Indonesia, the next Asian Tiger and Economic Powerhouse?
Indonesia seems to be in the news a lot lately, with some of the most well-known companies investing in Indonesia; Facebook building a cable connecting Singapore, Indonesia, and North America, and Amazon investing 5 billion dollars in Cloud Services, to name a few. You may also remember the viral photo of Indonesia’s President Jokowi visiting Elon Musk at Tesla’s factory.
When you think of influential economies in the Asian Market, countries such as Singapore, China, Japan and South Korea likely come to mind. However, the Emerald of the Equator, better known as Indonesia, is catching up and maysoon move to the forefront of the financial market in Asia. The outlook was less than favourable post 1997 Asian Financial Crisis, which, due to the large devaluation of the rupiah, had led to a period of economic crisis as well as political instability. They have since recovered strongly and gone through a steady economic growth over the last 20 years, as seen in Diagram 1 below. This year’s economic projection shows a robust 5.4% real GDP growth for Indonesia, further solidifying their economic boom (International Monetary Fund (IMF) , 2022).
Diagram 1 : Indonesia’s Gross Domestic Product (GDP) (Billion USD)
(Source: tradingeconomics.com | World Bank)
What perhaps worth considering are the various reforms implemented by Indonesia that helped bolster this renewed economic resurgence and growth. While it may be hard to extrapolate which reforms directly contributed to this growth, these reforms in the supply side all undoubtedly played a key role.
Since its inception, the geographical challenge faced by Indonesia is that the country is a collection of islands. Part of what possibly hampered Indonesia’s economic growth in the past was its lack of connectivity between not only rural and urban areas, but its islands (which would be a tall feat to connect all given that there are over 11,000 inhabited islands). The lack of connectivity was particularly hard on those in areas with low accessibility as their goods were more expensive due to the higher transportation costs. The construction of a 5000-km sea highway, a supply side reform, would help reduce this disparity in prices by reducing logistical issues.
For some nations, highways may be taken for granted but they play a significant role in promoting growth; allowing for greater connectivity between rural and urban areas as well as reduced journey times. Furthermore, highways also reduce the risk of accidents, as one doesn’t need to navigate hazardous back roads.
To give a sense of scale to the scope of the connectivity projects, in 2018, 616 kilometres of toll roads were built, which was double the entire amount of road building in the past 35 years.
This growth in infrastructure was beneficial to all age groups, as large businesses gained from easier transport and a wider market access, while small and medium enterprises were also taken into account as rest areas were developed that would allow access to these enterprises to share culture and small buisness. The infrastructure spending did not only extend to roads, but airports, ports and railways as well.
Bolstering Lower Income Groups
Part of the reforms under the Jokowi era included various initiatives that would bolster lower income groups; such as free infrastructure upgrades and healthcare inclusivity.
For instance, installation of new power grids was done to underprivileged neighbourhoods (prior to this, 200,000 in West Java did not have electricity, and those who connected their outlets to their neighbours who did, had to face unreliable connections). These new power grids would help alleviate the burden and also induce more economic activity; an anecdote mentioned in, Jokowi and the New Indonesia highlighted how a 52 year trader would now be able to continue trading into the night- something she wasn’t able to do earlier due to the lack of electricity.
Furthermore, Indonesia embarked on a project of healthcare reforms and introduced universal healthcare coverage in 2014. This would greatly benefit the lower-income groups as occasions where they fell sick took a larger toll on them, not only because of the treatment and medical costs,but also the loss of earnings. With these new healthcare policies, a worker with a desk job would still get paid and be able to claim for sick leave, and furthermore, would be covered under their firm’s health insurance. Currently JKN, or Kesahatan Nasional, covers 83% of Indonesia’s population.
A healthy economy
Aside from the positive GDP growth trend over the years, there are many other economic indicators that can solidify the fact that Indonesia’s economic outlook is incredibly positive. The country’s unemployment rate has fallen from 8.06% in 2007 to just 4.28% of the total labour force in 2020, which has led to a decline in poverty rates (headcount ratio at $1.90 a day) from 19.3% of the population in 2007 to just 2.3% in 2020 (International Labour Organisation, 2022)
This positive change in the unemployment rate has definitely impacted Indonesia’s economy positively as the increase in wage output indirectly increases money in the circular flow of the country’s economy. As a result, there is increased spending and economic growth, leading to a thriving business cycle and consequently more employment.
