McKinsey: Indonesia could reach high-income status by boosting its productivity
Indonesia has the potential to become a high-income nation by 2045, but this requires a significant acceleration in productivity growth and the expansion of larger companies.
Achieving this goal would necessitate annual GDP growth of about 5.4%, with productivity playing a much larger role than it has in the past. That is according to a detailed new report from McKinsey & Company, which explores the ways in which Indonesia could become high-income.
A country is considered ‘high-income’ – a metric defined by the World Bank – when it has a gross national income per capita of $14,005 or more. Countries that have joined the ranks of the high-income include the US, Australia, Russia, and most of Western Europe.
McKinsey’s report highlights that Indonesia’s economy is currently dominated by small, informal businesses, many of which operate in the ‘grey market’. To reach high-income status, the country needs a radical increase in investment, tripling the number of medium-sized and large companies to boost capital per worker and wages.
Drawing comparisons with other nations that have successfully made this transition suggests that Indonesia needs half of its non-agricultural workforce to be employed in companies with over 50 employees, a substantial increase from the current quarter.
While all sectors would need to contribute to this growth, services are projected to contribute the largest share, around 70%. Indonesia can expand its services sector by further leveraging its tourist attractions, modernizing operations, and developing skills.
The manufacturing sector could also be significantly boosted by capitalizing on global supply chain shifts and growing domestic demand. If Indonesia manages to make cities more sustainable and livable, it could facilitate the movement of 40 million more people into formal, productive urban jobs.
Indonesia has a huge population, and its large cities could become more productive if managed better. Urban challenges are significant. Jakarta, for instance, is so severely overcrowded that the government has opted to build an entirely new capital city on a different island.
Roadmap to high-income
The report identifies five key forms of capital that need to be unleashed in a synchronized way: financial, human, institutional, infrastructural, and entrepreneurial.
By transforming its ability to attract, grow, and deploy these forms of capital, Indonesia can increase productivity, scale businesses, foster new enterprises, and enable companies to pay higher wages, ultimately paving the way to a high-income economy.
“For Indonesia to meet an ambition of becoming a high-income economy by 2045, it would need to create the right conditions for productivity growth and to enable larger companies to thrive,” notes the report.
“Other economies have trodden this path to high-income status from comparable levels of per capita GDP as Indonesia today. For Indonesia to match their trajectory would require it to triple the number of medium-size and large companies and, by doing so, increase capital stock per worker in a process of rapid capital deepening. Pulling this off would need the full range of productivity enablers to be in place.”
