Java. These facets are also key to successfully accelerating the development of industrial estates and tourism zones as new growth centers outside Java.
Ways to increase investment in these growth centers are by easing permits and facilitating investment. During the 2014- 2019 period, 34 projects in special economic zones worth Rp 10.8 trillion received their corresponding permits.
The government also launched an accelerated construction program (or KLIK) for 318 projects worth Rp 334.4 trillion in various industrial estates.
Improvements to governance are also related to an improvement in the quality
of statistical data and information. The 2016 economic census serves as the foundation for business and economic analysis for future development. Further, the improved 2018 rice production data serves as the basis for improving food policies. Improving and providing data for tourism, the creative economy, and investment are also necessary in order to set more accurate development targets and provide a solid foundation for policymaking.
Along with its projected path to attain upper-middle-income status, Indonesia can take a more active role as a key partner for China, Brazil, India and South Africa in the Organization for Economic Cooperation and Development (OECD).
forest cover, such as Java, Bali, and Nusa Tenggara. The risk of water scarcity is also rising in other regions as a result of climate change. The percentage of area suffering from critical water shortages is expected to increase from 6% in 2000 to 9.6% by 2045.
Indonesia has a great opportunity to develop products derived from its
biodiversity if its sustainability is continually improved. The development is carried out through bioprospecting initiatives to meet the demand for raw materials to manufacture medicines, clothing, food, cosmetics, spices, animal feed, resins, and dyes, among others. In addition, diversifying primary medicinal plant products into high value-added secondary products is equally important.
Figure 2.2
Projected Forest and Water Sustainability in 2045
Effectiveness of Governance over Economic Resources The management of economic resources
is facing challenges related to the carrying capacity of the environment, availability of land, infrastructure, spatial planning, and welfare of farmers, fishers, and citizens who depend on natural resources for their livelihoods.
The management of food and agriculture is facing the issue of increasing demand for land and water as a result of increased economic activities. This condition has led to heightened competition in the use of land and water, particularly in agriculture, manufacturing, and housing.
Another challenge that is no less important is the rising demand for food, along with an increase in the total population by 1.2% p.a. Food production is affected by seasonal factors, and by the availability and reliability of production infrastructure, including irrigation.
Uncertainty causes fluctuations in food prices, for example, price fluctuation of rice averaged 0.6% per month. On the producer side, low productivity and fluctuations in food prices lead to low bargaining power of farmers, where the average farmer exchange rate was 101.3 in 2017.
Source: Estimates by Bappenas.
Management of fishery and marine resources are also facing several challenges, including: (1) the dominance of small-scale fishery and the use of simple technology, (2) high cost of production inputs, (3) low access to capital to improve businesses, (4) inadequate marine and fishery infrastructure, including fishing ports, hatchery and broodstock systems, cold chain systems, and salt ponds, among others, (5) ineffective and inefficient permit programs, (6) low integration of end-to-end fishery and issues with the product value chain, and (7) ecosystem degradation and the effect of climate change on the marine environment.
In the fishery and marine sector, the issues encountered are: (1) the need to strengthen the management and institution of fishery management areas;
(2) unproductive fishery; and (3) the need to enhance the harmonization of land and ocean spatial planning, by aligning them with spatial zoning plans (or RTRW), with zoning plans for coastal areas and small islands (or RZWP3K), and with the national strategic zoning plans (or RZKSN/KSNT).
Other issues are inefficient management and inefficient use of energy. For
example, the use of coal to meet domestic energy needs has not been optimal. The application of coal domestic market obligation (DMO) with market- based prices serves as an opportunity to increase the ratio of coal production reserves and development of new and renewable energy plants. Coal DMO only achieved 23.5% of the total coal production (548 million tons) in 2018.