In addition to that, low unemployment would also benefit the government by providing additional revenue from income taxes and taxes on expenditure.
On a separate note, there’s no denying that the role of digital industries has become more significant to a country as we have seen a huge increase in digitalization, from banking to e-commerce, and Indonesia has great potential in this sector. As of February 2022, it boasts the largest population of internet users in Southeast Asia at 204.7 million (Statista , 2022), and according to the World Economic Forum, Indonesia ranks among one of the most competitive countries in terms of its digital technology capabilities for the year 2021.
In fact, in late 2021, the Finance Minister of Indonesia, Sri Mulyani Indrawati stated at the 3rd Indonesia Fintech Summit that Indonesia’s digital economy had the largest value in its region with its total gross merchandise value (GMV) reaching approximately US$70 billion (Agatha O Victoria, 2021). Gross merchandise value tracks the total value of merchandise sold over a certain period of time, making a good metric to gauge the health of an e-Commerce business.
Diagram 2 below shows how Indonesia dominates the digital economy in Southeast Asia with its GMV projected to reach approximately US$120 billion in 2025, which would give this G20 country a huge economic boost.
Diagram 2: Southeast Asia’s Digital Economy Gross Merchandise Value (US$ billion)
Source : e-Conomy SEA 2020 report by Google, Temasek and Bain&Company | Graph first seen on the ISEAS EDU SG webpage.
The Indonesian Digital Economy
As seen in the statistics here, the digital economy industry has a huge potential to become a key component in Indonesia’s economic success in the years to come. The digital economy has been characterised by Deloitte as an economic activity that runs on online connections among people, businesses, devices, data, and processes. All in all, the digital economy is basically an economy based on advanced computing technology which transforms business processes by undergoing digitalization. An example would be conducting businesses via the Internet. Arguably, for a digital economy to be successful, the need for seamless connectivity between people, organisations and machines is undoubtedly essential, which translates to a strong internet and mobile technology infrastructure, and one that utilises the internet of things (IoT). IoT is the concept of connecting electronic devices to the Internet and to other connected devices, essentially forming a widely linked network and indirectly a connected community where data can be easily shared, stored and accessed.
A country would need to digitise and increase R&D spending in terms of improving its technology to support the ever-growing digital economy. Some may argue that there may be better industries for a country to invest in, but statistics such as those shown in Diagram 2 regarding Indonesia’s projected GMV in 2025 can further solidify the fact that an advanced digital economy enables a country such as Indonesia to reap the benefits in monetary terms.
The digital economy is a big one in Indonesia with loads of potential, having already produced seven start-ups with the “Unicorn Status” (Unicorns are startups valuing more than US$1b). Examples of these Unicorns are Tokopedia, Bukalapak, Traveloka and Gojek, which are all in the digital economy sector. Although this is a respectively good number (joint highest with Singapore in the ASEAN region), they are still a long way from the largest Asian economy, China, with a whopping 301 ‘Unicorns’.
MSMEs are picking up in the digital economy thanks to the Government
MSMEs (micro, small and medium enterprises) are the strong foundation for Indonesia’s growing economy), accounting for about 60% of Indonesia’s GDP making them an invaluable asset to the country.
Prior to the COVID-19 pandemic, only 13% of MSMEs had their operations digitised, which was particularly worrying, as they may be less efficient and less competitive without the advent of digitalisation. Given that 60% of Indonesia’s GDP is contributed by this sector, the government has thus initiated various policies to increase MSME adoption.
There were promising signs as Deloitte estimated roughly 15-20% of MSMEs migrating online due to the pandemic but this wasn’t enough. Let’s take a look at some initiatives the Indonesian Government has taken to help push MSMEs into digitalization and further scale them upwards.
