Why Indonesia's Economy Matters and Its Unexpected Growth | Indonesian Economy | Econ

Summary

Indonesia, the world's fourth most populous nation, is emerging as a significant player in Southeast Asia with a rapidly growing economy, averaging a 5% growth rate. Rich in resources like nickel and cobalt, essential for electric vehicles, it's poised to capitalize on the global energy transition. With a burgeoning digital economy and a young, urbanizing population, Indonesia is set to welcome 90 million new consumers by 2030. The government's infrastructure investments and strategic neutrality in global politics are attracting foreign investments, aiming to boost the economy beyond its current 5% growth rate.

Takeaways

• 🌏 Indonesia is recognized as a rapidly industrializing economy in Southeast Asia, often compared to the 'Asian tigers'.
• 📉 The country faced significant challenges after the 1997 financial crisis, leading to political reforms and economic restructuring.
• 📈 Indonesia's economy has been growing at an average rate of 5%, aiming to become a high-income nation by 2045.
• 🏞️ As the largest country in Southeast Asia, Indonesia is an archipelago with a population of 270 million, including a large young demographic.
• 🔋 Indonesia holds over a fifth of the world's nickel reserves, crucial for electric vehicle batteries, and is a top global source of cobalt.
• 🌐 The country's digital economy is leading in ASEAN, with a Gross Merchandise Value increasing from $41 billion in 2019 to $77 billion in 2022.
• 🚀 Indonesia's strategic position and resources make it an attractive investment hub for both Chinese and Western interests.
• 🛣️ Under President Joko Widodo, Indonesia has seen substantial investments in infrastructure, enhancing its global competitiveness.
• 💼 Despite challenges, Indonesia's economic growth has been driven more by domestic consumption and services rather than exports.
• 🌱 The country's economic revival is expected to be fueled by the digital revolution and its rich endowment of resources necessary for the energy transition.

Q & A

What is the significance of the .bio domain mentioned in the video script?

The .bio domain is significant as it offers a short, simple, and memorable URL for influencers, online creators, bloggers, brands, and entrepreneurs to showcase their work and reach their audience effortlessly.

How has Indonesia's economy been performing in recent years?

Indonesia's economy has been growing at an average rate of 5%, positioning it as an 'upper-middle-income country' and aiming to attain high-income status by 2045.

What challenges did Indonesia face after the 1997 financial crisis?

After the 1997 financial crisis, Indonesia faced considerable trouble, which led to significant political reforms and a period of economic instability.

What is Indonesia's demographic profile, and how does it impact the economy?

Indonesia has a young population with 52% of its population being young, which is a source of dynamism and is fueling growth in incomes, expected to see an influx of an estimated 90 million additional consumers with significant spending power by 2030.

How does Indonesia's natural resource endowment contribute to its economic growth?

Indonesia has more than a fifth of the world's nickel, which is vital for electric vehicle batteries, and is the world's third-largest source of cobalt, another crucial input. These resources are expected to drive an economic revival and accelerate further growth.

What is the current state of Indonesia's digital economy?

Indonesia's digital economy ranks first among other ASEAN countries, with the Gross Merchandise Value (GMV) rising from $41 billion in 2019 to $77 billion in 2022, and it is predicted to rise to US$130 billion by 2025.

How is Indonesia's economic growth driven, and what are the key sectors?

Indonesia's economic growth is primarily driven by domestic consumption and services rather than exports, manufacturing, or resources. The digital services sector is a significant source of dynamism, with over 100 million people spending $80 billion a year.

What is the role of foreign investment in Indonesia's economy?

Foreign investment plays a crucial role in Indonesia's economy, especially in metals-processing and manufacturing. The government has made efforts to attract more investments, such as from CATL and Tesla, to boost growth.

How has President Joko Widodo's administration impacted Indonesia's competitiveness?

President Joko Widodo, or Jokowi, has made substantial investments in infrastructure, leading to a ten-point increase in Indonesia's ranking on the IMD Competitiveness Index, making it the highest in the world.

What are the main challenges hindering Indonesia's economic growth?

The main challenges include diminishing returns on investment, poor infrastructure quality, high transportation and energy costs, a small portion of foreign direct investment, a declining manufacturing sector, low productivity, and corruption.

What steps has the Indonesian government taken to enhance the business environment?

The Indonesian government, under Jokowi, has implemented policies to enhance the business environment, such as reducing fuel subsidies to increase infrastructure spending, promoting national economic competitiveness, and attracting more investments.

