Indonesia is undergoing a historic transformation from a rural to an urban economy. The country’s cities are growing faster than in other Asian countries at a rate of 4.1% per year. By 2025 – in less than 10 years – Indonesia can expect to have 68% of its population living in cities.
Indonesia has the third-largest amount of urban land in East Asia, after China and Japan. Between 2000 and 2010, the amount of urban land in Indonesia increased from about 8,900 square kilometers to 10,000, or 1.1% each year. It is the largest increase in absolute amount of urban land after China.
Indonesia can benefit more from urbanization. Other countries have gained higher economic growth through formal employment and better labor productivity that result from urbanization. Every 1% growth in urban population correlated with per capita GDP increase of 13% for India, 10% for China, and 7% for Thailand.
But Indonesia is gaining only 4% GDP growth for every 1% of urbanization, due to the congestion, pollution, and disaster risks resulting from insufficient infrastructure investment.
Indonesian cities are not spending well or enough on its infrastructure. The country’s economy grew by an average of 5.8% in the mid to late 2000s, but infrastructure stock grew by only 3%. In contrast, China invested 10% of GDP in its infrastructure over the past decade.
Insufficient investments in infrastructure leave many communities vulnerable to poverty. Only 48% of households now have access to safe water, compared to 50% more than a decade ago. Sewerage coverage exists in only 11 of the country’s 98 cities. Only 2% of city residents have access to centralized sanitation systems.
High population density can put more pressure on existing infrastructure. From 2000 to 2010, urban population density in Indonesia increased sharply, from 7,400 people per square kilometer to 9,400 people. The amount of new urban land added per new resident is less than 40 square meters, the smallest amount of any country in the region.
Actions that can help Indonesia benefit more from urbanization include: prioritizing urbanization issues in the national development agenda, and addressing issues with a comprehensive approach. Financing of urban infrastructure can take advantage of domestic options. The managerial capacity of city governments can be strengthened. Carry out policy reforms that make it easier for investors to invest in infrastructure development.
The Indonesia Sustainable Urbanization Multi-Donor Trust Fund, or IDSUN, will support the country gain more benefits from urbanization by sharing international experiences, providing technical assistance and financing solutions to meet the challenges of urbanization.
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