- The government has drafted the Indonesia Digital Roadmap for 2021-2024 which acts as a guide to strategise its goal of achieving national digital transformation. According to the Communication and Informatics Minister, Johnny G.Plate, the plan aims to provide guidelines for digital infrastructure, digital government, digital economy and digital citizens. He added that at least 100 main initiatives within 10 priority sectors have been sketched out within the road map to realise inclusive digital transformation. “These sectors comprise digital transformation and tourism, digital trade, digital finance service, digital media and entertainment, digital agriculture and fishery. They also include digital real estate and city, digital education, digital health, industry digitalization, and government institution digitalization,” as explained by Plate.
- Pasar Digital (PaDi): Established by the Ministry of State Owned Enterprises, PaDi (SoEs) aims to encourage four SoEs (State Owned Enterprises) which are PT Telkom Indonesia (Persero) Tbk, PT Pertamina (Persero), PT Waskita Karya (Persero) Tbk, and PT Wijaya Karya (Persero) Tbk to utilise their budgets on expenditures with 540,000 MSMEs in Indonesia. PaDi was established in August 2020 and its marketplace is currently divided into B2B and B2C with the categories of products ranging from manufacturing, catering, advertising services and many more. B2B which is business-to- business are any transactions between 2 businesses whereas B2C is business-to-consumer where the transactions occur between a business and a consumer where the consumer will be the end-user of the service or product sold by the business
- Belanja Pengadaan (BELA) is another initiative launched by the National Public Procurement Agency (LKPP). According to their official webpage, BELA aims to act as an E-Purchasing Platform for procurement of government goods & services in collaboration with PPMSE ( business actors who provide electronic communication facility (e.g. platform) for trade/commercial transactions) to increase the use of domestic products and MSMEs involvement in the procurement of government goods & services. This initiative should encourage the development of micro and small businesses throughout Indonesia and is a mutually beneficial development for both the development of E-Marketplace procurement of goods & services while providing opportunities to MSMEs. As of 9th May 2022, total transactions were worth 247.4B rupiah (74 million Ringgit).
- Laman UMKM (MSMEs portal): Introduced by the Ministry of Cooperatives and Small and Medium Enterprises, this initiative consists of an e-catalogue portal designed to support MSMEs’ operating digital businesses. This initiative can help widen the potential target audience of MSMEs since it is able to target a larger group of individuals. This could help generate more leads which can boost sales, thus scaling up the MSMEs.
An industry with potential growth
Software as a service (SaaS) sector
Software as a service (SaaS) essentially allows individuals to connect to and use cloud-based apps over the Internet. Examples are Outlook or Google Calendar you use for work where you can see your team’s scheduled meeting.
The SaaS sector in Indonesia is still considered to be in its infant stage, but has a promising future ahead. Indonesia’s software spending in 2020 is estimated to be US$900 million, a 33% increase from 2017’s estimated US$672.5 million with the two major parts of the SaaS market being point-of-sale systems (27.8%) and human resource information system software (16.7%). Moreover, 58.3% of SaaS startups are currently in the seed stage,a stage where entrepreneurs approach investors to obtain financial support to fund their concept or product. Ultimately, the seed stage could develop into a strong and robust industry that becomes a major contributor to Indonesia’s economic growth.
Another solid reason as to why Indonesia has the potential to be an economic powerhouse is its rapid growth in the manufacturing industry, with production ranging from textiles and garments to F&B, electronics, chemicals and electronics. According to the latest data available by the United Nations Statistics Division, Indonesia was ranked as the top country in Southeast Asia in terms of its global manufacturing output which stands at 1.6% (Ritcher, 2021). The contribution of the manufacturing industry to Indonesia’s GDP has risen significantly over the years as seen in Diagram 3 below.
Adding on to this, its neighbour, China, who is a global manufacturing powerhouse has been shifting towards high-tech manufacturing with its average growth in high-tech manufacturing surging to 13.2%. This scenario will definitely benefit the Indonesians as labour costs would be lower and more competitive compared to China. Thus, we should not be surprised if we see Indonesia increasing its share of global manufacturing output in the next decade or so.
Diagram 3: Indonesia’s GDP from Manufacturing.
Why the future is looking bright
A huge population which is relatively young, Indonesia boasts approximately 276 million individuals (Population Pyramid, 2021) and a median age of 29.7 in 2020. This potentially results in a large labour force which is both tech-savvy and adaptable. With the digital world shaping our future, this young generation could give Indonesia an edge over its neighbours such as Singapore, which has a median age of 42.2 and Japan at 48 years of age. Many critics may argue that a young population does not necessarily guarantee a digitally literate workforce, but many reports and studies have pointed out that the Gen-Zs are digital natives merely due to the fact that they grew up in a technologically advanced era.
