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Indonesia's plan for G-7 status is not bold enough

President Joko Widodo needs to invest in education as well as bridges

| Indonesia
President Joko Widodo, delivering his 2017 state budget, now faces greater challenges to turn Indonesia into a top-seven economy   © Reuters

McKinsey has tipped Indonesia to reach Group of Seven status, having one of the world's largest economies, by 2030. With his new budget, the first since winning a second term in May, President Joko Widodo offered his boldest vision for getting there.

In his first five years running Southeast Asia's biggest economy, with its gross domestic product of $1 trillion in 2018, Widodo, known as "Jokowi," scored some vital reform wins. He accelerated efforts to upgrade ports, bridges, roads and power grids. He also implemented a tax amnesty, prodding tycoons to repatriate funds to invest at home.

Jokowi's new budget aims to supercharge development, throwing a record $178 billion of spending at Jakarta's challenges. The problem is that, like his immediate predecessors, Jokowi is too concerned with hardware -- and not enough with the economic software needed to curb inequality and beat the "middle-income trap." This is when income per capita stalls below $10,000.

The fiscal jolt Jokowi previewed is all about the number seven. To propel Indonesia into G-7 orbit, Jokowi aims to generate 7% growth annually. That was his campaign pledge back in 2014. Since then, growth has hovered just above 5%. The 5.05% rate in the second quarter was the slowest in two years.

The U.S.-China trade war and deteriorating global outlook already have many Indonesia-watchers doubting Jakarta's numbers. Given those headwinds, it is hard not to be pessimistic that the 5.3% Jokowi's team projects for 2020 can be achieved, says economist Juniman of Maybank Indonesia. (Like many Indonesians, Juniman goes by one name.) Indonesia's exports, after all, just fell for a ninth straight month.

Others question the fuzzy-math proposition that Jakarta could ramp up fiscal expenditures while also projecting a narrower budget deficit. Economist David Sumual of PT Bank Central Asia calls "counterintuitive" the government's idea that the fiscal deficit will shrink to 1.76% of gross domestic product from 1.93% now.

The bigger problem, though, is how Indonesia is prioritizing physical infrastructure over strengthening its human capital. To be sure, better roads, ports, rail lines and airports are vital for a sprawling and resource-rich archipelago of more than 17,000 islands. Jokowi, like predecessor Susilo Bambang Yudhoyono, is right to boost Indonesia's attractiveness as a manufacturing base.

There is merit, too, to Jokowi's bold plan to move the capital outside of pollution-plagued Jakarta -- perhaps to the island of Borneo. Jakarta is literally sinking. And its notorious traffic squanders an estimated $7 billion of annual GDP.

Indonesia needs to spend money on bridges, such as this one damaged after floods hit in January 2019, but also on education   © Reuters

But Indonesia risks squandering something even more precious: its enviable demographic dividend. While McKinsey is eyeing 2030, consultancy PwC reckons it may take until 2045 for Indonesia to become a "high-income" nation. Getting there means growing better, not just faster.

By 2020, the United Nations Population Fund reckons that 70.7 million of Indonesia's 260 million people will be under 15. That compares with 68.1 million in 2010. This dividend becomes a nightmare if Indonesia does not create enough well-paying jobs to utilize all that young labor.

The 2010 bookend is important. That was the year Yudhoyono's reform push began to catch the globe's attention. It is easy to forget how close Indonesia came to failed statehood following the 1997-98 Asian financial crisis.

After massive street protests drove dictator Suharto from power in 1998, Jakarta saw a revolving door of presidents, each more hapless than the last. In 2004, voters went for Yudhoyono, a general-turned-politician. Yudhoyono acted fast to extricate the military from the mainstream economy, improve infrastructure and attack Indonesia's notorious graft.

In 2004, Jakarta ranked 133rd on Transparency International's corruption perceptions index, trailing Pakistan and Iraq. By 2010, it was 110th, winning Jakarta investment-grade status a year later. Today, Jakarta is 89th -- a great accomplishment, but not improvement enough considering the peers Indonesia is competing with for investment. China is 87th, while India is 78th and Malaysia 61st.

Throwing tens of billions of additional dollars at infrastructure is great. It must, however, be paired with more assertive efforts to root out graft. That means cutting red tape and putting more project-bidding processes and government procurement online.

Raising salaries for lawmakers, bureaucrats and police officers would curb incentives for rent-seeking behavior. Jokowi should give Jakarta's anti-graft body greater investigative powers.

Jokowi also must ensure Jakarta strengthens education and training to jump-start innovation and job growth from the ground up. This is vital to ensuring per capita income does not get trapped below $10,000. It is currently about $3,900 in nominal terms, trailing Mongolia and Sri Lanka.

Admittedly, Jokowi is purporting to do just that. His budget raises expenditure on education by 30% from 2015 levels and aims to boost assistance for university studies. Yet such pledges were made in 2014, just as Yudhoyono made them in 2004. At every turn, implementation has fallen short of lofty rhetoric.

For inspiration, Jokowi's team might look to Indonesia's counterintuitive knack for producing tech unicorns. It is already home to four startups worth more than $1 billion, compared to one in Singapore and two in Japan. Cultivating more game-changers would position Indonesia for where the global economy is heading in the decades ahead.

Infrastructure and creating manufacturing jobs are plenty important. But so is multitasking. Unless Indonesia works harder to nurture its animal spirits, its young and growing population will not be happy come 2030.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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