Outlines

00:00

🌟 Indonesia's Economic Rise and Digital Transformation

Indonesia has emerged as a significant economic power in Southeast Asia, akin to the Asian tigers, with a steady 5% growth rate aiming for high-income status by 2045. Despite past financial crises, Indonesia boasts a young, populous nation with a strategic position in global politics, rich in resources vital for the electric vehicle industry. The country's digital economy is burgeoning, with a significant increase in Gross Merchandise Value, supported by government initiatives and a thriving startup ecosystem.

05:03

📈 Indonesia's Economic Drivers and Foreign Investment Attractiveness

Contrary to common perceptions, Indonesia's growth is driven more by domestic consumption and services than exports or manufacturing. Despite a decline in the resource sector's contribution, Indonesia has become a hub for foreign investment, especially with its young population and strategic geopolitical stance. The government's infrastructure development and policies have enhanced the country's competitiveness, attracting investments in key areas like electric vehicle batteries and digital services.

10:09

🚀 Indonesia's Growth Challenges and Future Ambitions

Indonesia's growth has been steady but faces challenges such as diminishing returns on investment, poor infrastructure, and a declining manufacturing sector. The country's geography and natural disasters add to these challenges, impacting foreign investment and economic efficiency. Despite these, President Jokowi's administration has made significant strides in improving the business environment and attracting investment in strategic sectors like EV batteries, aiming to boost the economy beyond the 5% growth rate.

15:14

🌐 Introducing the .bio Domain for Digital Presence

The script concludes with a promotion for Porkbun's .bio domain, emphasizing its simplicity and memorability for online creators and businesses. The .bio domain is positioned as a professional tool for managing online presence, offering features like free WHOIS privacy and SSL certificates. The promotional offer encourages securing a .bio domain at an affordable price, highlighting its potential to enhance digital identity and reach.

Keywords

💡Indonesia

Indonesia is a Southeast Asian country made up of thousands of volcanic islands. It is the world's fourth most populous country and has the largest Muslim population. In the video, Indonesia is highlighted for its rapid economic growth, strategic geopolitical position, and rich natural resources, which are key to its development and global influence.

💡Asian tigers

The term 'Asian tigers' refers to a group of East Asian countries that experienced rapid economic growth in the late 20th century, including Hong Kong, Singapore, South Korea, and Taiwan. The video draws a parallel between these countries and Indonesia, indicating that Indonesia is following a similar trajectory of rapid industrialization and economic success.

💡Financial crisis of 1997

The 1997 financial crisis, also known as the Asian financial crisis, was a severe economic downturn that affected several Asian countries. The video mentions this crisis as a significant event that Indonesia overcame, leading to substantial political reforms and setting the stage for its current economic resurgence.

💡Upper-middle-income country

An 'upper-middle-income country' is a classification by the World Bank based on a country's人均国民总收入. The video positions Indonesia in this category, indicating that it has made significant progress in economic development but still has room to grow to achieve high-income status.

💡Nickel

Nickel is a chemical element that is crucial for the production of batteries, particularly those used in electric vehicles. The video emphasizes Indonesia's vast nickel reserves, which are a strategic asset as the global demand for electric vehicles increases, potentially driving further economic growth.

💡Digital economy

The digital economy encompasses all economic activities that result from digital technologies, platforms, and business models. The video highlights the rapid growth of Indonesia's digital economy, which has been a significant driver of its recent economic expansion, with a notable increase in the Gross Merchandise Value (GMV) from 2019 to 2022.

💡Urbanization

Urbanization refers to the population shift from rural to urban areas, often associated with economic development and industrialization. The video mentions Indonesia's quick urbanization as a factor contributing to the growth in incomes and the expansion of its consumer market.

💡ASEAN

The Association of Southeast Asian Nations (ASEAN) is a geopolitical organization of ten Southeast Asian countries. The video places Indonesia as a leader within ASEAN in terms of its digital economy, showcasing its regional influence and economic integration.

💡Foreign direct investment (FDI)

Foreign direct investment refers to an investor or a company from one country investing significant resources to acquire lasting interest in an enterprise in another country. The video discusses the relatively low levels of FDI in Indonesia compared to its Asian peers, which is a challenge the country is looking to address to boost its economic growth.

💡Infrastructure

Infrastructure encompasses the basic physical and organizational structures needed for the operation of a society or enterprise. The video highlights the importance of infrastructure development in Indonesia, as it is crucial for improving the country's competitiveness and attracting more investments.

💡Economic competitiveness

Economic competitiveness refers to a country's ability to produce and sell goods and services in the global market. The video discusses how Indonesia has been working to enhance its economic competitiveness through various policies and infrastructure development to attract investment and boost growth.

