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OPINION July 27, 2017

Indonesia’s future depends on its investments now

Since the democratic transition in the late 1990s, Indonesia has overcome many challenges to become one of the world’s most promising countries. The world’s fourth largest nation is the biggest economy in ASEAN, and now part of the G20. In the last decade, Indonesia has reduced poverty by more than 50 percent – an extraordinary accomplishment for any country. 

Now, Indonesia aspires to become a high-income country. It has all the right elements, but the clock is ticking. It needs to reach high-income status before the working age population, relative to the rest of the population, starts to shrink by 2030.

How can Indonesia prosper before it gets old? Over the next 15 years, the country needs to grow by around 8 to 9 percent annually, an extremely high level of economic growth. To get there, Indonesia needs to invest much more in both infrastructure – things like ports, airports, and roads – and in people, to develop the knowledge and skills required to grow an economy in the digital age.

It starts with more efficient revenue collection: today, Indonesia collects less than 50 percent of its potential tax revenues. Instead of growing, its tax-to-GDP ratio has been decreasing from 11.4 percent in 2012 to 10.4 percent in 2016.  Indonesia’s tax collection ratio is lower in the Philippines (13.6 percent) or Cambodia (14.6 percent), despite having similar tax rates.

Indonesia, therefore, needs to increase its efforts on tax reforms. The World Bank estimates that a gain of 1.1 percent of GDP (approximately US$10.3 billion) is possible in the medium term from tax administration reforms such as e-filing and e-invoicing, and up to a further 1.0 percent gain is possible from broader tax policy reforms.

But to close the infrastructure gap, Indonesia will need to invest 500 billion over the next 5 years. This can only be achieved by bringing in much more private sector investment.

With higher revenue collection, Indonesia will also be able to invest more in its people – and that has to start early. Indonesia has alarming rates of child malnutrition, which leads to stunted development. According to the latest national health survey, around one third of Indonesian children under 5 years of age were stunted – nearly 9 million children.

Stunting has long-term impacts: children who are stunted are more susceptible to illness, they have more problems in school, and as adults, they have far worse prospects for jobs – if they have any prospects at all.

Recent research analyzing national survey data from 2007 and 2013 found that if children have food security, a safe and clean environment, health services, and adequate care, they have a significantly lower chance of being stunted.

Focusing on nutrition and a child’s early years are two of the most cost-effective investments Indonesia can make. Globally, every dollar invested to reduce stunting has an average return of US$16. And we estimate that if we had prevented malnutrition around the world when today’s workers were children, the global per-capita GDP would be 7 percentage points higher.

After the early years, it’s crucial to invest in long-term health and education. It is encouraging that the government is improving the quality and impact of spending on health and education. Every year, Indonesia spends US$31 billion, or 20 percent of the budget, on education, and US$13.7 billion on healthcare. 

We hope this will increase:  in healthcare alone, Indonesia needs to increase spending from the current 1.4 percent of GDP to 2.3 percent of GDP. Improving healthcare will also have an enormous impact on reducing inequality and poverty for future generations.

None of these actions are easy. I’m convinced that they are possible, but only with the sustained commitment of all Indonesians. This includes keeping the government accountable, staying engaged in civil society, and contributing. For example, paying taxes is more than just a civic duty – it’s a concrete way to support the country you love. It funds efforts to end stunting and prepare young Indonesians for the economy of the future, and it empowers the government to deliver, so that no one gets left behind.

The World Bank has partnered with Indonesia for more than 60 years, and we’re working closely to help realize the prosperity that all of its people deserve. We will keep working to help Indonesians achieve their aspirations, and turn the vision of becoming a high-income country into a reality. 


This article was previously published in The Jakarta Post