I

ndonesia, the world’s 16th largest economy and the fifth largest in Asia with a gross domestic product of US$850 billion last year, has been projected by the McKinsey consulting company to become the seventh largest economy in the world by 2030 with more than 135 million middle-class consumers.

McKinsey assumes the Southeast Asian powerhouse can maintain its current annual growth rates of higher than 5 percent.

Among the biggest downside risks to this growth projection, McKinsey says in its mid-September report, are low labor productivity, inadequate infrastructure and regulatory uncertainty in mining and banking.

It also points to the enormous challenge of generating jobs for 55 million semi-skilled and skilled workers, or about 50 percent of the total workforce, who are predicted to more than double to 113 million by 2030.

However, one week later the Paris-based Organization of Economic Cooperation and Development (OECD) issued its survey report on Indonesia with a more bearish outlook, doubting Indonesia’s ability to rise to the world’s 10 largest economies within the next 15 years.

The OECD forecast Indonesia’s growth at only about 6 percent this year and in 2013, lower than the government’s estimates of 6.3 to 6.7 percent, while the country needs to expand by 7 to 9 percent to achieve a top 10 position by 2025, as the government has targeted in its 2011-2025 Economic Master Plan.

The Paris organization pointed to excessive energy subsidies (accounting for around 25 percent of total spending), abuses of the regional autonomy process that have caused regulatory overlap and inconsistencies and corruption as among the biggest barriers to growth.

The OECD cautioned that Indonesia’s demographic dividend — with more than 50 percent of its population under 29 years of age – would fade over the next decade.

The OECD rightly argued that if energy subsidies could be restricted to only those who really needed them, the savings could be used for social investment (health and education), basic infrastructure, housing, drinking water and other much-needed public services.

 The problem though is that the credibility of the government and its coalition partners has been so damaged by corruption that the President and lawmakers will not be able to take the bull by the horns and raise fuel prices, especially with the legislative and presidential elections less than 18 months away.

The Washington-based International Monetary Fund (IMF) came up with an equally cautious message in August in the report on its 2012 examination of Indonesia’s economy.

The IMF report mentioned inadequate infrastructure and slow implementation of government investment, pointing out that last year only 80 percent of the government investment budget was implemented with more than 50 percent disbursed during the last quarter. In the first half of this year, only 19 percent of planned capital spending had been disbursed.

The three reviews cited inadequate infrastructure as one of the main barriers to sustainably high growth.

Unfortunately, not much improvement can be expected in infrastructure development within the next one or two years due to inadequate institutional capacity to implement the public-private partnership (PPP) scheme and the poor selection of projects proposed for PPPs, especially at the local government level.

Even the long-awaited law which has been designed to streamline the procedures for land acquisition for infrastructure will start coming into force only next year. This will mean that the law will only be fully implemented later next year, due to start-up problems over the first six months.