What are the current major economic problems faced by Indonesia and how can Indonesia overcome them?

With a population of over 250 million people, Indonesia is the 4th most populated country in the world. Despite the abundance of human capital, Indonesia is severely underperforming economically with a GDP that is number 16th in the world rankings. Why is this the case? It is fair to say there are several major fundamental problems in Indonesia’s economy. Here are the top 3:

Lack of tax authority enforcement

Our tax revenue is very poor and ranks among one of the lowest percentage globally at 12% of GDP. To add some perspective:

USA: 26.9%

UK: 39.0%

Germany: 40.6%

Japan: 28.3%

China: 22.0%

Its no surprise considering we only have approximately 27 million registered taxpayers when there should be around 120 million citizens complied to the tax law. This is due to the severe lack of funding and manpower in our tax office, leading to many citizens having a completely lax attitude towards tax evasion as they probably wouln’t get caught anyway. Indonesia’s lack of tax authority enforcement leads to the Government having little money for serious developments.

Lack of infrastructure

This is an issue that is being addressed by the current Government. The fact is Indonesia is so far behind in terms of infrastructure. The most important of which is port capacity, roads and railway networks.

Ports

Indonesia’s port capacity is very poor. The largest port in Indonesia located in Jakarta has a capacity of 5 million TEUs (container units) and has not been subject to development since the Dutch colonialist era. Other ports in less developed region are way more poor in its capacity. To add some perspective, port of Singapore has a capacity of 32 million TEUs and they have a population less than Jakarta.

What this means is there is very little incentive for the private sector to make investments into shipping vessels as there is just not enough capacity to sustain it. This leads to Indonesians having to spend much more if they want to export goods to foreign markets as there is very little supply of container transportation. It is much more lucrative to base operations in Singapore which has ready made cheap transport for exports. As a result, Singapore has an export level of around USD23 Billion, which dwarfs Indonesia at USD12 Billion, despite having a small fraction of Indonesia’s population.

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Many Indonesians find it more profitable to base and list their business in Singapore due to its infrastructure availability and ease of doing business.

Roads & Railway Networks

The island of Java is fairly developed in terms of roads and railway networks, although it is still behind other developing nations. Moving to other regions though, the developments are clearly very poor. Many regions in Indonesia can barely be accessed by heavy vehicles. This results in a severe disparity in prices between the regions as the private sector dont find it profitable to do business in inaccessible areas. There are many regions in Indonesia where basic commodities such as medicine are severely overpriced. This lack of access to goods hinders the developments of many regions.

Lack of development and socialization on the financial industry

Indonesia’s financial industry is underdeveloped and undersocialized. The lack of availability in financial instruments which could generate higher returns to investors and lack of financial literacy among the Indonesian population is costing Indonesia. As a result, Indonesians react to this in 2 different ways:

  1. Many wealthy Indonesians would choose to launder and park their money abroad (mainly Singapore), where they can invest in wide variations of financial instruments provided by investment banks.
  2. Other Indonesians with disposable income can only invest in traditional assets, most popular of which is property.

The first point is a broad discussion in itself so i am going to discuss the second point.

A developed economy typically needs to have a strong financial industry. This is because the financial industry enables a more efficient allocation of money and capital. With a solid financial sector, industries that have great potential for growth would have easier access to money and capital as investors have a platform to invest in that industry. Through the advanced financial sector, mainly investment banks and wealth management firms that would invest towards the growth of said industry. Put simply, a solid financial sector is a lubricant for growth as the allocation of capital in the economy is more efficient.

Indonesia, due to lack of availability and literacy among the population does not have an efficient allocation of capital. The typical wealthy Indonesian would choose to invest in property, owning more than one houses and apartments. This drives up prices and results in an overpriced property market especially in the more urbanized regions. Property prices in Jakarta right now is at unrealistic levels relative towards the average Indonesian income.

With the availability of advanced financial institutions, Indonesians could have invested in sectors that would have been more beneficial towards the overall growth of Indonesia’s economy such as tech and e-commerce. There is a severe lack of such medium right now.

Unfortunately, this is a tricky issue to manage due to the significance of private sector involvement. The Government needs to continue improving Indonesia’s business environment in hopes that the financial industry grows in its variations and level of sophistication.

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