Counting the Cost

What is holding Indonesia’s economy back?

As Indonesia is on the road to becoming one of the world’s biggest economies, we look at challenges facing the country.

Indonesia’s economy isn’t growing as fast as President Joko Widodo had promised it would when he was elected five years ago. But the president, who is also known as Jokowi, has put the economy at the centre of his pitch to voters for the April elections once again. He is spending huge sums to try to get re-elected for a second term, giving regional governments billions as well as giving hand-outs to the country’s poorest. 

While Indonesia is well on its way to becoming a $2 trillion economy in the next five years, a population of more than 250 million people strung across more than 17,000 islands is being held back by – among other things – poor infrastructure.

The World Bank estimates that Indonesia has an infrastructure gap of $1.5 trillion compared with other emerging markets. Widodo is halfway through a 10-year, $327bn programme to construct new airports, highways and ports.

Indonesia’s first subway has opened in the country’s capital, Jakarta last week – a development that’s seen as crucial to tackling some of the world’s worst congestion costing Indonesia billions in lost revenue.

So what is holding Indonesia’s economy back? And could it damage the president’s hopes for re-election?

“I think there’s a number of factors … [holding back the economy],” says Gareth Leather, senior economist at Capital Economics. “I think more fundamentally, it’s just been a failure to revitalise the manufacturing sector, which, when he [Joko Widodo] set out five years ago was one of his key aims … In Indonesia, it’s incredibly expensive to hire and fire workers. And what that means is that people are reluctant to set up manufacturing facilities in Indonesia when they could so much more cheaply in neighbouring, say Vietnam for example. I think that’s been the key reason why growth has failed to come anywhere near the government’s target.”

According to Leather, Widodo “has made some reasonable progress in infrastructure spendings … The key thing that he really needs to do is press ahead with these labour market reforms … I think without that then Indonesia is really going to struggle to attract the kind of manufacturing sector that it needs to really raise growth above the five percent that we seem to be stuck at the moment.

“If you look at the most successful Asian economies since the second World War … What they all had in common was a very competitive export-orientated manufacturing sector. Now this is something that Indonesia really struggled to create and generate …. Until you see the big changes in the labour market – and also land reform is another area that he hasn’t really touched on – Indonesia is really going to struggle.”

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