Indonesia, a rising Asian economic powerhouse: 6 key lessons for other countries
Indonesia’s economy is now 10 times bigger than it was just 2 decades ago
When you think of Asia's most successful economies, countries like Singapore, South Korea and Japan, probably come to mind. But it’s a different country that’s becoming a symbol of economic success.
And at the same time, it's a country that you don’t really ever hear much about. I'm talking about Indonesia. Its economy is roaring. In the shadows of the global stage, this economic titan has been stirring.
While others basked in the limelight, Indonesia, with more than 17,500 islands, has been busy outmanoeuvring established giants, one by one. Hidden from the flash of headlines, a quiet transformation has unfolded. Indonesia, is weaving its way to become Asia's third economic behemoth, after China and India.
These are the 6 things Indonesia has done right:
#1. Economic reforms
Indonesia has undertaken several key economic reforms in recent years aimed at boosting growth, attracting investment, and improving the overall business climate.
The most significant of which are:
• Omnibus Law (2020): This legislation, passed on October 5, 2020 aimed to streamline rules, cut red tape for businesses and boost jobs. While its implementation has faced criticism, it signifies a push towards a more investor-friendly environment.
• Tax Incentives: The government has offered tax breaks and other incentives to attract foreign investment in strategic sectors like technology and infrastructure.
• Ease of Doing Business: Indonesia has been working on improving its ranking in the World Bank's Doing Business Index by simplifying regulations and procedures.
Today, Indonesia boasts an impressive position on the world stage. A GDP estimated at $4.73 trillion by end-2024 (purchasing power parity, PPP, based on IMF estimate in April 2024) would propel Indonesia past established powers, solidifying its place behind China and India.
Home to the world's fourth-largest population, it also ranks as the 10th largest economy based on purchasing power parity (PPP) according to the World Bank.
#2. Infrastructure Development
• President Widodo's Infrastructure Focus: President Joko Widodo has prioritised infrastructure development, investing in projects like toll roads, airports, rail and seaports. This aims to improve connectivity and reduce logistical bottlenecks.
• An example is the Trans-Java Toll Road, a massive network of toll roads that spans the length of Java, Indonesia's most populous island. It stretches over 1,167 kilometers (725 miles) and connects the westernmost tip of Merak to the easternmost tip of Surabaya.
• Public-Private Partnerships: The government is increasingly using public-private partnerships (PPPs) to finance infrastructure projects. This allows for private sector participation and expertise.
Classified as a lower-middle-income nation with an emerging market economy, the country actively participates in the G20, a forum where global leaders collaborate on critical issues facing the world's economy.
Indonesia has made substantial strides in poverty reduction, cutting its poverty rate by more than half since 1999. This progress, unfortunately, was upended temporarily by the pandemic.
The nation’s digital economy offers a bright spot. In 2022, it reached a staggering $77 billion, and projections suggest it will surpass $130 billion by 2025. This digital boom presents exciting opportunities for continued economic growth and development.
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#3. Financial sector development
• Financial inclusion: Initiatives have been launched to promote financial inclusion, bringing more people into the formal financial system. This can boost economic activity and access to credit.
• Economic growth: Indonesia's economy is projected to grow at 5.0% in 2024 and 2025, according to the Asian Development Bank (ADB) and World Bank. This is considered healthy and stable growth.
• Digital economy: The nation’s digital economy also offers a bright spot. In 2022, it reached a staggering $77 billion, and projections suggest it will surpass $130 billion by 2025. This digital boom presents exciting opportunities for continued economic growth and development.
#4. Balancing act: 'Nickel boom'
Indonesia is experiencing a remarkable economic transformation. By refusing to simply export key raw materials, the country is leveraging its natural minerael resources to build a robust domestic manufacturing sector, and its economic prospects.
A June 2024 report by Bloomberg states that the Southeast Asia nation now accounts for roughly half of global nickel production.
Here’s how this move helped the Indonesian economy:
• Higher value added: Prior to the ban, Indonesia exported raw nickel ore, receiving a much lower price compared to processed nickel products. The ban incentivised the development of domestic nickel processing facilities. This shift resulted in a significant increase in the value of Indonesia's nickel exports. Studies suggest a 30x increase in the value of nickel-related exports since the ban.
NMC (Nickel Manganese Cobalt): This is the most common type of lithium-ion battery used in EVs currently. The nickel content in NMC batteries can range from 60 per cent to 80 per cent, with newer formulations reaching close to 90 per cent nickel.
NCA (Nickel Cobalt Aluminum): This type offers higher energy density but lower stability than NMC. NCA batteries typically contain around 80 per cent nickel.
