Indonesia Needs to Raise Efforts to Escape Middle Income Trap
In order to escape the middle income trap (and become a high income country), the government of Indonesia needs to raise efforts to enhance the development of an inclusive economy by reforming the education and technology sectors as well as by combating social injustice. With a "business as usual" approach the government will not succeed in escaping this trap, says economist Faisal Basri. Indonesian society is currently highly unfair as 1 percent of the population controls 50.3 percent of the nation's total assets.
Meanwhile, it is estimated that ten percent of the total Indonesian population controls 77 percent of the country's total assets. Basri adds that in the current situation it is easier for Indonesia's low-income people to fall on the income ladder rather than to rise.
Based on profound research (covering the period 1870-2010), Basri says the key to escape the middle income trap is to improve education, technology and social harmony. Together these matters will cause inclusive economic growth in Southeast Asia's largest economy.
However, it is also key to push for (structurally) high economic growth in order to escape from the middle income trap. In 2015 Indonesia's gross domestic product (GDP) expanded 4.79 percent year-on-year (y/y), below the target of 5.5 percent (y/y) that was set in the government's national medium term development plan (RPJMN) 2015-2019. Alarmingly, there may occur a widening gap between growth targets and growth realization in the years ahead. In 2019 the government targets an 8 percent (y/y) GDP growth pace through the RPJMN. However, analysts see growth at a maximum of 6 percent (y/y) in 2019, implying a 2 percent shortfall.
Basri says it will require 8 percent (y/y) growth in the years ahead to escape the middle income trap.
Meanwhile, economist Wahyoe Soedarmono says the composition of Indonesia's economic growth needs to change in order to reach +7 percent GDP growth. Currently, 56 percent of GDP is accounted for by domestic consumption, while the remainder is accounted for by investment (34 percent) and government spending (10 percent). Particularly domestic investment needs to rise sharply in the years ahead to boost structural economic growth. This also means that the national savings rate of Indonesia (currently at 33 percent of GDP) needs to rise (to at least 44 percent of GDP) to allow for higher investment.
He adds that the Indonesian government is currently too eager issuing government bonds. This reduces room for domestic (private) investment as funds are simply transferred from banks to the government.
Lastly, Soedarmono says, considering the current account deficit of Indonesia being under control, the government needs to select several key sectors and increase spending in these sectors. For example education, healthcare, and infrastructure are key sectors that bring inclusive economic growth. Meanwhile, the government needs to remain focused on improving the investment climate through deregulation, as well as strengthening the quality of existing bureaucracy and institutional governance.
What is the Middle Income Trap?
The middle income trap occurs when rapidly growing economies stagnate at middle-income levels for many years, thus failing to reach a high income level (examples are Brazil, Mexico, South Africa and other middle income countries from the early 1980s to the mid-2000s).
Two years ago the World Bank devoted a report to this topic. It concluded that Indonesia needs to implement a six reforms in priority areas in order to avoid the so-called middle income trap:
1) close the infrastructure gap
2) close the skills gap
3) well-functioning markets
4) access to quality service for all
5) improving social protection
6) natural risk management