Indonesia has come a long way since the despair of the 1998 Asian financial that left the country’s economy in shambles. But despite how much progress it’s made and its vast wealth of natural resources, many economists believe Indonesia is still punching well below its weight for numerous reasons, including a lack of infrastructure and an overabundance of bureaucracy.
However, there is reason to be optimistic about the future. A new report by one of the globe’s largest professional services firms, PricewaterhouseCooper (PwC), predicts Indonesia will boast the world’s fourth most powerful economy by 2050.
The PwC report, titled ‘The Long View — How Will the Global Economic Order Change by 2050’, outlines how Indonesia’s economy will grow based on a rigorous modeling approach, focusing on fundamental drivers of growth such as demographics and productivity.
Countries are ranked by their gross domestic product (GDP) at purchasing power parity (PPP), which “adjusts for price level differences across countries and provides a better measure of the volume of goods and services produced in an economy.”
According to the report, Indonesia’s projected rise from its current position as the eighth largest economy in the world to the fourth largest, behind only China, India and the United States, represents a trend towards emerging economies coming to dominate the 21st century.
Comparing the group of advanced economies (G7) with the group of emerging market economies (E7), the report projects that by 2050, six of the top seven largest economies in the world will be E7 nations.
PwC says emerging markets will be “the growth engine of the global economy”, with E7 economies expected to increase their share of world GDP from around 35% to almost 50%.
While Indonesia’s economy could be the world’s fourth largest by 2050, the gap between the third and fourth largest economies may be significant.
The projected third largest economy, the United States, is expected to be 325% larger than Indonesia’s economy in 2050.
PwC also expects China’s aging population and labor cost increases will lead to global multinationals shifting some of their offshore jobs from China to other countries, including Indonesia.
The report assumes Indonesia will have a slower rate of technological progress compared to G7 economies in the short term, but will accelerate its catch-up in the long term as it strengthens its institutional frameworks.
But in order for Indonesia to realize their growth potential, PwC urges the government to implement structural reforms “to improve macroeconomic stability, diversify [the economy] away from undue reliance on natural resources…and develop more effective political and legal institutions.”
President Jokowi has acknowledged in the past that “now is the era of competition” and has accelerated infrastructure reform and moved towards a more open economy.
But Indonesia still has an over-dependence on resource exports and Jokowi has focused more on political maneuvering recently, rather than on grand economic reform.
Despite this, PwC’s report paints a promising picture of Indonesia’s potential, giving future governments a blueprint to develop the nation into an economic powerhouse in the decades to come.
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