Highlights

Indonesia has established itself as a rapidly industrializing economy, similar to the Asian tigers.

The country experienced a financial crisis in 1997, leading to significant political reforms.

Indonesia's economy is growing at an average rate of 5%, aiming to be a high-income country by 2045.

As the largest country in Southeast Asia, Indonesia is the world's fourth-most-populous country with a young population.

Indonesia is the world's largest Muslim-majority state and has a rich and versatile past.

The country is a strategic player in the rivalry between America and China.

Indonesia is projected to be the 7th largest emerging market by GDP and may surpass Germany and Russia by 2024.

The country has a young population and is urbanizing quickly, with an influx of 90 million additional consumers expected by 2030.

Digital services are a source of dynamism, with over 100 million people spending $80 billion a year.

Indonesia has more than a fifth of the world's nickel, crucial for electric vehicle batteries.

Jakarta is a successful incubator of new technology companies, overcoming geographical challenges through digitization.

Indonesia's digital economy is the largest among ASEAN countries, with a GMV rising from $41 billion to $77 billion.

Domestic consumption and services are the main drivers of Indonesia's growth, not exports or resources.

Indonesia has become increasingly attractive to foreign investors due to its young population and cautious diplomacy.

The country maintains a neutral stance in global conflicts, attracting investments from both China and the US.

Under President Jokowi, Indonesia has made substantial investments in infrastructure, improving its global competitiveness.

Indonesia banned the export of unrefined ore in 2014, boosting foreign investment in metals-processing and manufacturing.

The digital revolution is helping reduce economic inequality in Indonesia by expanding the digital economy.

Indonesia's economic growth has been steady at 5%, but the president aims to raise it to 7%.

Challenges to growth include diminishing returns on investment, poor infrastructure, and a declining manufacturing sector.

Indonesia's economic growth is centered around Jakarta, with significant regional disparities.

The country is poised to play a role in the electric-vehicle industry due to its substantial nickel deposits.

Transcripts

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In recent decades, Indonesia has captivated global attention as a shining star in Southeast

Asia, firmly establishing itself as a highly successful and rapidly industrializing economy,

much like its predecessors, the Asian tigers (Hong Kong, Singapore, South Korea, and Taiwan).

Although Indonesia’s economy grew with impressive speed during the 1980s and 1990s, it experienced

considerable trouble after the financial crisis of 1997,

which led to significant political reforms.

Today Indonesia's economy continues to grow at an average rate of 5%,

positioning it as an 'upper-middle-income country'

and eagerly pursuing its ambition to attain high-income status by 2045.

While Indonesia is still a part of the developing world, it has a rich and versatile past, in

the economic as well as the cultural and political sense.

This resource-rich archipelagic nation is the largest country in Southeast Asia, with

270 million people spread across thousands of islands

that stretch from the Indian Ocean to the Pacific.

It is the world's largest Muslim-majority state, its third-biggest democracy, and its

fourth-most-populous country, with 52% of its population being young.

For many years, this mighty nation remained the world's largest invisible economy,

shrouded in obscurity.

The last time its economy and politics grabbed the world's attention was during the chaos

of the 1990s when a crony-capitalist system crumbled amidst the Asian financial crisis,

marking the end of the 32-year-long dictatorship of Suharto.

But now it is again in the spotlight with playing a strategic role between America and China.

And like India and other emerging markets, it is adapting to a new world order in which

globalization and Western supremacy are in retreat.

Beneath the hoods of cutting-edge electric vehicles (EVs) and on apps used by hundreds

of millions of customers, South-East Asia’s largest economy is rapidly becoming even more visible.

Indonesia is the 7th largest emerging market by GDP at purchasing power parity, and it's

projected to surpass Germany and Russia by 2024.

Its economy is transforming rapidly.

Indonesia has a young population and is quickly urbanizing, fueling growth in incomes.

Between now and 2030, Indonesia is expected to see an influx of an estimated 90 million

additional consumers with significant spending power.

A source of dynamism is digital services, which are helping create a more integrated

consumer market, with over 100 million people collectively spending $80 billion a year on

everything from e-payments to apps for on-demand trucking.

This growth in Indonesia's consuming class is stronger than in any economy in the world

apart from China and India.

One reason the Indonesian economy is gaining attention is that it has more than a fifth

of the world's nickel, a vital ingredient in the batteries that power electric vehicles.

The only other country with similarly vast reserves is Australia.

Additionally, Indonesia ranks as the world's third-largest source of cobalt, another vital input.

As the West, China and India increase subsidies to attract EV investment at home,

Indonesia sees an opportunity.