Other issues in relation to energy management and energy use that need to be addressed are: (1) adequate energy supply—especially natural gas—and electricity to meet the emerging needs of the real sector; (2) maximum use of energy resources for industrial raw materials; (3) quality and reliability of energy distribution, especially outside Java; (4) ineffective use of energy for broader economic development; (5) inefficient energy consumption which is remedied by improvements to energy savings in manufacturing, transportation, construction, and commercial facilities, with the potential savings of around 30%
of current energy use; and (6) lack of national energy buffer reserves to anticipate energy crisis and emergency conditions.
Sluggish Structural Transformation Because of sluggish structural transformation, Indonesia has not been able to resume the socio-economic transformation that had stopped due to the monetary crisis in 1997-1998.
Indonesia's average economic growth declined from 6.0% in the 1990-2000 period to an average of 5.0% in the 2000- 2015 period. The contribution of manufacturing to GDP also declined to
19.9% in 2018. On the other hand, in the same year, the contribution of the service sector increased to around 59.2% and that of the primary sector increased by 20.9%.
The rising contribution of the service sector to GDP shows a transition of sources of growth from the primary sector to tertiary, even though the
transition has not been able to achieve higher growth. This is due to the low growth contribution from the informal service subsector, which happens to absorb the most labor migration from the primary sector. The manufacturing
sector, which has the greatest potential to drive growth and create formal employment, continues to face challenges that include wage growth that has not been complemented by equal productivity.
Figure 2.3
Comparison of Productivity in Various Sectors
Figure 2.4
Level of Education of Workers in Indonesia in 2015-2019
The issue of low productivity is related to low-quality human capital. The workforce is currently dominated by as many as 50.2 million (or 39.7%) elementary school graduates and below. Meanwhile, not all workers with higher education have the readiness and capacity according to the
needs of the workforce. Mismatched skills, gaps in the quality of education among regions, and limited pool of talent ready to be tapped have become challenges associated with labor productivity.
Source: BPS, 2018 (compiled).
Source: BPS.
The sluggish structural transformation in Indonesia is also linked to low exports.
The ratio of Indonesia's export value to GDP only reached 19.0%, far below Thailand (69.0%), Vietnam (93.0%) and Singapore (172.0%). Further, Indonesia’s leading natural resources have not been optimally processed into high value- added products, as shown by Indonesia’s exports that are currently dominated by commodities (more than 50%) that include processed crude palm oil, base metals, rubber, and food.
The low export-to-GDP ratio and dominance of commodity exports highlight three key issues in the national industrial structure that require attention, which are: (1) the lack of coordination among upstream and downstream sectors that leads to vulnerable national industrial supply or value chain, which then causes low industrial competitiveness; (2) the low capacity for innovation in Indonesia due to lower exports of high-technology products in comparison to other similar countries;
Figure 2.5
Indonesia's Exports in Comparison to Other Similar Countries
Figure 2.6
Percentage of High-Technology Exports
Source: The Atlas of Economic Complexity, World Development Indicators (2016), and World Bank (2018).
Source: World Bank (compiled)
Figure 2.7
Declining Upstream-Downstream Linkages in the Past 15 Years
Figure 2.8
Shifting Investment to Tertiary Sector
(3) low-quality investment due to limited investment, including foreign direct investment, into export-oriented production. The transfer of technology and knowledge from foreign direct investment—which encourages innovation and diversification of exports—has not been completely implemented. Most investment targets the domestic market where most production is not export-oriented.
Nonetheless, investment has also shifted from the secondary sector to tertiary in the past two years.
Improving the quality of investment also carries its own challenges, especially in relation to business competition. The
Global Competitiveness Index report from 2019 shows a high level of industrial concentration in Indonesia (with a score of 4.0), which is measured by the value of market dominance. This demonstrates that the industry is only dominated by a few business actors. The expansion of new industry through investment, and the acceleration of ease of doing business are expected to foster fairer business competition, efficiency, and inclusive growth.
Efforts to increase investment, bolster exports, and promote tourism are also conducted through economic diplomacy.
