Indonesia is facing a tough challenge in avoiding the middle-income trap amid an unstable growth cycle. The country’s economic fundamentals must be strengthened through transformation and sustainable growth.
By
KARINA ISNA IRAWAN
·4 minutes read
JAKARTA, KOMPAS - Indonesia is facing a tough challenge in avoiding the middle-income trap amid an unstable growth cycle. The country’s economic fundamentals must be strengthened through transformation and sustainable growth in the real sector.
The founder of the Institute for Development of Economics and Finance (Indef), Didin S Damanhuri, said in an economic discussion held by Indef and CNBC Indonesia in Jakarta on Tuesday that Indonesia’s economic growth cycle was not stable. After almost leaving the group of middle-income countries, Indonesia was hit hard by the 1997-1998 financial crisis. Now, when Indonesia is classified as an upper-middle-income country, there are some weaknesses regarding the transformation of the digital economy.
On July 1, the World Bank classified Indonesia as an upper-middle-income country with a gross national income (GNI) per capita of between US$4,046 and $12,535, an upgrade from its previous status as a lower-middle-income country (GNI per capita between $1,036 and $4,045). The classification is based on the GNP per capita in 2019.
The key to transformation is technology, so plural transformation is needed for Indonesia to get out of the middle-income trap
According to Didin, Indonesia is “plural” in its socioeconomic aspects, so transformation must be carried out carefully. If the transformation only focuses on the digital economy, which tends to be homogeneous, it is feared that Indonesia will face difficulties in avoiding the middle-income trap.
Since the New Order, the economic structure has been under transformation, which has made the manufacturing industry more dominant than the agricultural sector. However, during the Reform Era, the dominance of the industrial sector declined. This indicates an error in transformation. According to Didin, the government does not consider Indonesia\'s economic structure as being plural.
The key to transformation is technology, so plural transformation is needed for Indonesia to get out of the middle-income trap. One of the steps that must be taken is to take the advantage of the technology the country has in order to provide added value to the real sectors, such as agriculture and industry.
Meanwhile, professor of the school of economics and business at Padjadjaran University, Rina Indiastuti, said there were 16 economic subsectors whose contributions to the economy increased from 48.32 percent in 2016 to 53.04 percent in 2020. The increase was due to a rise in demand in the domestic market. However, the increase in the contribution has not been followed by an improvement in productivity, which is needed in order to boost competitiveness in the global market.
A professor for the school of economics and business at Gadjah Mada University, Mudrajad Kuncoro, called on the government to sharpen the direction of the road map for Indonesia\'s Vision 2045. In the vision, it is not yet clear whether Indonesia will be turned into an industrial or service country.
According to Coordinating Economics Minister Airlangga Hartarto, there are seven priority policies for 2020-2023, which cover health programs, social assistance, labor-intensive activities, relaxation of regulations, restructuring of micro, small and medium enterprises (MSME), placement of funds and guarantees and digital-based economic transformation.
The pandemic is believed to accelerate digital transformation, which is expected to become a buffer that can help Indonesia avoid the middle-income trap.
Meanwhile, the economy is estimated to suffer contraction again in the third quarter this year. Economic growth is projected at a range of between zero and minus 2.1 percent. The deeper contraction may occur due to the implementation of a second large-scale social restriction (PSBB) phase in Jakarta.
According to Finance Minister Sri Mulyani Indrawati, the impact of the PSBB in Jakarta is still being assessed, but the economic contraction is estimated to be lower than in the level recorded in the second quarter of 2020. Jakarta contributed 17.7 percent to the country’s gross domestic product (GDP).