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Jakarta Post

Indonesia’s prosperity rising, yet big challenges remain

  • Stephen Brien

    -

London   /   Fri, November 29, 2019   /   09:06 am
Indonesia’s prosperity rising, yet big challenges remain Indonesia’s notable success story as one of the index’s fastest risers has been achieved by the development of better institutions and greater economic openness. (Antara/Bayu Pratama S)

Despite the bad news we often hear from around the world, there is still much to celebrate: Not only is prosperity increasing globally, but it is improving at a faster rate in Indonesia than all but four other countries.

Worldwide prosperity has been improving steadily since 2007, and in 2019 reached its highest ever level. Of the 167 countries we measure in the Legatum Prosperity Index, 148 — including Indonesia — have become more prosperous in the last decade.

Indonesia’s notable success story as one of the index’s fastest risers has been achieved by the development of better institutions and greater economic openness.

Although a relatively young democracy, Indonesia is more politically stable than many of its neighbors, and has benefited from five free and fair elections since president Soeharto’s over 30-year rule ended in 1998. Indonesia’s vibrant civil society has helped to hold its government to account, and high levels of civic and social participation have empowered them to participate effectively in politics. The country ranks first for civic and social participation in our Legatum Prosperity Index 2019, with the highest levels of volunteering of any country and a high voter turnout of above 70 percent.

The openness of Indonesia’s economy has also strengthened following the 1998 Asian financial crisis, promoting greater macroeconomic stability and increased enterprise. The country’s investment environment performance has risen 24 places in 10 years to rank 64th in the index, thanks to a range of regulatory reforms including improving patent and copyright laws, strengthening competition law and increasing the ease of doing business.

There are now 60 venture capital funds in Indonesia, and the huge potential of the market — especially its e-commerce sector, already the largest in ASEAN — has led to a global rank of 25th for venture capital availability. Indonesia is home to four of Southeast Asia’s 10 unicorns (a start-up company valued at over US$1 billion), all of which are e-commerce ventures. The combination of growing financial markets and greater access to venture capital has caused Indonesia to rise 33 ranks over the past decade to 31st for its financing ecosystem.

However, further opportunities exist for Indonesia’s economy. Many industries remain concentrated in a small number of state-owned enterprises (SOEs). For example, about 80 percent of public construction projects are handled by SOEs, and the financial services sector remains dominated by state-owned banks, which tends to result in inefficient allocation of capital. The market needs to be opened up to enable greater competition and all the other benefits a more competitive market will bring.

In addition, the labor market is inflexible, with overly restrictive regulations, such as high redundancy costs, resulting in many small employers staying in the informal sector. Formal employment levels only overtook informal employment levels in 2011. Encouraging businesses to enter the formal economy will expand the nation’s tax base. The country will also benefit from improving competition — highly contested markets drive innovation and productivity, attracting skills and investment, yet Indonesia’s performance remains middling for domestic market contestability, ranking 70th in the world, down seven places from a decade ago.

The challenge and the opportunity for Indonesia is to ensure its economic improvements benefit all of its residents. It is true that more than 35 million Indonesians have been lifted from extreme poverty (defined as living on an income of less than $1.90 a day) since 2007 and, as a result of continued economic growth, the country now has over 70 million people in the “consuming class” (with a daily income above $10 a day), with this number expected to more than double by 2030.

In addition, basic service provision has widened and there is a safer living environment now than 10 years ago. However, living conditions remains Indonesia’s lowest-ranking pillar of prosperity in the Index.

In addition, the level of nutrition across the country has not improved significantly over the past decade. In particular, there has been a recent increase in the proportion of children with wasting (although the level is lower than it was a decade ago) and a rise in the proportion of people without enough resources to pay for adequate food, up to 41 percent from 22 percent in 2009.

Finally, the quality of education in Indonesia is faltering and the country ranks just 88th in the world for education. Whilst education overall has improved since 2009, due to completion rates at all levels of education improving, as well as enrolment rates increasing at all levels except primary, improvements have not been made in the quality of learning. There remains a significant learning gap at the tertiary level, leading to a skills gap in the labor market. Indonesia ranks in the bottom 10 countries in each of the most recent reading, maths, and science PISA assessments, and while it has nine universities in the top 1,000 globally, there are none in the top 250.

Seven of the nine are public universities and together they have capacity for less than 20 percent of Indonesia’s graduating secondary students. By 2030, Indonesia will have a shortage of some 3.8 million workers with postsecondary education, a shortage of 7.5 million workers with upper secondary education, and a shortage of 6.7 million of lower skilled workers. These shortages could prove to be a considerable brake on future prosperity.

Indonesia has much to celebrate as the fifth most improved country overall over the past decade. This success has arisen out of a stabilized political foundation, a reasonably robust democratic society, and the influence of an active civil society. The environment for financial investment and business creation has significantly improved, leading to a more open economy.

However, while experiences of millions of Indonesians have been improved, in particular through reductions in poverty, more needs to be done to improve education quality and to address the projected shortfall in skilled workers, to ensure prosperity continues to improve.

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Director of Policy, Legatum Institute

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.