NextBillion Editor

Indonesia’s New Economic Era: A presidential election on the horizon, the world’s most populist Muslim country faces old problems

This article was written by Megan Gerard, a contributing writer to Global Envision, a blog managed by Mercy Corps focused on market solutions to poverty.

Indonesia’s economy is set to outpace Germany and the United Kingdom by 2030, yet nearly half its population struggles to survive on less than $2 a day, according to a report by the McKinsey Global Institute.

The upcoming presidential election could set the stage for an inclusive, equitable economy that lifts the poorest out of poverty, provides good jobs and rewards the business sector.

Several powerful trends will shape Indonesia’s economy over the next 16 years:

  • An estimated 90 million Indonesians will join the consuming class;
  • Roughly 70 percent of the population will live in urban areas;
  • Indonesia’s young population will total 280 million, almost the total current U.S. population; and,
  • Technology use will continue to grow from today’s 220 million mobile subscriptions and almost 100 million Internet users.

The economic boom could be a $1.8 trillion opportunity for the private sector, but only if the country’s leaders prioritize the consumer service, agriculture, energy and human capital sectors, the report states.

But private sector growth should not occur without development. Other countries have learned from experience the social unrest and violence that occurs when a burgeoning youth population is not given opportunities in the labor market.

Here are the hurdles Indonesia must clear on its way to a healthy, equitable economy:

  • Transform consumer services. The growing class of consumers—around 50 percent of Indonesians by 2030—will create new markets, largely in financial and retail services. To capture the full economic potential, the government must simplify complex regulations that control financial services, upgrade poor transportation infrastructure, improve supply-chain efficiency and encourage technological innovation. The deployment of fixed broadband lines across the archipelago, for example, could increase productivity and growth in many sectors.

  • Boost productivity in agriculture and fisheries. More affluent consumers will raise demand for food as some 8 million Indonesians leave farming behind and migrate into cities. By boosting yields, shifting production to high-value crops and reducing post-harvest waste, Indonesia could meet domestic demand and become a net exporter of agricultural products to the international market. Smallholder farmers, who account for 90 percent of the country’s agriculture production, should be a critical focus. They need better access to credit, information on farming techniques and technology advancements from agriculture research and development.

  • Create a resource-smart economy. As Indonesia enters a period of intensive growth, demand for energy, materials and water will create a $270 billion market. Oil, gas and coal will continue to dominate the energy market, but Indonesia can turn to unconventional energy sources, like its geothermal resources–the largest in the world. The biggest barrier to reliable electricity is government underinvestment in infrastructure–only about 4 percent of GDP. Leaders could extend existing grids and encourage development of mini-grids on medium-sized islands and rural areas, according to McKinsey.

  • Invest in skill building. Human capital is a major obstacle to a vibrant Indonesian manufacturing sector, according to the World Bank. Indonesia needs skilled, educated workers as the consumer services industry–finance, insurance and real estate–grows. At the same time, McKinsey projects an oversupply of vocational graduates with the wrong labor skills. The government could facilitate private-sector involvement in vocational curriculum so its young population has a path to employment.

To secure Indonesia’s position as a regional and global leader, its new leadership needs to address remaining human development challenges.

Jakarta Gov. Joko Widodo, the presidential front runner from the Indonesian Democratic Party of Struggle, is known for his no-nonsense approach and for championing policies dedicated to improving the lives of ordinary citizens. In a presidential field of retired generals, businesspeople and old guard cronies, Widodo ignited excitement among voters but did not do as well as expected in the April parliamentary elections.

Indonesia has 187 million registered voters ready to elect a government capable of navigating the challenges to a more productive, inclusive and resilient economy. As McKinsey recommends, the new government will need to carefully manage “this once-in-a-generation economic transformation.”