In his inaugural address to the MPR on October 20, 2019, President Jokowi conveyed the ideals of Indonesia’s economic development in 2045.
The President set three indicators for achievement: 1) income per capita reaches Rp 320 million per year; 2) Nominal Gross Domestic Product (GDP) reaches 7 trillion US dollars or equivalent to Rp 98,000 trillion (with an exchange rate baseline of Rp 14,000 / US dollar; 3) the poverty rate is close to zero.
To achieve these goals, the President began by delivering five pillars in 2020, namely: 1) the development of quality human resources (HR); 2) continuing infrastructure development; 3) trimming regulations, and preparing large laws (Laws), namely the Employment Cipta Karya and UMKM; 4) simplification of bureaucracy; and 5) economic transformation.
2045, another 25 years. If we move from the latest performance of economic performance in 2018, the Central Statistics Agency (BPS) data records nominal per capita income (GDP per capita) of Rp. 56 million per year, with a nominal GDP of Rp. 14,837.4 trillion, and poverty rate 9.66 percent.
With this database, the ideals of 2045 can only be achieved with quadratic or even exponential growth, not linear growth. This is where the creativity ability of policy makers is needed to be able to explore policy ideas that, as Jokowi said, ‘out of the box.’
“Rule of 70”
In the theory of economic growth, there is the term rule of 70. This rule of 70 is used to calculate how long GDP per capita can be doubled on the basis of average economic growth. Taking the average nominal GDP growth in the last 10 years from 2009 to 2018 there was a growth of 10 percent.
To make nominal per capita GDP double or reach Rp. 112 million, it takes seven years that is 70 divided by 10, and then to make the nominal per capita GDP to Rp 224 million takes seven more years, and for seven years in the third cycle a nominal per capita GDP of Rp. 448 million was obtained. The amount of GDP per capita in the next 21 years from 2018 can be above this goal, and even shorter time is needed, which is 21 years.
Of course the above calculation will be different if we use real GDP growth. In economics, the difference between nominal and real calculations lies in the treatment of prices. Nominally, prices are determined according to time, so prices move continuously.
An increase in nominal GDP could be due to an increase in production volume or / and rising prices. While the real calculation is to set prices in a certain year called the base year, so that the calculation in real terms only see changes in terms of volume or value of its output.
Using real calculations, GDP per capita in 2018 was Rp 39.4 million per year, and real economic growth in the same period was 5.4 percent, then to double GDP per capita to Rp 78.8 million would take 13 years . Likewise for the next cycle to Rp 157.4 million, it takes 26 years. Using real calculations, it seems difficult to reach Rp 320 million for the next 25 years.
This Rule of 70 certainly contains many weaknesses including constant growth (linear) which occurs plus factors that do not change (ceteris paribus). Even though many factors have changed in the next 25 years including higher prices, people’s behavior / tastes, work methods, and values that will be adopted by the productive generation of the next 25 years.
In the decade before this, the manufacturing industry played an important role contributing to GDP of more than 25 percent, but now this sector is slowing to under 20 percent.
While the service sector is growing eroded the role of manufacturing. It may be that in the next 25 years there will be changes in community values that are increasingly concerned with the sustainability of a healthy and clean environment, and prioritizing economic growth that can provide quality of life, not prioritizing economic growth in terms of ‘numbers’.
Happiness index and other quality of life index are likely to be important indicators to consider. The linear assumption of economic growth does not factor in the potential for future changes.
The need to boost economic growth is still needed at this time, namely accelerated economic growth that can lift GDP per capita higher. In the National Medium-Term Development Plan (RPJMN) 2020-2024 the economic growth target is set to reach as low as 5.3 percent to as high as 6.5 percent.
Not to mention the global uncertainty that is still very high in the next five years, including the Chinese economy which could be still in a slowing trend, Trump’s trade policy if Trump is re-elected as US president in the 2020-2024 period, and other potential uncertainties that make the global economic cycle still slowing down. The dynamism of the global economy is a necessity that must be accepted but that does not mean it cannot be anticipated.
Expansive government and monetary fiscal policies of Bank Indonesia tend to contain the slowdown by creating an increase in the aggregate demand side but not enough to accelerate economic growth. Policies on the supply side policies are believed to be able to create long-term sustainable economic acceleration and foundation.
It may be that in the next 25 years there will be changes in community values that are increasingly concerned with the sustainability of a healthy and clean environment, and prioritizing economic growth that can provide quality of life, not prioritizing economic growth in terms of ‘numbers’. Happiness index and other quality of life index are likely to be important indicators to consider.
Long-term key economic productivity
In the Solow growth theory, capital per labor (capital per labor) becomes an indicator to measure an economy that can reach a steady state. The theory of growth evolved to the point where the technology-capital per worker. The most important production factor in driving economic growth is human resources (HR). In a simple factor of production, output is formed by two inputs namely capital and labor. It is the labor factor that can create the economic multiplier effect.
Starting from the income received by workers, continues as a source of consumption, and an incentive to produce for producers. Next the economy will spin. Among the policies that can be carried out on the supply side is a focus on aspects of employment.
But technology-based work methods pose a threat of disruption to the workforce. So that workers do not become ‘rivals’ in technology, workers need to be equipped with the expertise to use technology so that education is a key factor.
BPS data shows the total workforce of 136.18 million people. Of that number, 129.36 million people worked, and 76.12 percent of those employed had a junior high school education. As a result, many workers rely on labor-intensive sectors that are currently heavily technology disrupted. Therefore human resources need to graduate with higher education.
The most important production factor in driving economic growth is human resources (HR). In a simple factor of production, output is formed by two inputs namely capital and labor. It is the labor factor that can create the economic multiplier effect.
President Jokowi’s policy of building quality human resources with education above senior high schools (SMA) gives hope of improving the quality of human resources. This foundation should be sustainable in the next government as a policy to develop high-productivity human resources. This HR development also needs to be adjusted to the road map towards the transformation of Indonesia’s economy to be achieved.
Improving the quality of human resources will make the poverty rate will also go down. The current cash transfer policy as a social cushion is needed to accompany the process of improving the quality of human resources. Education helps change the mindset, so that the term poverty does not mean ‘hereditary’ which means sustainable poverty.
The next 25 years is not a short year for economic development. But it is also not a long year to start laying the foundation for reaching higher economic stages. There is still enough time to do from now on but of course with very super hard work.
The vision to penetrate the top five of the world and out of the middle income trap becomes the vision of Indonesia’s long-term economic development starting from 2020 by making the population a quality economic asset.
Improving the quality of human resources will make the poverty rate will also go down. The current cash transfer policy as a social cushion is needed to accompany the process of improving the quality of human resources.
Lana Soelistianingsih, Lecturer in the Faculty of Economics and Business, Universitas Indonesia