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
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.
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)
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
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
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
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
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
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
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
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
