Indonesia aims to be one of the world's five largest economies by 2045. Which policies can help the country propel to the high-growth levels necessary to achieve this goal?
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In this episode of VoxDevTalks, Tim Phillips speaks with Muhamad Chatib Basri, economist and former Finance Minister of Indonesia, about his experience as a policymaker looking to promote economic growth, and the country's current economic trajectory. Indonesia has set its sights on achieving the ‘Golden Indonesia’ vision by 2045, aiming to become one of the world’s five largest economies, but challenges remain, including its heavy dependence on commodity exports.
Sustained growth but a narrowing window of opportunity
Indonesia’s economy has grown consistently at around 5% annually for the past decade, a rate considered strong by global standards. Yet, Basri warns that this growth is insufficient to achieve Indonesia’s ambitious targets before the country faces a significant demographic shift.
“There is a risk for us... too old to get rich. So that is why acceleration of this economic growth is very important, and our window (of) opportunity is limited, because if we start to enter the aging population by 2050 it means that we only 25 more years to go.”
Although growth has lifted many Indonesians into the middle class, this progress has recently reversed. The middle class expanded from just 4% of the population in 2003 to 23% by 2018. However, by 2024, it had declined to approximately 17%. This reversal, according to Basri, is partly due to a shift in job creation from formal to informal sectors, which offer lower productivity and income security.
The danger of over-reliance on commodities
Indonesia’s recent growth has been driven by a commodities boom, particularly in palm oil, coal, natural gas, and nickel. Yet, Basri expresses deep concern about the sustainability of this model. The commodities boom has led to 'mild Dutch disease', where investment shifts away from manufacturing toward natural resources, weakening long-term industrial capacity.
Basri highlights how the profit margins in the natural resources sector incentivise this shift:
“In the natural resources, we are a price setter… because the profit margin in the natural resources sector is much higher than the manufacturing sector, then they shift investment from the manufacturing into natural resources.”
In contrast, manufacturing in Indonesia faces high regulatory costs and is less competitive due to bureaucratic inefficiencies.
“... an issue about the high-cost economy, we cannot pass on this burden to the consumer. The consumer will buy products from other countries.”
Industrial policy: Necessary but fraught with risks
Indonesia’s government has pursued industrial policies like ‘Making Indonesia 4.0’ and downstreaming strategies to promote domestic processing of commodities, such as nickel. The goal is to move up the value chain and diversify exports away from raw materials.
The export ban on nickel ore successfully attracted foreign investment, boosting stainless steel exports from US$2 billion in 2015 to $30 billion. However, Basri cautions that such policies are not a long-term solution.
“When the relative price of nickel increases, this will induce innovation in other countries.”
Basri argues that export taxes are a more sustainable and WTO-friendly alternative to export bans.
“We need to diversify our exports, but the best way to do it is to use [an] export tax rather than [an] export ban.”
He also advocates for a more targeted, ‘lean industrial policy’ that focuses on supply-side improvements, such as infrastructure, human capital, and research and development (R&D), instead of heavily protectionist measures. As Chatib notes:
“Government is very bad at picking winners, but losers are very good at picking government."
The critical role of foreign direct investment
Time is short for Indonesia to diversify its economy through domestic capability building alone. Basri argues that the quickest path is to attract foreign direct investment (FDI) with strong technology transfer incentives.
“The shortest route to do so is to expect the technology transfer from the foreign direct investment.”
He points to the example of Daihatsu using Indonesia as a production base to export to Japan. But attracting FDI requires substantial policy reform.
“You have to streamline the government regulation. You have to remove the bureaucratic hurdles. You have to improve the quality of human capital.”
Globalisation, geopolitics, and the shifting trade landscape
The fragmentation of global trade and the rise of regional trade blocs present additional challenges for Indonesia. The COVID-19 pandemic exposed the vulnerabilities of global supply chains, prompting countries to prioritise economic security over efficiency.
“Globalisation [has] become the source of uncertainty. If you become too dependent on other countries, you’ll be in trouble.”
Indonesia can capitalise on shifts in global supply chains, particularly as investors seek alternatives to China. However, to attract this investment, Indonesia must enhance its investment climate through deregulation and improved governance.
“It is very important for us to diversify, not only our export [but] even the source of our supply chain. We cannot rely only on one particular country.”
Economic growth targets and structural limitations
President Prabowo has set an ambitious target of 8% annual economic growth by 2029. Basri is sceptical that this is achievable under current conditions.
“To grow by 8% means we need investment... over GDP of more than 50%—very high.”
With Indonesia’s domestic savings at around 37%, the country faces a substantial savings-investment gap, which could trigger unsustainable current account deficits.
“The country with a current account deficit higher than 3% always is being punished by the market.”
Improving productivity is the only viable route to achieving higher growth without excessive investment. This requires enhanced human capital, infrastructure, and governance. Corruption remains a critical barrier.
“There is one thing worse than organised corruption, which is unorganised corruption.”
He draws a comparison between the corruption under Suharto, which was consistent and easier for business to navigate, and the fragmented, uncertain corruption of today’s decentralised democracy.
Basri also underscores the importance of increasing Indonesia’s tax-to-GDP ratio, currently at a low 9–10%. However, he suggests this should be achieved through administrative reform rather than higher tax rates.
The path forward: Realism and political constraints
Ultimately, Basri takes a pragmatic view of Indonesia’s policy challenges, having experienced first hand the constraints the policymakers face.
“We’re probably not living in the first best world. We’re probably living in the second best world and run by the third best bureaucracy.”
While Indonesia’s goals are ambitious, achieving them will require sustained political will, smart policy choices, and a relentless focus on improving productivity.
“If the government is able to provide all these prerequisites, I do believe that we could achieve that 8% economic growth, but without that, it is not going to be easy.”