Indonesia’s economic growth has averaged 5 per cent in the last decade, placing it well below past peak growth rates of Asian economies the country seeks to emulate. Yet change is possible, says its former finance minister M Chatib Basri.
Indonesia 's new President Prabowo Subianto , right, announces his cabinet lineup as Vice President Gibran Rakabuming Raka, left, looks on at Merdeka Palace in Jakarta, Indonesia , Sunday, Oct. 20, 2024. . Though the nation’s 5 per cent growth rate is solid by global standards, it falls short of countries like India, Vietnam and the Philippines.faces significant hurdles. By 2050, the country will be in the throes of an ageing population.
Indonesia’s debt-to-GDP ratio has increased, though it remains within safe limits. What requires attention is the rising debt service ratio - the proportion of government revenue spent on interest and debt repayments. To improve this situation, the government needs to increase revenues, particularly through tax reform - something Indonesia has previously found difficult. This includes enhancing tax administration, reducing the scope of tax exemptions and reviewing existing tax incentives. On the expenditure side, improving the quality of spending is crucial, including reallocating fuel subsidies to direct subsidies, education and healthcare spending.The third challenge relates to the middle class.
Formal sector jobs have contributed to nearly 75 per cent of the increase in middle-class jobs. Investments in tourism and creative industries also could create more middle-class employment opportunities.Unfortunately, high economic costs hinder these industries. In highly competitive, export-oriented manufacturing sectors, producers are price-takers on the global market - they are usually unable to pass high costs onto consumers.
The data shows, however, that Indonesia’s FDI-to-GDP ratio has declined from 2.8 per cent in 2014 to 1.9 per cent in 2022. This is one reason why Indonesia’s economic growth has been stuck at around 5 per cent since 2014.The government has implemented a number of policies to support small- and medium-sized enterprises , but these have been more protectionist than productivity-enhancing. It is important to integrate SMEs into global value chains by providing them with market access.
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