Indonesia After 2014 by Greg Barton

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Indonesia After 2014 by Greg Barton

  1. 1. 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
  2. 2. 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
  3. 3. Indonesia: flawed but free
  4. 4. 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
  5. 5. 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
  6. 6. 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.
  7. 7. 2010 v 2020
  8. 8. Stable Growth
  9. 9. Stable Growth
  10. 10. McKinsey Global Institute – Sep 2012
  11. 11. A decade of stable growth
  12. 12. 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)
  13. 13. Asia’s rise is Indonesia’s rise
  14. 14. Global growth (PPP)
  15. 15. World Economic Expansion
  16. 16. Growth - E7 vs G7 – 2011-2050
  17. 17. 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
  18. 18. Asia’s rising middle class
  19. 19. Middle class consumption
  20. 20. The rise of the middle class
  21. 21. 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
  22. 22. E7 - Urbanisation
  23. 23. The rise of the cities
  24. 24. Urbanization: China, India
  25. 25. Urbanization: SEA
  26. 26. Indonesia: 2010-2025
  27. 27. Agglomerations Mapped
  28. 28. Economic Density
  29. 29. Agglomerations: Java, Sumatra
  30. 30. Agglomerations: Kalimantan, Sulawesi
  31. 31. Not just Java
  32. 32. 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
  33. 33. Growth in Wages – China - Indonesia
  34. 34. Global Working Age Populations to 2050
  35. 35. 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
  36. 36. Slow Recovery in Manufacturing
  37. 37. New Manufacturers
  38. 38. Growth Outside Java
  39. 39. Rates of Return: SEA
  40. 40. Manufacturing: The Missing Middle
  41. 41. 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
  42. 42. E7 – Ease of Doing Business
  43. 43. Emerging 7 – FDI - 2002-2011
  44. 44. Asia: road density
  45. 45. Vehicle Fleet: 2001 - 2009
  46. 46. Asia – Cost and Speed of Logistics
  47. 47. SEA: travel times and expressways
  48. 48. Central government expenditure on roads
  49. 49. Infrastructure investment
  50. 50. Investment in Infrastructure
  51. 51. Asia compared: infrastructure
  52. 52. Highway Quality
  53. 53. SEA – Internet Usage
  54. 54. Global Social Network Usage
  55. 55. 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
  56. 56. Richard Lewis – Cultural Types
  57. 57. Richard Lewis – Cultural Types
  58. 58. Richard Lewis
  59. 59. 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
  60. 60. Higher Education Enrollments: 1970-99
  61. 61. Higher Ed – Closing Gender Gap – 93-05
  62. 62. Asia – Research and Development
  63. 63. 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

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