This document discusses Indonesia's economic development opportunities and challenges after 2014. Key points include: 1) Indonesia has experienced a successful democratic transition and political/social stability since 1997 but faces challenges in developing innovation and improving infrastructure. 2) Indonesia is on track to become the 11th largest economy by 2020, joining the emerging economies of Brazil, Russia, India, China, Turkey and Mexico (E7). 3) Rapid urbanization, growth of the middle class, and younger workforce present opportunities for economic growth but also challenges around infrastructure, education, and developing manufacturing outside of Java.

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. 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

7. Indonesia: flawed but free

10. 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

11. 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

12. 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.

13. 2010 v 2020

14. Stable Growth

15. Stable Growth

16. McKinsey Global Institute – Sep 2012

19. A decade of stable growth

20. 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)

21. Asia’s rise is Indonesia’s rise

22. Global growth (PPP)

23. World Economic Expansion

24. Growth - E7 vs G7 – 2011-2050

26. 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

28. Asia’s rising middle class

29. Middle class consumption

30. The rise of the middle class

31. 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

32. E7 - Urbanisation

33. The rise of the cities

34. Urbanization: China, India

35. Urbanization: SEA

36. Indonesia: 2010-2025

37. Agglomerations Mapped

38. Economic Density

39. Agglomerations: Java, Sumatra

40. Agglomerations: Kalimantan, Sulawesi

41. Not just Java

42. 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

43. Growth in Wages – China - Indonesia

44. Global Working Age Populations to 2050

45. 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

46. Slow Recovery in Manufacturing

47. New Manufacturers

48. Growth Outside Java

49. Rates of Return: SEA

50. Manufacturing: The Missing Middle

51. 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

52. E7 – Ease of Doing Business

53. Emerging 7 – FDI - 2002-2011

54. Asia: road density

55. Vehicle Fleet: 2001 - 2009

56. Asia – Cost and Speed of Logistics

57. SEA: travel times and expressways

58. Central government expenditure on roads

59. Infrastructure investment

60. Investment in Infrastructure

61. Asia compared: infrastructure

62. Highway Quality

63. SEA – Internet Usage

64. Global Social Network Usage

65. 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

66. Richard Lewis – Cultural Types

67. Richard Lewis – Cultural Types

68. Richard Lewis

69. 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

71. Higher Education Enrollments: 1970-99

72. Higher Ed – Closing Gender Gap – 93-05

73. Asia – Research and Development

74. 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