By Vanesha Manuturi on 03:43 pm Mar 17, 2014
Tags: Indonesia infrastructure
Indonesia needs to be swift in improving its infrastructure and human capital in order to avoid the middle-income trap, a public policy expert says.
“[Indonesia] has done well, but right now it’s at the risk of backsliding so it needs to get back on track,” Jack Knott, the dean of the University of Southern California’s Price School of Public Policy, said during a recent visit to Jakarta.
“If Indonesia can invest in the right way in terms of infrastructure, it’ll be a very important boost.”
The middle-income trap describes the phenomenon when a country’s growth plateaus when it reaches a certain middle-income level.
It is generally indicated by a low investment ratio, slow manufacturing growth, limited industrial diversification, and poor labor market conditions.
The lack of efficient and working infrastructure is one of the factors that hinders the country’s competitiveness, Knott said, citing the World Economic Global Competitiveness Index where Indonesia is currently ranked 80th out of 140 countries, with infrastructure scoring 3.5 out of 7.
Although the country had a relatively healthy infrastructure development, about 8 percent of the gross domestic product, prior to the global financial crisis, the number has now fallen by half to about 4 percent, Knott said.
“It’s very important to raise that to 8 or even 10 percent to sustain its economic growth,” he said.
The biggest issue Indonesia must improve is providing reliable electricity sources across the archipelago, according to Knott.
“Over 60 percent of Indonesian households don’t have reliable electricity. Meanwhile, electricity was one of the biggest booms for the United States to grow in the 19th century,” he said.
“That was a huge push – it was the beginning of our real industrial revolution.”
Improving the country’s infrastructure will also be crucial as Indonesia faces a major structural shift in its demographic.
Data from the Indonesia Investment Coordinating Board show that between 2020 and 2030, the country’s dependency ratio will reach its lowest point, which means that the working population in Indonesia will be greater than the population of children and the elderly.
“[The demographic dividend] is a phenomenon that’s been happening across many great countries over the last few decades,” Edward Teather, an economist at UBS, said in February.
Additional reporting by Basten Gokkon