Indonesia after 2014: Democratization and Social

Transformation - Can Indonesia Develop an

Innovation-led economy?An Overview of Challenges and

Opportunities

Greg Barton

Herb Feith Professor for the Study of Indonesia

Monash University

ICID, Den Haag, 13 Sept 2013

1. Democratic Transition • Successful democratic transition• Political and social stability• Disillusionment with political parties and leaders• Support for the democratic republic• Indonesia and Turkey represent the most

successful Muslim majority nations

Indonesia: flawed but free

2. Economic takeoff • Indonesia has returned to the economic takeoff

that was interrupted by the 1997 financial crisis– Indonesia’s takeoff is reinforced by the rise of

Asia and the other large emerging markets• The current level of political stability and

openness is substantially better than the 1990s– Regime change no longer looms on the horizon

Joining the BRICs and the E7

• Indonesia is now increasingly recognized as a key nation in the emerging second tier of rapidly developing large nations

• joining the likes of Turkey and Mexico • in the wake of the original BRIC group (Brazil,

Russia, India, and China) of first tier emerging nations.

• The E7 – as Price Waterhouse Coopers refers to this group - Brazil, Russia, India, and China + Indonesia, Turkey and Mexico

A present reality

• This is a present reality not merely a long-term projection.

• Over the next seven years Indonesia is on track to overtake Spain, Canada and Italy to become the world's 11th largest economy in 2020 (in PPP terms) – just behind South Korea – Indonesia is currently ranked 15th.

2010 v 2020

Stable Growth

Stable Growth

McKinsey Global Institute – Sep 2012

A decade of stable growth

3. The E7 and the Rise of Asia • Indonesia’s economic takeoff is linked to the

general rise of Asia– In particular, the rise of China and India– China and India are key because of the absolute

size of their economies• Together with China and India, Indonesia joins

the other large emerging markets of Russia, Brazil, Turkey, Mexico: the Emerging Seven (E7)

Asia’s rise is Indonesia’s rise

Global growth (PPP)

World Economic Expansion

Growth - E7 vs G7 – 2011-2050

4. Era of the Middle Class• The rapid rise of the E7 is accompanied by

sharp reductions in poverty• Most people in Indonesia are poor but over the

next decade the majority of people will move out of poverty

• New entrants to the ‘middle class’/’consuming class’ will still have modest incomes

• By 2030 around 2/3 of all people in Indonesia (135-180m out of 280m) will be middle class

• By 2030 around 2/3 of all middle class people will be living in Asia

Asia’s rising middle class

Middle class consumption

The rise of the middle class

5. Urbanization • 2013 - 53% of Indonesians live in cities

– 2030 more than 70% will live in cities• 2013 – 74% of GDP generated in cities

– 2030 – 86% of GDP generated in cities– Jakarta will remain constant at 20% – but midsize cities (2-10m) will contribute 25% of

GDP in 2030– Small cities (0.15 – 2m) contribute 31% of GDP

growing to 38% in 2030• Indonesia (and the Philippines) are more

urbanized than the rest of Asia

E7 - Urbanisation

The rise of the cities

Urbanization: China, India

Urbanization: SEA

Indonesia: 2010-2025

Agglomerations Mapped

Economic Density

Agglomerations: Java, Sumatra

Agglomerations: Kalimantan, Sulawesi

Not just Java

6. Labour Force• Indonesia has a population of 252 million growing

at 0.99% per annum– By 2030 Indonesia’s population will plateau at 280– By 2030 the work force will grow by 40m

• Indonesia has a relatively youthful population with a median age of 28.9 years– 60% are 30 years or young– Only 7.6% of the population is 65 years or older

• Indonesian wages are substantially lower than wages in China

Growth in Wages – China - Indonesia

Global Working Age Populations to 2050

7. Manufacturing• Manufacturing plummeted after the 97/98 crisis• Manufacturing growth remains stunted• There are signs of growth, including outside Java

– particularly in new areas• Rates of return remain low and profit risk high• Indonesia is missing middle-sized firms• Indonesia has great potential that remains

partially unrealized

Slow Recovery in Manufacturing

New Manufacturers

Growth Outside Java

Rates of Return: SEA

Manufacturing: The Missing Middle

8. Infrastructure and FDI• Whilst Indonesia’s economic performance has

been impressive growth is still lower than it could and should be

• Foreign Direct Invest stopped for a decade after the 97/98 Economic Crisis – it remains too low

• Investment is held back by lack of ease in doing business

• Growth continues to held back by poor infrastructure – particularly logistics & transport

• Internet use remains below par

E7 – Ease of Doing Business

Emerging 7 – FDI - 2002-2011

Asia: road density

Vehicle Fleet: 2001 - 2009

Asia – Cost and Speed of Logistics

SEA: travel times and expressways

Central government expenditure on roads

Infrastructure investment

Investment in Infrastructure

Asia compared: infrastructure

Highway Quality

SEA – Internet Usage

Global Social Network Usage

9. Culture- Culture strongly influences thought and

behaviour- Education – formal and informal – shapes

the expression and influence of culture- Indonesian culture is both plural and

distinctive- Optimizing innovation requires attention to

culture and education

Richard Lewis – Cultural Types

Richard Lewis – Cultural Types

Richard Lewis

10. Good or great? • Growth is currently ~ 5-6%• Growth can and should be ~ 7%• Labour productivity has accounted for 60% of

growth in the last two decades and 40% has come from population growth

• Productivity growth needs to increase substantially if 7% GDP growth is to be reached

• Higher Education has grown dramatically but both quality and quantity need to improve– The gender gap has closed – but the quality gap remains

Higher Education Enrollments: 1970-99

Higher Ed – Closing Gender Gap – 93-05

Asia – Research and Development

Conclusion • Indonesia’s political and social stability represents a

great asset and must be safeguarded• Growth stable but damage from 97/98 crisis remains• Indonesia is part of the E7 – for better or worse• Growth of the middle class is key• Urbanization presents challenges and opportunities• Demographics present a limited window of opportunity• Manufacturing needs to innovate and grow• Infrastructure needs massive investment• The development of human capital is the key to going

from good to great