Decoding Indonesia’s Economy: intriguing insights from McKinsey [1]

Ref Mat_Indo Economy_MGI McKinsey Global Institute_MGI_The archipelago economy_Unleashing Indonesia's potential_Sept 2012_1

Facts and figures always speak louder than words, just as a picture tells a thousand words, and magnify the picture further, making the story whole.

By any measure, Indonesia is an anomaly. One with an unfathomable economic potential!!

The world’s largest archipelago, home to the world’s 4th largest population, a nation of such diversity that it defies logic on how it could be under the same flag. After all a Balinese (undeniably the Indonesia’s most famous island), is as different from a Buginese (seafaring ethnic group from Sulawesi… that’s Celebes to those of you, uninformed mortals!), as a Badui (Indonesia’s answer to the Amish, an ethnic tribe in West Java who steadfastly keep their old traditions alive, renowned for shunning modern technology, including electricity!) is from a Batak (gregarious, loud and fun-loving ethnic tribe who are predominantly Christian and love to belt out songs on cue. They inhabit areas around Lake Toba in North Sumatra).

Indonesian cities are justifiably different from one another, Batam, Bagansiapiapi, Bengkulu, Bandung, and Banjarmasin are all distinctively different. Indonesia’s rate of urbanization ranks among the highest in the world, more people than ever before are flocking to the cities in search of jobs, and a better life.

Ref Mat_Indo Economy_MGI McKinsey Global Institute_MGI_The archipelago economy_Unleashing Indonesia's potential_Sept 2012_2A nation rich in natural resources, home to the world’s 2nd largest tropical rainforest after Brazil, Indonesia’s biodiversity – both above ground and under water – is staggering.

Politics and government aside, economists the world over, as well as statisticians, and a slew of other brainacs from the disciplines of sociology, culture, anthropology, have been going through piles of data to unravel and understand what makes Indonesia tick. It’s a lengthy journey indeed. Understanding its intriguing culture is a good starting point – and a challenging one nonetheless.

As for me, whenever I attempt to tell Indonesia’s story to any foreigner, I always stick with my favorite line: “Indonesia is the least known country of her size.”  This statement always helps put it in perspective, and then of course I’d go into my lengthy rhetoric, explaining that Bali is not a country or an exotic surfing haven, but just one of Indonesia’s most famous islands; Java and Sumatra aren’t coffee varietals found at Starbucks, while confirming some interesting trivia, like the infamous Kopi Luwak, that Oprah helped promote, is indeed a civet cat’s shit disguised as coffee beans (the world’s MOST EXPENSIVE, by the way). And the Komodo Lizard is not the last descendant of the dinosaur, but an oversized monitor lizard that has grown to its massive size as the reptile has retained leadership position at the top of the food chain. And the Orang Utan, the furry “man of the forest” (that’s the literal translation from Bahasa Indonesia/Malay language, again for all of you uninformed mortals!) is indeed endemic to Indonesia, with a bigger population than neighboring Malaysia (the only two nations on the planet that have Orang Utans) likes to claim.

And while I won’t go into the mundane details, I’ll let the above stats + figs do the talking. A valuable find, from the brilliant and inquisitive minds at McKinsey Global Institute, who published a report entitled: The archipelago economy: Unleashing Indonesia’s potential (September 2012).

Most international businesses and investors know that modern Indonesia boasts a substantial population and a wealth of natural resources. But far fewer understand how rapidly the nation is growing. Home to the world’s 16th-largest economy, Indonesia is booming thanks largely to a combination of domestic consumption and productivity growth. By 2030, the country could have the world’s 7th-largest economy, overtaking Germany and the United Kingdom. But to meet its ambitious growth targets and attract international investment, it must do more.

Indonesia has an attractive value proposition. Over the past 20 years, labor productivity improvements, largely from specific sectors rather than a general shift out of agriculture, have accounted for more than 60 percent of the country’s economic growth. Productivity and employment have risen in tandem in 35 of the past 51 years. And unlike typical Asian “tiger” economies, Indonesia’s has grown as a result of consumption, not exports and manufacturing. The archipelago nation is also urbanizing rapidly, boosting incomes. By 2030, Indonesia will have added 90 million people to its consuming class—more than any other country except China and India.

Nevertheless, to meet the government’s goal of 7 percent a year growth by 2030, the economy must grow faster. Given current trends, the McKinsey Global Institute estimates that Indonesia has to boost productivity growth to 4.6 percent a year—60 percent higher than it has been during the past decade. Amid rising concern about inequality, the country must also ensure that growth is inclusive and manage the strains that the rapidly expanding consumer classes will place on its infrastructure and resources.

Of course, Indonesia should tackle well-known problems such as excessive bureaucracy and corruption, access to capital, and infrastructure bottlenecks. But in addition it must address its impending skills gap; the country could, for example, develop a private-education market that might quadruple, to $40 billion, by 2030.

If at the same time Indonesia took action in the three key sectors below, it could create a $1.8 trillion private-sector business opportunity by 2030:

  • Consumer services. Indonesia faces a range of challenges to productivity growth—including complex regulation of financial services, poor transportation infrastructure, and barriers to entry for new retail players and expansion limits for existing ones. If Indonesia overcame these problems, consumer spending could rise by 7.7 percent a year, to $1.1 trillion, by 2030.
  • Agriculture and fisheries. Indonesia needs to raise productivity per farmer by 60 percent just to meet domestic demand. If the country can boost yields, reduce postharvest waste, and shift to higher-value crops, it could become a net exporter of agricultural products, supplying more than 130 million tons to the international market. Revenue from these sectors, together with the related upstream and downstream revenues, could increase by 6 percent a year, to $450 billion, by 2030.
  • Energy. Demand not only for energy but also for other key resources, such as materials and water, is likely to increase rapidly through 2030. Indonesia could meet up to 20 percent of its energy needs by turning to unconventional sources, such as coal-bed methane, next-generation biofuels, geothermal power, and biomass. This approach could also help boost resource productivity—for example, improving the country’s energy efficiency could reduce energy demand by as much as 15 percent. By 2030, Indonesia’s energy market could be worth $210 billion.

Inspiration: McKinsey Global Institute Report

About dianhasan

Brand Storyteller, Travel Writer, Speaker, Creative Writer & Thinker - avid observer of randomness in everyday life - Sustainable Business, Eco Matters, Sustainable Urban Issues, Architecture, Heritage Conservation, Innovation & Brand-Strategy, Cross-Cultural Communications, Travel, Tourism & Lifestyle.
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