This abundance of essential resources for the global energy transition is expected to

drive an economic revival and accelerate further growth.

But Indonesia’s natural resources are not the only factor that might spur faster growth.

Jakarta, the capital, has become one of South-East Asia’s

most successful incubators of new technology companies.

This, in turn, raises hopes that Indonesia's challenging geography – it's a vast archipelago

of thousands of islands – can be overcome through digitization.

Indonesia’s digital economy ranks first among other ASEAN countries.

The Gross Merchandise Value (GMV) of the digital economy, which represents the value of goods

sold through customer-to-customer or e-commerce platforms, has risen from $41 billion in 2019

to $77 billion in 2022.

It is predicted to continue to rise to US$130 billion in 2025.

This rapid growth of Indonesia's digital economy, occurring during a pandemic, serves as a testament

to the adaptability, hard work, and resilience of the Indonesian people as a whole.

The sustained increase in the value of our digital economy relies on a few key factors:

government-led digitalization, the progress of Micro, Small, and Medium Enterprises (MSMEs),

and a thriving startup ecosystem.

As many outsider assume that Indonesia is a typical Asian manufacturing exporter driven

by its growing workforce

or a commodity exporter driven by its rich endowments of natural resources.

However, the reality is that it is domestic consumption rather than exports, and services

rather than manufacturing or resources, which are propelling growth.

In 1990, when Malaysia had similar income levels to Indonesia today, Malaysia's exports

as a proportion of its GDP were approximately twice as high as Indonesia's are now.

This means that Malaysia relied more on exports for its economic activity compared to Indonesia.

Surprisingly, the resource sector's contribution to the economy has actually declined since

2000, despite booming resource prices.

Mining and oil and gas now account for only 9 percent of Indonesia's nominal GDP, which

is less than advanced economies like Australia (16 percent) and Russia (15 percent).

Indonesia has become increasingly attractive to foreign investors.

With the youngest population in the region, where 26% of the people are under 15,

it boasts a massive consumer market.

Furthermore, Indonesia has maintained a cautious approach in its diplomacy for a long time.

This makes it a good choice for both Chinese and Western investors, capitalizing on its

relative lack of global attention.

Its strategic location, size, and abundant resources position it as a critical player

in the rivalry between superpowers.

Indonesia has a tradition of not taking sides in global conflicts that goes back to the 1950s.

It wants to stay neutral and is looking to attract investments

from both China and the United States.

This stance has transformed Indonesia into an arena where Chinese and American digital

companies and investors engage in direct competition.

For instance, in the field of batteries, CATL, a major Chinese company,

is investing $6 billion in a project.

At the same time, President Jokowi is also trying to attract Tesla to invest in Indonesia.

Since President Joko Widodo, or Jokowi, was elected in 2014,

he has made substantial investments in infrastructure.

The government has built 16 new airports, 18 new ports, 2100 kilometers of toll roads

and 36 out of 61 dams have been completed.

This made Indonesia more Competitive in the global economy.

According to the IMD Competitiveness Index, Indonesia's ranking has climbed from 44 to

34, marking a ten-point increase – the highest in the world.

Competitiveness isn't solely influenced by GDP and productivity; it hinges on efficient

infrastructure, strong institutions, and policies that promote sustainable value creation.

In 2014, just before Jokowi’s first term in office,

Indonesia banned the export of unrefined ore.

It allowed Indonesia to process raw materials domestically.

It helps to surge foreign investment, especially in metals-processing, and force foreign investors

to invest in Indonesia, it has provided the most obvious boost to growth in recent years.

The investment extends beyond metals-processing to manufacturing.

On the island of Java, home to half the population, a South Korean battery firm, LG Energy Solution,

and Hyundai, a carmaker, began building Indonesia’s first EV battery-cell plant late last year.

The government wants Tesla to follow and has offered the company land for a big factory

in Central Java.

This raises questions about Indonesia's economic growth, as it has largely centered around

Jakarta.

The GDP per capita in Indonesia's capital has reached approximately $19,000 per person.

However, in Central Java, which is relatively close to Jakarta (about 230 kilometers away),

the GDP per capita is significantly lower, standing at less than $3,000 per person.

Moreover, in more distant and remote islands of Indonesia, the economic conditions are

even worse, with lower income levels than in Jakarta or Central Java.

However, the digital revolution is helping to reduce economic inequality in Indonesia.

It's making things better by reducing rules and giving investment rewards.

The e-commerce explosion is letting people

from many different places take part in the digital economy.

You can buy nearly anything through Indonesian e-commerce now.

