JAKARTA: Indonesia is currently at a critical juncture. On one hand, its economy, in nominal terms, has grown at a solid 9 percent compounded annual growth rate, or CAGR, over the last five years, but a young and aspirational population makes sustaining that growth-momentum imperative. At the same time, President Joko “Jokowi” Widodo’s government is more than halfway into its current term, and it should showcase a blueprint for its long-term economic vision as a potential plank for the upcoming election.
So if Indonesia wants to grow its economy from the current $1 trillion to $2.5 trillion by 2025, it would have to target a stellar 12 percent CAGR. That sounds daunting, but many nations have achieved decadal double-digit growth. Even India’s Maharashtra state recently announced a vision to grow its economy by 15 percent CAGR to $1 trillion by 2025.
About 41 percent of Indonesia’s gross domestic product (GDP) is estimated to come from industry, on the higher side of the average 30-40 percent seen in most large emerging markets. If its industry has to maintain at an average 35 percent proportion, it would have to grow at a 9 percent CAGR, less than the estimated GDP growth. Indonesia’s gross investment at around 33 percent of GDP is also in line with the average 35-40 percent seen in China, Malaysia and Thailand in their initial years of industrialization.
If it intends to hold this at this level to drive normal capacity-addition and avoid building excesses in the system by investing beyond 40 percent of GDP, its investment has to grow at a 12 percent CAGR in line with the estimated GDP growth. Investment also correlates with productive imports like machinery. In Indonesia, imports comprised 18 percent of GDP, which is roughly half of the share of investment in the economy. Recent industrializing nations have also seen their share of imports to be 50-60 percent of their share of investment. This trend has to continue, assuming it implies most imports are strictly for productive use contributing to investment. If import grows at 12 percent CAGR same as investment, its share will be 18 percent of GDP by 2025 (i.e. 55 percent of the share of investment, estimated at 33 percent of GDP).
