It has been 76 years since Indonesia's independence. It's a gateway that allows us to be equal to other nations. The nation's grand ambition is to become a developed nation by the 100th anniversary of our independence. This status allows Indonesia to play an active role in maintaining world order, as mandated by founding fathers . What must Indonesia do to become a developed nation?

 

 Developed countries

Developed countries are defined differently: the IMF calls them advanced countries , the UNDP calls them developed countries , and the World Bank calls them high-income countries .

Currently, the contribution of developed countries to the global economy varies, rising from 13% (1990) to 17% (2010 – IMF), remaining at 25% (UNDP), and 16% to 26% (World Bank). Developed countries are also defined differently. The common denominator is a country's development, measured by its GDP per capita (>US$12,696 in 2020, up from US$6,000 in 1989), economic, political, and other social stability that indicate a country's strength, and the dominance of the industrial and service sectors in the economy.

China is the leading country in escaping the middle-income trap (MIT). Since reaching a GDP per capita of over US$1,000 in 2001, it had reached US$10,500 by the end of 2020. Malaysia experienced a longer period, from 1977 to 2020 ($10,402). Hong Kong took 14 years (1971–1984) to become a developed nation, similar to South Korea.

Meanwhile, Singapore only needed 12 years (1971-1982) to become one of the world's highest-income countries. Several countries are categorized as MITs, such as Argentina, which had a GDP per capita of US$14,613 (2017), then declined (US$9,912 – 2019; US$8,442 – 2020). Similarly, Brazil and Russia experienced the same. Thailand performed better (US$7,817 – 2019; US$7,189 – 2020) compared to Indonesia (US$4,135 – 2019; US$3,870 – 2020). This condition has lowered Indonesia's status from an upper- to a lower-middle-income country.

 

Economic transformation

In the 2019-2024 National Medium-Term Development Plan (RPJMN), the strategic program of the Advanced Indonesia Cabinet is economic transformation. This is defined as a continuous process (McMillan et al., 2017) to (a) shift workers and other resources from low to high productivity (structural change), (b) increase growth in existing sectors through the use of technology, and (c) encourage potential regions to act as growth engines.

Data from the World Bank and the United Nations Industrial Development Organization (UNIDO) shows that the economies of developed countries were dominated by the services sector (69.76%) from 2016 to 2019, followed by agriculture (16.23%), and industry (only 14.01%). In upper-middle-income countries , services contributed 55.44%, followed by agriculture (24.87%), and industry (19.69%).

This economic structure differs from Indonesia, where services still account for 43.72%, followed by agriculture (36.21%), and industry (20.06%). More than half of Malaysia's economy is in the services sector (52.90%), followed by agriculture (25.44%), and industry (21.65%).

China and South Korea share a similar profile. Services dominate as the largest contributor, but industry is larger than agriculture. The growth of sectors using technology for efficiency is also interesting to observe. UNIDO data shows that more than a quarter of South Korea's manufacturing industry (+US$507 billion) is driven by information technology.

Of course, Samsung and other manufacturers' strong market share in information technology is the reason. For China, although its percentage contribution to information technology hasn't changed significantly, its total output has tripled compared to 2005. Meanwhile, the US's contribution to information technology was 7.41% (2018), with a total output of US$2.61 trillion.

What about Indonesia? The food and beverage industry (19.86%), petrochemicals (12.37%), and automotive (10.43%) are the three main contributors, with a total output of +US$163 billion. Finally, certain regions are being used as new growth centers (Zhou and Hu, 2021).

For China, this began in 1979 with the establishment of four special economic zones (Shenzhen, Zhuhai, Shantou, and Xiamen), primarily aimed at attracting overseas investment. Over the following decades, this expanded, not only to areas with ports directly facing the sea, but also to areas along river estuaries. While in 1995 only Shanghai was considered an upper-middle-income , five regions had achieved high-income by 2015: Beijing, Tianjin, Shanghai, Jiangsu, and Zhejiang.

This is facilitated primarily by integrated development under national programs, particularly the Belt and Road Initiative . What about Indonesia? In 2019, only Jakarta had high-income . Five regions had upper-middle income : Riau, the Riau Islands, East Kalimantan, West Kalimantan, and West Papua. Surprisingly, five regions in Java still had lower-middle income .

 

Recommendation

Indonesia still has 24 years to realize its ambitious goal of becoming a developed nation. If growth were at the average rate of the last 10 years, it would take 64 years for Indonesia to surpass the minimum threshold for a developed nation. This requires a structural economic transformation, increasing the contribution of the services sector to 26% from its current level.

This expansion needs to be accompanied by the development of Indonesian human resources through relevant higher education. Selecting services with high added value and linkage effects is essential. As the middle-income class expands, the need for tourism, world-class higher education, healthcare and related services (including beauty), sports, and the creative economy are some of the sectors that need to be prioritized.

Competing with other countries in industrial sectors that rely on low costs, particularly human resources, is not an ideal option for leaving MIT. Lee (2019) emphasizes the importance of selecting strategic industries with high added value and broad market reach, namely high technology.

Article 84, paragraph 2, point b, of Law No. 11/2020 concerning Job Creation needs to be operationalized through  a roadmap for Indonesia's strategic industries.  The roadmap will provide a national research direction, focusing on areas that researchers should focus on, and which our industry will utilize. Of course, incentives for businesses, such as the acceleration of Government Regulation No. 45/2019 as the basis for the super deduction tax , will encourage the growth and development of strategic industry businesses.

The agricultural sector is also strategic, particularly in relation to food security and inflation. Understandably, developed countries still make significant contributions to this sector. This, of course, involves the use of technology. 33.4 million Indonesians work in this sector, and technology tailored to market needs will provide significant added value and attract younger generations to participate.

The global back-to-nature trend needs to be addressed by promoting non-organic tropical fruits and vegetables. Tapping into the demand for halal meat and food is also promising, with 1.8 billion Muslims and a market value of US$3.2 trillion. Indonesia's large domestic market shouldn't make us mere spectators and consumers of other countries' products.

Learning from Japan, South Korea, and China, Indonesia must capitalize on its large domestic market with a middle-income class to develop services, industry, and high-value-added agricultural products. A solid domestic economic foundation ensures Indonesia's continued economic growth, becoming a developed nation by 2045.