The largest economy in Southeast Asia, Indonesia – a diverse archipelago nation of more than 300 ethnic groups -- has charted impressive economic growth since overcoming the Asian financial crisis of the late 1990s. The country’s GDP per capita has steadily risen, from $857 in the year 2000 to $3,603 in 2016. Today, Indonesia is the world’s fourth most populous nation, the world’s 10th largest economy in terms of purchasing power parity, and a member of the G-20. An emerging middle-income country, Indonesia has made enormous gains in poverty reduction, cutting the poverty rate to more than half since 1999, to 10.9% in 2016.
Indonesia’s economic planning follows a 20-year development plan, spanning from 2005 to 2025. It is segmented into 5-year medium-term plans, called the RPJMN, each with different development priorities. The current medium-term development plan – the third phase of the long-term plan -- runs from 2015 to 2020, focusing, among others, on infrastructure development and social assistance programs related to education and health-care. Such shifts in public spending has been enabled by a reform of long-standing energy subsidies, allowing for more investments in programs that directly impact the poor and near-poor.
Considerable challenges remain in achieving Indonesia’s goals.
A continued slump in demand for commodities – the fuel for Indonesia’s economic boom in the past decade – has led to moderating GDP growth. Trade has slowed, as has expansion of fixed investment, and domestic consumption – long the main driver of growth – is also less buoyant. These developments have led to a slower pace of poverty reduction.
While the poverty rate declined by 1% annually from 2007 to 2011, since 2012 poverty has declined by an average of only 0.3 percentage points per year. Hence out of a population of 252 million, more than 28 million Indonesians still live below the poverty line. Approximately 40% of the entire population remain vulnerable of falling into poverty, as their income hover marginally above the national poverty line.
Another challenge to efforts at reducing poverty – and to the 1.7 million youth who enter the workforce each year – is the slower pace of job creation. Employment growth is now slower than population growth.
While there are greater efforts at improving basic public services, the quality of health clinics and schools is uneven by middle income standards, contributing to alarming indicators, particularly in health.
For example, the maternal mortality rate in Indonesia is 126 maternal deaths per 100,000 live births – higher than the Millennium Development Goal of 102 maternal deaths per 100,000 live births. 1 in 3 children under the age of 5 suffer from stunting, or shorter height, which reflects impaired brain development that will affect the children’s future opportunities. If not reversed, the gap between rich and poor, already increasing in recent years, may widen. At 0.40, Indonesia’s GINI coefficient – a measure of inequality - is higher than in neighboring countries.
In order to strengthen the investment climate and economic growth, the government continues to announce policy reforms intended to ease red-tape. Investors welcome the policy reforms, which include opening up sectors for investment and reducing high logistics costs.
Last Updated: Apr 10, 2017