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Indonesia returns to upper-middle-income status
Risk of falling into middle-income trap still looms.
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ndonesia has reacquired its status as an upper-middle-income country, marking the bounce back of its economy following the pandemic.
The country’s gross national income (GNI) per capita, which measures the sum of money a nation earns divided by its population, reached US$4,580 last year. It increased by 9.8 percent from the previous year, according to the World Bank database.
Countries earning over $4,466 in GNI per capita receive the upper-middle-income status from the World Bank. Every year, the World Bank updates its classification, which it says follows a similar methodology to its operational lending policy.
Indonesia sat as an upper-middle-income country based on its GNI per capita in 2019, but was relegated back to lower-middle status following the COVID-19 pandemic’s impact on the economy.
“Subsequently, the government has committed to maintaining the economic recovery quality,” Febrio Kacaribu, head of the Finance Ministry’s Fiscal Policy Agency (BKF), said in a statement on Monday.
Febrio attributed the improvement to the government’s success in bringing poverty back down to single digits in 2022 after it rose to above 10 percent the previous year, as well as the declining rate of unemployment, as the economy approaches a return to pre-pandemic levels of employment.
During the pandemic, Indonesia saw its first annual economic contraction since 1998 as GDP dropped 2.07 percent in 2020 amid battered consumer spending and private investment.
The country grew by 5.31 percent last year, following the recovery of household spending and investments as well as export boosts due to high commodity price.
The ministry said Indonesia’s return to upper-middle-income status was also inseparable from its downstream push to raise the value of mineral exports as well as the effectiveness of its COVID-19 handling, which led to accelerated national economic recovery.
M. Rizal Taufiqurahman, who heads the center of macroeconomics and finance at the Institute for Development of Economics and Finance (Indef), told The Jakarta Post on Tuesday that the recent rise in Indonesia’s status did not necessarily translate to the country’s overall welfare.
He argued that the national income measured in the metric was mainly driven by international trade, including its taxes. This included the mining and palm oil sectors, which benefited from the soaring commodity prices.
Meanwhile, inward indicators such as the tax-to-GDP ratio that more reflect the domestic economy were in decline despite a significant pick up in 2022 due to the high commodity prices.
The Finance Ministry noted that Indonesia’s ratio stood at 10.38 percent last year, higher than around 9 percent in the previous year. However, the figure was still lower than in the previous decade, which saw an annual ratio above 10.5 percent, according to Trading Economics data.
“Economic development must be accompanied by equitable society well-being,” Rizal said.
Novia Xu, a researcher at the Centre for Strategic and International Studies (CSIS) think tank, told the Post on Tuesday that despite Indonesia’s rebound to upper-middle-income status, the country still had a long journey to get out of the middle-income trap.
The term refers to countries with their economies stuck in the middle-income grouping. According to the World Bank, it may indicate stagnation in an economy’s competitiveness, while Asian Development Bank (ADB) points out that it may reflect slow growth, stagnant or falling wages and a growing informal economy.
To escape it, a country should make its way into high income grouping that require over $13,845 of GNI per capita by World Bank standards as of June 30.
According to the National Development Agency (Bappenas), Indonesia’s economy should grow by between 6 and 7 percent annually to achieve high income grouping, whereas the country’s growth was hovering just at around 5 percent during the past decade.
Novia emphasized that currently Indonesia was still heavily reliant on its natural resources, while it lacked progress in pursuing sustainable practices. She said these trends could become a problem as more countries were placing attention on sustainability in the economy.
Furthermore, the country’s infrastructure drive that the government previously claimed would help the country’s economic growth is still lacking in effectiveness, especially in terms of anti-disaster standards, which may result in high costs in the event of natural disasters striking many parts of the country.