However, its implementation has not been optimal due to the following
Source: Bappenas.
Source: BKPM (compiled).
obstacles: (1) the lack of integration of policies and coordination among stakeholders—including the government, BUMN, and both the private and public sector) in conducting economic diplomacy; (2) lack of mechanisms to coordinate investment abroad; (3) lack of integration of domestic regulations to support the implementation of trade agreement negotiations; and (4) weak penetration of the Indonesian market into non-traditional countries.
Sluggish structural transformation is also manifested by the dominance of micro businesses in the national business system (at 99.0%). This dominance reveals a "hollow middle", which limits the capacity of businesses to develop upstream-downstream linkages.
Efforts to increase the scale of micro, small, and medium enterprises (UMKM) have also not been optimal. The facilitation for various UMKM to form cooperatives is conducted to improve efficiency and economies of scale.
However, these efforts are faced with the challenge of transforming cooperatives into modern and professional businesses.
Increasing business linkages among UMKM, expanding business partnerships among UMKM and large businesses, and fostering entrepreneurship have always been supported and encouraged.
However, only around 7.0% of micro and
small enterprises (or UMK) have formed a partnership with other companies.
Meanwhile, there has been a continuous improvement in entrepreneurship as reflected in the entrepreneurial ratio in Indonesia, which reached 3.3% in 2019.
This improvement is supported by the rising number of entrepreneurs in recent years. Data from the Global Entrepreneurship Monitor (2017) shows a rise in confidence, capacity, and participation of Indonesians in entrepreneurship in comparison with the economic landscape in 2014. The data is backed by the following indicators: (1) rising confidence in entrepreneurship, (2) ownership of businesses, (3) the view that entrepreneurship is a beneficial career choice and boosts social status, and (4) rising women's participation in entrepreneurship. This trend is in line with the development of the digital economy, which opens up many business opportunities.
On the other hand, there are significant challenges that need to be addressed to ensure the sustainability of entrepreneurship. For example, interest in entrepreneurship is often not accompanied by sufficient capacity for entrepreneurs to run the business. Most models of entrepreneurship are based on imitation and not on understanding of business models, markets, and innovation.
Industrial Revolution 4.0 and the Digital Economy In 2018, the government launched the
"Making Indonesia 4.0" movement. This movement conforms with the era of digitalization, which facilitates the integration of information for the purpose
of increasing productivity, efficiency, and service quality.
The process of digitalization confers great potential as a tool to increase economic
value-added. For example, the benefits of Industry 4.0 on the value chain include improvements to the efficiency of
upstream-downstream linkages and rise in the aggregate economic contribution of value-added to manufacturing.
Figure 2.9
The Network Readiness Index of ASEAN Countries
However, there are significant challenges facing Indonesia in the era of digitalization. In terms of innovation readiness, Indonesia ranked 73rd out of 139 countries in the Network Readiness Index, whereas similar countries scored better, like Malaysia (ranked 31st), Turkey (48th), China (59th), Thailand (62nd).
Indonesia has the advantage of price but lags behind in terms of infrastructure and public use.
Indonesia also lacks readiness to explore and adopt digital technology that can drive transformation in the government, business models, and public lives. This is reflected in the data from the World Digital Competitiveness Ranking (2019), where Indonesia ranked 56th out of 63 countries. Adaptation, education, training, technology ecosystem. and integration of information technology are key factors
that need to be addressed in order for Indonesia to take advantage of digital technology advancements for economic growth and improvement in the quality of life.
Other challenges facing Indonesia pertain to the development of human resources and business competition. The era of digitalization has an impact on the work pattern and potentially eliminate low- skilled jobs. On the other hand, the changing trading pattern, the provision of online-based services, and the use of cashless payments have rendered many conventional business models obsolete.
These changes necessitate a comprehensive adaptation policy to ensure sustainable and equitable economic growth, and to improve the quality of life and the environment.
Source: Global Information Technology Report, World Economic Forum (2016).