Jakarta, IO – Accelerating Growth for “Golden Indonesia”
Based on the 2024 Global Risk Report survey by the World Economic Forum of 1500 economists worldwide, it was found that in the next two years, the highest economic risks will be inflation, economic decline and fewer job opportunities. Prabowo’s administration promises high economic growth, 7-8% per year, from the third or fourth year of his administration. This breakthrough will accurately address Indonesia’s economic challenges mentioned by the World Economic Forum.
Economic growth of 7-8 % can primarily deal with the issue of economic decline and reduced job opportunities. Regarding inflation challenges, Indonesia does not seem to have that much of a problem; the 2023 CPI was recorded at 2.6% – the fourth lowest in the world.
Even though Indonesia’s economic growth in 2023 of 4.97% is the fifth-highest in the world (below India at 6.33%, Bangladesh at 6.03%, China at 5.01% and the Philippines at 5.32%), the magnitude of this growth has not been able to keep up with the increased number of job seekers in the country. In Indonesia, based on 2023 data, every 1% of economic growth is equivalent to absorbing 570,000 new jobs. Every year, 4 million new job seekers enter the market in Indonesia. It means that with 4.97% economic growth like in 2023, only 2.8 million job seekers will be absorbed from the 4 million.
Meanwhile, the 1.2 million job seekers who are not absorbed will either be unemployed or are forced to enter the informal sector. An additional 2.1% is needed to solve the problem of 1.2 million job seekers who are not absorbed every year. Economic growth of 7-8%, or an additional 2-3% growth, could solve this problem.
If Indonesia’s economic growth can stabilize at 7% in coming years, then by 2041 Indonesia will be able to enter the level of high-income countries or, in other words, become a developed country. If Indonesia’s economic growth is stable at 8%, then Indonesia can become a developed country three years sooner, that is, by 2038. The higher the economic growth, the faster Indonesia will improve people’s welfare and solve unemployment and poverty problems to achieve a prosperous society, as envisioned by the nation’s founding fathers. Therefore, the 7-8% economic growth can ensure the realization of Indonesia’s prosperity before the Golden Indonesia Vision in 2045.
Four Reforms to Accelerate Economic Growth
1. Agrarian Reform
To achieve high economic growth, Indonesia can learn from the experiences of other countries in the East Asia region, such as Japan, China, South Korea, Taiwan and Singapore. These five countries implemented a series of fundamental reforms in their economic structure; what they have in common is that they applied agrarian reform from the outset. In Japan, in 1946, the Government sold off landowners’ land to small-scale farmers at very cheap prices. In China, 40 million hectares of land were distributed to around 300 million rural residents after the 1949 Revolution. In South Korea, in 1950, the Government distributed 577 thousand chungbo/hectare of land to 1.6 million farmers. In Taiwan, land owned by estate moguls was broken up and distributed to small farmers in 1953. In Singapore, in 1966, the Government controlled all the land at a low price and allocated it for building a new airport, industrial area, public housing and schools. As various other reforms and industrialization were also implemented in the following years, these five countries enjoyed high economic growth for many years.
Agrarian reform in Indonesia can be conducted by distributing land of around 2 hectares (on Java Island) and 5 hectares (outside Java), taken from land owned by the Government, state-owned enterprises (SOEs) and unproductive concessions, and entrusted to landless farmers. The entrusted land cannot be sold or sub-leased, and the recipients of the entrusted land will receive facilities such as subsidized fertilizer, seeds, technology and low-interest credit.
2. Reform of Natural Resource Management
To carry out industrialization, downstreaming of all sectors other than mining, such as plantations, fisheries, agriculture and forestry will require immense government capital, in addition, of course, to inviting foreign investment. One of the ways to obtain government capital is by increasing income from the mining sector, which is currently the most prominent one. Steps to gain additional revenue from the mining sector can follow what President Jokowi did with Freeport, that is, by increasing government ownership to 51% (recently, it even reached 61%). The Government can revise the Mineral and Coal Law to include a clause that stipulates that “The Indonesian people, through their Government, are entitled to 51% of the shares or profits from every mining business management in Indonesia”.
3. Credit Reform
Credit inequality is the next structural problem that must be resolved. Currently, 83% of banking credit only flows to several hundred SOEs and large corporations, while the remaining 17% is fought over by 60 million micro, small and medium enterprises (MSMEs) and cooperatives. In fact, MSMEs and cooperatives are where the majority of workers in Indonesia place their fate and contribute 61% to Indonesia’s economy or GDP. To help develop MSMEs and cooperatives, the Government can pressure banks, especially state-owned ones, to increase the portion of credit to MSMEs and cooperatives. The target is for the share of banking credit to grow to at least 30-50% in the future. If the problem of credit inequality is resolved, MSMEs and cooperatives can fully become motors of economic growth in the future.
4. Tax Reform
Indonesia’s tax revenue ratio, which is currently only 9% (plus non-tax revenue of 13%), is among the lowest in Asia. The tax amnesty that has been implemented twice is a government policy that needs to be revised, because it has proven to further impair the tax revenue ratio. Increasing the VAT tax to 12% can be implemented as long as taxes on the wealthy are also raised, proportionally. Examples of sectors where affluent people need to pay more taxes include the debt market, stock market and futures market.
Read: Tightening Monetary And Fiscal Policy
The root of the problem of low tax revenues includes corrupt tax officials and the lack of transparency in the tax collection system. Consequently, many palm oil companies manage to avoid paying taxes, for instance. In fact, apart from mining, the palm oil sector is one of Indonesia’s leading ones. The Corruption Eradication Commission (KPK) estimated that 40% of palm oil companies avoid paying taxes.
The formation of a Tax Agency that is separate from the Ministry of Finance must be fortified by electing a leader with strong integrity and competence. The increase of tax revenues in the future can become capital for the Government to carry out industrialization and ultimately accelerate economic growth.