Indonesia has also been experiencing a rise in foreign direct investments (FDI). Increased FDIs will not only improve capital flow but also result in economic growth through multiple channels, such as increasing government revenue via increases in tax revenues. This, in turn, triggers a positive multiplier effect and encourages improvements in technology which would drive advancements in productivity. Data by The World Bank shows a steady increase in FDI net inflows into Indonesia (% of GDP); numbers having risen from -2.57% in 2000 to 1.81% in 2020 with Singapore, China and Japan being among the largest contributors.
Furthermore, education expenditure has increased significantly, with the 2022 allocation currently valued at 541.7 trillion Rupiah, which is a 53% increase compared to the Pre-Jokowi budget of 353 trillion Rupiah. Some of the educational policies pursued include increasing scholarship recipients and funding vocational programs (pg.160, Prasdojo, 2020).
A potential area of risk
A potential area of concern with Indonesia is their incurrence of debt. As a developing economy, it is no surprise to see that Indonesia’s gross external debt has been on a sharp rise over the last 20 years due to an increase in foreign direct investments into the country. A closer look at these worrying statistics show how influential China is to Indonesia. It’s no secret that there are a large number of poorer countries in danger of falling into a “debt trap” with China. According to data from the World Bank International Debt Statistics, countries like Laos, Zambia and Kyrgyzstan have debts with China equivalent to approximately 20% of their annual GDP. and there are a few situations that could drag Indonesia into a similar plight. Indonesia already has US$4.95 billion of sovereign debt exposure to China and US$17.28 billion in what’s known as a “hidden” public debt due to it being incurred by state-owned companies (Mcbeth, 2021). Adding on to that, Indonesia’s construction of the Jakarta-Bandung high speed railway, which is reported to be at an 80% completion status as of April 2022, has a price tag of more than US$8 billion and unfortunately Indonesia has reportedly allowed the sharing of the cost of this project with the government and will seek financial aid worth 75% of the total cost from the Chinese Development Bank according to Radio Free Asia. This would only add fire to the already growing amount of Indonesia’s “hidden debt” with China. If Indonesia does not manage these external debts sustainably, it could mean trouble for them and further hinder the country’s economic development in the future.
Indonesia will definitely face many challenges in pursuit of sustainable economic growth. However, the government has taken some initiatives such as the construction of the Jakarta-Bandung high speed railway, and another US$400 billion into other infrastructure projects according to KPMG. However, as explained above, their method of financing could bring about some issues. Overall, their weak infrastructure foundation could bring many complications which would disrupt Indonesia’s plans to be a global economic powerhouse. For instance, poor city planning and lack of infrastructure has indirectly contributed to the sinking capital of the country, Jakarta. According to The Organization of World Peace (OWP), Jakarta is sinking up to 25cm per year, making it the world’s fastest sinking city. This scenario would disrupt businesses, social welfare and impede potential investments from MNCs and other countries. In addition to that, increased expenditures to solve problems caused by bad planning would reduce the government’s funds which could have been used to spearhead other economic developments.
Furthermore, remember how earlier in the report we lauded Indonesia for the construction of highways that offered greater economic activity? There was a fair amount of criticism surrounding the “5000km sea tunnel” as while the program did reduce costs, it still fared worse compared to its neighbours – shipping would cost more than $1400 compared to $100-200 in neighbouring countries, and port utilisation remained dismal with only 20% in use. While the initiative was carried out with good intent, governance and policy making are ultimately not a magic wand to cure economic challenges.
All in all, Indonesia undoubtedly has an abundance of economic potential to be at the forefront of the Southeast Asian financial market as the next global superpower. However, all countries will definitely face challenges in their pursuit of development and Indonesia is no exception. Nevertheless, the various reforms that promote greater connectivity and increase in human capital have certainly helped propel Indonesia to the front line of ASEAN economies.
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Researcher: Edwin Oh Chun Kit
Reviewer : Muhammad Bahari
Editor: Julia Yazid