The fastest-growing cities are the middle-sized ones with more than two million people,

except Jakarta.

These cities, like Medan, Bandung, and Surabaya, have had an average yearly growth of 7.5 percent

over the last five years.

Jakarta's growth was a bit lower at 6.3 percent.

But Jokowi has bigger ambitions.

Indonesia’s economic output has grown by a respectable 5% a year since the Asian financial

crisis, well above the global average of 3.6%.

But its expansion has been overshadowed by faster-growing economies: China’s GDP grew

by an average of 8.7% a year, India by 7% and Vietnam’s by 6.3%.

The president first won election on a pledge to raise the growth rate to 7%.

That will not happen.

So why is Indonesia stuck with a 5% growth rate?

During Suharto, the two decades before the Asian financial crisis in 1997–98, Indonesia’s

average annual economic growth rate was slightly higher than 7%.

However, it was lower after the crisis, mostly due to the inability of Indonesia’s manufacturing

sector to grow as fast as it did before the crisis.

During Susilo Bambang Yudhoyono's (SBY) presidency from 2004 to 2014, Indonesia managed to recover

from the crisis, primarily benefiting from the mining boom and favorable monetary policies

of several developed countries, particularly the US.

Nonetheless, growth didn't reach 7%, hovering just above 5.0% annually.

In 2014, Joko Widodo (Jokowi) succeeded SBY as the President of Indonesia.

His ambition is to bring Indonesia's economic growth back to at least the pre-crisis level

of above 7% annually by the end of his presidency.

Jokowi and his cabinet implemented various policies to boost the Indonesian economy.

They reduced the country's fuel subsidy to increase government spending on infrastructure,

aiming to remove the significant bottleneck hindering Indonesia's economic growth.

Furthermore, his government aimed to enhance national economic competitiveness, promote

exports, and attract more investments.

While these efforts show that Jokowi and his economic team addressed several challenges

in the Indonesian economy, they fell short of achieving the 7% growth target.

The main problems with the current growth is diminishing return on investment.

A significant portion of Indonesia's existing infrastructure is of poor quality, and the

country lacks essential components such as roads, ports, airports, and power generation resources.

Building and maintaining infrastructure are also particularly challenging due to Indonesia's

geography and the frequent occurrence of natural disasters like floods, earthquakes,

volcanic eruptions, and tsunamis.

As a result, transportation and energy costs are high,

which discourages foreign investment in the country.

Foreign direct investment (FDI) makes up a relatively small portion of the total investment,

averaging 2% of GDP over the past decade.

This figure is lower than that of most Asian peers, such as Vietnam with 6.6% of GDP, Malaysia

with 3.5%, and Thailand with 2.5%.

Since FDI typically results in significant productivity improvements and positive impacts

on other parts of the economy, this diminishes the overall efficiency of investment.

Another issue is the declining manufacturing sector.

Indonesia witnessed growth driven by manufacturing from the mid-1980s to the mid-1990s.

However, since then, it has been on the decline.

The lack of substantial productivity improvements has been a major factor contributing to the

sector's overall performance decline.

Studies have also identified other significant causes, including an infrastructure deficit,

labor market issues, an uncertain business climate,

and a wavering stance on economic reform policies.

Among these problems, the productivity output per hour worked by Indonesian people is still

low compared to neighboring countries, such as China, Malaysia, and Thailand and higher

than that of India and Vietnam.

Unfortunately, one of the reasons for low productivity is that the government spends

less on development – on capital, education, health, and social assistance — remains

low and has even fallen slightly relative to GDP since 2015 as weak revenue collection

has forced the government to contain overall expenditure.

Whereas the average emerging economy in Asia invests more than 14% of its GDP on development,

Indonesia still only invests about half that amount.

Corruption in Indonesia has remained a persistent issue, impacting the government's capacity

to operate efficiently and provide public services.

It can discourage foreign investments and raise the cost of conducting business.

According to the Corruption Perceptions Index, Indonesia ranks considerably higher than China,

India, Malaysia, Vietnam, and Thailand.

However, Jokowi's pro-growth agenda aims to significantly enhance Indonesia's challenging

business environment.

Substantial progress has been made, as indicated by the notable improvement in Indonesia's

Ease of Doing Business ranking.

Indonesia may still attract scant attention internationally, but the outlines of a more

visible economy are increasingly clear.

With its substantial nickel deposits, Indonesia is poised to play a prominent role in the

thriving electric-vehicle industry,

which is still in the early stages of a decades-long expansion.

If it succeeds, Indonesia will improve the lives of a quarter of a billion people and

spur on a growth-starved world.

It could even alter the global balance of power.

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