• Job creation and industrial development: A bold industrial policy is key to job creation for its young people. Building and operating nickel processing plants like smelters created new job opportunities in Indonesia. This boosted the domestic economy and fostered the development of a domestic nickel processing industry.
• Strategic control and future potential: By controlling the processing of its own nickel resources, Indonesia gains more control over a critical material for industries like stainless steel and electric vehicle batteries.
This strategic positioning could benefit the country in future negotiations and potentially lead to further economic advantages.
• Their production skyrocketed from 5 per cent of the global market in 2015 to a whopping 50 per cent in 2023.
• This surge is attributed to a global demand surge for nickel, a key component in electric vehicle batteries, coupled with Indonesia's vast nickel reserves (estimated at 22 per cent of the world's total).
• From raw to refined: Previously, Indonesia exported raw nickel ore, fetching a lower price. To capture greater value, the government implemented an export ban on raw ore, pushing companies to build processing facilities within Indonesia.
• This policy resulted in a boom in domestic nickel processing plants like smelters, creating jobs and boosting the industrial sector.
#5. Beyond resources: The tech boom
Another key driver of Indonesia's success is its thriving digital economy, particularly e-commerce and fintech.
E-commerce growth: Indonesia boasts the largest e-commerce market in Southeast Asia, fuelled by a strong middle class and widespread internet access. This has fostered a vibrant tech ecosystem, producing numerous billion-dollar startups. The e-commerce marketplace has a projected value of $360 billion, according to Asia Fund Manager. This signifies a large and engaged online population.
Mobile first: Indonesia's digital economy is heavily influenced by mobile technology. A large portion of internet traffic comes from smartphones, making mobile apps and mobile-friendly platforms crucial for businesses to succeed.
Super Apps: Local players like Gojek and Tokopedia have emerged as "super apps," offering a wide range of services from ride-hailing to payments and online shopping. This indicates a strong mobile-first approach and user base.
Startup Ecosystem: The Manila-based Asian Development Bank (ADB) states that Indonesia ranks highly in terms of the number of startups, with estimates suggesting over 2,500 in 2023. This signifies a vibrant entrepreneurial environment.
Investment in digital infrastructure: The government is actively investing in expanding internet access and improving digital infrastructure, creating a more connected society.
Startup support programmes: Initiatives exist to promote innovation and provide support to startups, fostering the growth of tech companies.
Regulatory focus: The government is looking to create a more transparent and business-friendly eco-system, alongside a regulatory framework that encourages innovation while balancing concerns like data privacy.
#6. Human capital development
Indonesia recognises the importance of a skilled workforce to achieve sustainable economic growth.
• Education Reforms: The government has implemented reforms to improve the quality of education and equip the workforce with the skills needed for the changing economy.
• Improved early childhood & K-12 Education: Curriculum reforms are underway to improve the quality of basic education, focusing on critical thinking and problem-solving skills.
• Vocational Training: Expansion of vocational training programs to equip individuals with job-specific skills needed in the current job market.
• Higher Education Reforms: Increased access to higher education, with a focus on science, technology, engineering, and mathematics (STEM) fields.
Digital powerhouse: Beyond e-commerce, Indonesia's digital landscape is rapidly diversifying. Sectors like online payments, ride-hailing services, and digital media are experiencing significant growth.
This can improve access to education (e.g., online learning), healthcare (e.g., telemedicine), and economic opportunities (e.g., e-commerce) for all Indonesians, according to McKinsey consulting house.
Untapped potential in Tier-2 & Tier-3 cities and MSMEs: These sectors hold significant potential for economic growth. Investing in digital infrastructure and promoting digital adoption among Tier-2 & Tier-3 cities and MSMEs can create a more dynamic and inclusive digital economy.
Digital technology as a catalyst for growth: Digital tools like AI and online platforms can empower Indonesians, improve access to services, and create new economic opportunities. This can be particularly beneficial for education, women's participation in the workforce, and MSME growth.
Education access: Efforts to address disparities in access to quality education across different regions and income levels, as well as matching skills with labour market needs are on-going.
The future: A global powerhouse
Experts predict Indonesia's rise will continue. By 2030, it's projected to surpass the UK and Germany's economies. Its young, growing population further strengthens its future potential.
Indonesia's future hinges on its ability to navigate the economic and geopolitical complexities as well as domestic challenges.
The whispers are growing louder, and soon, the world will be forced to acknowledge the undeniable truth: Indonesia is a force to be reckoned with. The new Asian giant has awakened, and its rise is nothing short of phenomenal.