Indonesia got its act together in fixing its macro-economy after the 1998 Asian Financial Crisis by lowering inflation; repaying its external debt and restructuring the banking sector. It also got lucky as it was able to ride on the commodity boom and a fast growing Asia.
Exports of coal and palm oil grew by double digits and that brought in much needed foreign exchange earnings.
Domestically, a young, growing urban population provided a pool of increasingly skilled labor pool. Growth in telecommunication infrastructure, wholesale retail and transportation sectors helped to boost productivity. Between 2000 and 2010, the urban population grew by nearly 10%, which boosted consumer services.
Three areas of opportunities and challenges.
Indonesia’s labor productivity still lags behind Malaysia and Thailand and needs to grow by 25% just to remain competitive. From 2006 to 2014, the economic growth came primarily from an expanding labor pool rather than from productivity improvements.
In terms of inclusive growth, per capita income has risen but still half of the population lives on US$2 a day, which is higher than Vietnam and Sudan. It is critical that the social fabric of the nation remains intact.
As we have learned from other markets, as the economy grows, Indonesian will consume more. Energy consumption is expected to rise by three times over the next decade and that also applies to steel, cement, water. Across all resources, we must ensure supply.
To keep growing sustainably, Indonesia will also need boost its domestic capital market to raise funds.
As incomes have risen, so has disposable income. Indonesians have been consuming more as a result, both in terms of buying items more regularly as well as trading up. Indonesia’s middle class is estimated to exceed 100 million from the current 60 million by 2020.
Shoeb Kagda, founder of Synthesis Indonesia, talks to McKinsey Indonesia’s President Director Arief Budiman about this issue in a four-part interview. Find parts two, three, and four in our corporate blog.