The Archipelago Economy

Most international businesses and investors know that modern Indonesia boasts a substantial population and a wealth of natural resources. But far fewer understand how rapidly the nation is growing. Home to the world’s 16th-largest economy, Indonesia is booming thanks largely to a combination of domestic consumption and productivity growth. By 2030, the country could have the world’s 7th-largest economy, overtaking Germany and the United Kingdom. But to meet its ambitious growth targets and attract international investment, it must do more.

Indonesia has an attractive value proposition. Over the past 20 years, labor productivity improvements, largely from specific sectors rather than a general shift out of agriculture, have accounted for more than 60 percent of the country’s economic growth. Productivity and employment have risen in tandem in 35 of the past 51 years. And unlike typical Asian “tiger” economies, Indonesia’s has grown as a result of consumption, not exports and manufacturing. The archipelago nation is also urbanizing rapidly, boosting incomes. By 2030, Indonesia will have added 90 million people to its consuming class—more than any other country except China and India.


90 million indonesians will have joined the consuming class by 2030

Nevertheless, to meet the government’s goal of 7 percent a year growth by 2030, the economy must grow faster. Given current trends, the McKinsey Global Institute estimates that Indonesia has to boost productivity growth to 4.6 percent a year—60 percent higher than it has been during the past decade. Amid rising concern about inequality, the country must also ensure that growth is inclusive and manage the strains that the rapidly expanding consumer classes will place on its infrastructure and resources.

Of course, Indonesia should tackle well-known problems such as excessive bureaucracy and corruption, access to capital, and infrastructure bottlenecks. But in addition it must address its impending skills gap; the country could, for example, develop a private-education market that might quadruple, to $40 billion, by 2030. If at the same time Indonesia took action in the three key sectors below, it could create a $1.8 trillion private-sector business opportunity by 2030:

  • Consumer services. Indonesia faces a range of challenges to productivity growth—including complex regulation of financial services, poor transportation infrastructure, and barriers to entry for new retail players and expansion limits for existing ones. If Indonesia overcame these problems, consumer spending could rise by 7.7 percent a year, to $1.1 trillion, by 2030.
  • Agriculture and fisheries. Indonesia needs to raise productivity per farmer by 60 percent just to meet domestic demand. If the country can boost yields, reduce postharvest waste, and shift to higher-value crops, it could become a net exporter of agricultural products, supplying more than 130 million tons to the international market. Revenue from these sectors, together with the related upstream and downstream revenues, could increase by 6 percent a year, to $450 billion, by 2030.
  • Energy. Demand not only for energy but also for other key resources, such as materials and water, is likely to increase rapidly through 2030. Indonesia could meet up to 20 percent of its energy needs by turning to unconventional sources, such as coal-bed methane, next-generation biofuels, geothermal power, and biomass. This approach could also help boost resource productivity—for example, improving the country’s energy efficiency could reduce energy demand by as much as 15 percent. By 2030, Indonesia’s energy market could be worth $210 billion.


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  1. Hijjaz

    10 / 3 / 2012 10:23 am

    The news of rapidly growing economy has been now indeed blossoming as supported by either analyst or economist research. The indicator may vary but downstreaming to the same bank revealing “Indonesia is on the significant progress”. But the matter is still the same, how to preserve the forecasting will have been running on the track or even higher than the threshold, is turning out to be the challenges.

    Energy (alone) is the concern which shall come to take role that may cause major crisis before it is overdue. Dating back to industrial revolution, boldly underlined those countries capitalized the energy (oil) were whose massive power belong to. But the future is more obvious, people are asked from now to concern by no longer suspension to rethink again the concept of energy use itself. The green energy has been broadly sounded yet still remains big challenge. Indonesia may have no worry about since potential of environmental friendly energy is available named goethermal (40% of world’s sources are here), wind generated energy, tidal wave generated energy, as well as solar energy and perhaps some others still unexplored yet. But the biggest concern toward energy and its sustainability is the cutting-edge technology application still remains lack or yet not well implemented in bigger scale to maximize those very prospective potentials. This concern may become revolve as the government pledged to cut carbon emission 26% by 2020 in front of world leaders. So energy will be hot talking as time runs proving the pledge.

    There’s no economy without activity, and there’s no activity without energy. We may begin to deepen our thought how tomorrow will survive.





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