Indonesia Has Moved Up – but Not for Everyone

June 23, 2014

  • Indonesia has managed to sustain its economic growth and reduce the poverty rate, to less than 12 percent.
  • But without critical reforms, Indonesia can see the growth trajectory slow and not escape the so-called middle income trap.
  • A World Bank report outlines how Indonesia can avoid the middle income trap with reforms in six priority areas.

JAKARTA, June 23, 2014 - Indonesia’s economy has grown confidently, helping  to lower the poverty rate. The country has succeeded in halving the poverty rate from 24 to 12 percent between 1999 and 2012. However, 65 million people still live between the national poverty line of $1.25 a day and the global poverty line of around $2 a day.

Rasma, a fruit ice seller in the country’s capital, is among those who have not really felt the benefits of Indonesia’s progress.

“I see that Jakarta has moved up, but not me,” says Rasma. For him, his wife, and their three children, when the rainy season comes, they easily fall into poverty.

“People don't buy fruit ice when it rains. So I have to borrow money from relatives or neighbors to support my family. As long as my family can eat. Once I have some extra money, I pay them back,” he says.

Strengthening social protection can help ensure that prosperity is shared more widely. However, building Indonesia’s social security system has begun and results will greatly depend on how well these reforms are implemented.

Providing better jobs is one way out of poverty, but these better jobs are scarce and many turn to whatever jobs they can get.

“After being unemployed for six months, I chose to take a job as an advertising administrative assistant because that was the only opportunity and looking for other jobs was hard,” said Elfa Mandiri, who holds a degree in international relations.

" After being unemployed for six months, I chose to take a job as an advertising admin assistant because that was the only opportunity and looking for other jobs was hard "

Elfa Mandiri

Degree in international relations

The country also faces the challenge of a skills gap between available jobs and education opportunities. Employers complain about not being able to fill jobs with skilled applicants, while certain sectors report not having enough graduates in those fields.

Higher economic growth also needs more and better infrastructure. Total infrastructure investment has remained at only 3-4 percent of GDP over the past decade. This is far below the rates of above 7% of GDP before the 1997 Asian financial crisis, and the 10% and 7.5% spent by China and India, respectively.

Zaldy Mista, head of the Indonesia Logistics Association, highlights the bottleneck at the country’s main sea port of Tanjung Priok, which handles two-thirds of Indonesia’s entire international trade.

“Four to five years ago, one of our trucks travelling from the industry center of Cikarang, in the outskirts of Jakarta, to the main sea port of Tanjung Priok and back could get three trips a day. But now it’s just about one trip a day,” says Zaldy.

Avoiding the middle income trap

Despite numerous challenges, Indonesia can potentially avoid the middle income trap. A new World Bank study provides insights on how this can be achieved. Its central claim is that Indonesia can climb the income ladder and join the rank of high-income economies within two decades – and do so in an inclusive manner --  with a few critical reforms in six priority areas:

  • close the infrastructure gap
  • close the skills gap
  • well-functioning markets
  • access to quality service for all
  • improving social protection
  • natural risk management

“In the absence of critical reforms, Indonesia would float in the middle, as was the case of Brazil, Mexico, South Africa and other middle-income countries from the early 1980s to the mid-2000s,” said Ndiame Diop, World Bank Indonesia lead economist, and lead author of the study.

Indonesia is fortunate to have options in financing these reforms without threatening its long-term fiscal outlook.  These options include phasing out the large fuel subsidies, and enforcing spending efficiencies at both the national and local government level.

The main difficulties are getting the reforms implemented in a complex institutional and decentralized government. But the costs of complacency are high. So are the rewards -- for action.