

This diminishes the overall efficiency of investment .

Another issue is the declining manufacturing sector , Indonesia witnessed growth driven by manufacturing from the mid 19 eighties to mid 19 nineties .

However , since then it has been on the decline .

The lack of substantial productivity improvement has been a major factor contributing to the sector's overall performance decline .

Studies have also identified other significant causes , including an infrastructure deficit , labour market issues , an uncertain business climate and a wavering stance on economic reform policies .

Among these problems , the productivity output per hour worked by Indonesian people is still low compared to neighbouring countries such as China , Malaysia and Thailand and higher than that of India and Vietnam .

Unfortunately , one of the reasons for low productivity is that the government spends less on development on capital , education , health and social assistance .

It remains low and has even fallen slightly relative to GDP since 2015 as weak revenue collection has forced the government to contain overall expenditure .

Whereas the average emerging economy in Asia invests more than 14% of its GDP on development , Indonesia still only invests about half that amount .

Corruption in Indonesia has remained a persistent issue , impacting the government's capacity to operate efficiently and provide public services .

It can discourage foreign investments and raise the cost of conducting business .

According to the Corruption Perceptions Index , Indonesia ranks considerably higher than China , India , Thailand , Malaysia and Vietnam .

However , Jokowi's pro growth agenda aims to significantly enhance Indonesia's challenging business environment .

Substantial progress has been made as indicated by the notable improvement in Indonesia's ease of doing business .

Ranking Indonesia may still attract scant attention internationally , but the outlines of a more visible economy are increasingly clear .

With its substantial nickel deposits , Indonesia is poised to play a prominent role in the thriving electric vehicle industry , which is still in the early stages of a decades long expansion .

If it succeeds , Indonesia will improve the lives of a quarter of a billion people and spur on a growth starved world .

It could even alter the global balance of power .

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