By Maria Monica Wihardja, Visiting Fellow at ISEAS Yusof Ishak Institute

Indonesia is poised to become the fourth-largest economy in the world by 2075, if not sooner. This will add significant global economic weight to the Indo-Pacific region, as China and India are poised to take the first and second place. But will Indonesia actually live up to this expectation?

Indonesia is on a population growth trajectory that will potentially boost its economic productivity. The number of working-aged people is set to only peak in 2050. But by 2075, the bulk of the population will be in their 60s-70s, meaning this economic productivity will begin to drag. So the question in policymakers’ minds is: will it get rich before it gets old?

The country faces a big challenge. It needs to grow by six to seven percent annually for the next 15-20 years to reach this goal. But, with a current economic growth rate of five percent a year, Indonesia will not get where it wants to be unless it finds a new source of economic growth.

To reach its economic potential, it must prioritise its people first by boosting education and healthcare. Strong human capital is the foundation of high productivity, yet research indicates that Indonesians are significantly behind in development. Furthermore, Indonesian children are projected to achieve only about half of their full productivity potential, in contrast to 88 percent of Singaporean children.

Indonesia also needs to make big reforms if it wants to empower its people to actually create a more economically productive population. The key to achieving this will be allowing more foreign investment in the education and health industries.

In the present, Indonesia has already begun moving in the right direction. Its Omnibus Law now permits increased foreign investment in hospitals, and the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) includes provisions aimed at enhancing Indonesian health professional standards, vocational education and training, as well as higher education.

Next, Indonesia needs to shift its economic priorities to move from a resource-based to a knowledge-based economy. Indonesian President Joko Widodo’s economic strategy of boosting Indonesia’s critical minerals processing capabilities through ‘downstreaming’ will make it more, not less, reliant on the resources industry.

Indonesia’s broader economic strategy of ‘industrialisation’ can also be put in question as countries aren’t looking for offshore manufacturing like they used to, and automation means there’s less of a demand for labour. So, Indonesia’s new source of growth will need to increasingly come from its knowledge economy, especially the high-end services sector, including the ICT sector.

In addition, Indonesia has massive potential to become an Indo-Pacific digital hub. It has a thriving start-up ecosystem, driven by its highly entrepreneurial and creative people. Indonesians also love going online. In fact, the country ranks eighth in the world in screen time which is close to nine hours a day. This screen time, combined with the talents and digital inclination of the Indonesian people, could be channelled into more economically productive uses by offering digitally delivered services such as graphic design, data entry, marketing, or other professional services to international customers. The government can support this shift with improved education, skill development, and regulatory frameworks.

Of course, all of these outcomes will depend on Indonesia’s ability to mitigate climate change. As the world’s largest archipelagic country, Indonesia will be one of the countries hardest hit, and there is already a rising incidence of climate-related disasters and elevated temperatures in Indonesia. Climate adaptation is key and as the world’s fifth largest greenhouse gas emitter, Indonesia can do its part now by cutting emissions.

“Prediction is difficult, especially if it is about the future,” the Nobel Laureate in physics, Niels Bohr, warned us.But it seems like the writing is already on the wall: if the Indonesian government does not double down on necessary reforms now to improve human capital and capitalize on emerging opportunities, it risks missing out on the economic status it’s been waiting for.

About the writer

Maria Monica Wihardja is a Visiting Fellow at ISEAS Yusof Ishak Institute.

This article was first published in the Perth USAsia Centre on September 19, 2023.