Achieving the 2045 Goals
In his inaugural address at the People’s Consultative Assembly (MPR) on 20 Oct. 2019, President Jokowi laid out the economic development goals for 2045.
The President has set three achievement indicators: 1) per capita income of Rp 320 million per year; 2) nominal gross domestic product (GDP) of US$7 trillion, equivalent to Rp 98,000 trillion (assuming an exchange rate baseline of Rp 14,000 per US dollar; and 3) near-zero poverty rate.
To achieve these goals, the President is to start delivering on five pillars in 2020: 1) develop the quality of human resources (HR); 2) continue infrastructure development; 3) trim regulations and draft overarching laws, i.e. the employment law and the small and medium enterprises law (UMKM); 4) simplify bureaucracy; and 5) economic transformation.
This is where the creative skills of policymakers are needed, to explore policy ideas that, as Jokowi said, are “outside the box”.
The year 2045 is almost 25 years away. If we inch forward from our latest performance in 2018 – for which Statistics Indonesia (BPS) has recorded a nominal income per capita (GDP per capita) per year of Rp 56 million, a nominal GDP of Rp 14,837.4 trillion and a poverty level of 9.66 percent – the 2045 goals can only be achieved by growing fourfold; exponential growth, not linear growth. This is where the creative skills of policymakers are needed, to explore policy ideas that, as Jokowi said, are “outside the box”.
‘Rule of 70’
The “rule of 70” is a calculation for economic growth. It is used to calculate how long it will take to double GDP per capita according to average growth. The average growth of the nominal GDP in the last 10 years (2009-2018) is 10 percent. It will take seven years to double the nominal GDP per capita to Rp 112 million, or 70 divided by 10. It will take another seven years to double this to Rp 224 million, and another seven years to double the nominal GDP per capita a third time to Rp 448 million. The GDP per capita could grow beyond this in the 21 years since 2018, or could take less than 21 years.
Of course, the calculation will produce a different result if we use real GDP growth. In economics, the difference between nominal and real calculations depends on prices. Nominally, price is determined according to time, so prices shift continuously. An increase in nominal GDP could be due to an increase in production volume and/or prices. Meanwhile, the real calculation uses the prices of a certain year – the base year – so it only changes in the volume or value of the output.
In 2018, the real GDP per capita was Rp 39.4 million per year, and the real economic growth was 5.4 percent, so doubling the real GDP per capita to Rp 78.8 million would take 13 years. Likewise, for the next doubling cyle to Rp 157.4 million would take 26 years. The real calculation indicates that it will be difficult to reach Rp 320 million in the next 25 years.
Of course, the rule of 70 contains many weaknesses, including that it combines constant (linear) growth with unchanging factors (ceteris paribus). In fact, many factors will change over the next 25 years, including prices, people\'s behavior/tastes and the work methods and values that the productive generation will adopt in the next 25 years. In the previous decade, the manufacturing sector played an important role by contributing more than 25 percent to GDP. However, this sector has now slowed to below 20 percent.
Meanwhile, the service sector has grown by eroding the role of manufacturing. It could be that, in the next 25 years, social values will change in line with increasing concerns about the sustainability of a healthy and clean environment, and with prioritizing economic growth that provides quality of life, not economic growth by numbers. The happiness subcategory and other subcategories in the quality of life index are likely to become important considerations. The linear assumption of economic growth does not factor in potential changes.
Efforts to boost economic growth is still needed, namely to accelerate growth to drive the GDP per capita higher. The National Medium-Term Development Plan (RPJMN) 2020-2024 sets the economic growth target at a minimum of 5.3 percent and a maximum of 6.5 percent. Following the economic transformation of 1997-1998, the Indonesian economy achieved its highest growth rate of 6.38 percent in 2010 due to rising commodity prices. The commodities boom is over. Commodity prices are relatively low at present, so the Indonesian economy is slowing down.
In addition, global uncertainties will remain very high over the next five years, including the slowing trend of the Chinese economy, Trump\'s trade policy (if Trump is reelected for 2020-2024) and other potential uncertainties that could slow the global economic cycle. The dynamic global economy is a necessity that must be accepted, but this does not mean that it cannot be anticipated. Bank Indonesia’s expansive monetary and fiscal policies have reined in the slowdown by increasing aggregate demand, but not enough to accelerate economic growth. Its supply-side policies are expected to create long-term sustainable economic acceleration and foundation.
Commodity prices are relatively low at present, so the Indonesian economy is slowing down.
Key to long-term productivity
In the Solow economic growth model, capital-to-labor is an indicator of an economy that is reaching a steady state. The model also includes technological capital per worker. The most important production factor in driving economic growth is human resources. In basic production, output is created by two inputs, capital and labor. It is labor that causes the multiplier effect.
Starting from workers’ income, this provides a source of consumption and an incentive for producers to produce, and then the economy will move. Employment must be a focus in supply-side policies.
However, technology-based work methods threaten to disrupt the workforce. To prevent workers from becoming "an enemy" of technology, they must be equipped with technological skills, so education is a key factor.
BPS data shows that the total workforce is 136.18 million people. Of these, 129.36 million people are employed, and 76.12 percent of employed people have a junior high school education. As a result, many workers are dependent on the labor-intensive sectors that are currently being heavily disrupted by technology. Therefore, human resources need to have completed higher education levels.
President Jokowi\'s policy to develop quality human resources with education above senior high school (SMA) gives hope. This policy should be sustained by the next administration for developing high-productivity human resources. HR development also needs to be adjusted according to the road map for Indonesia\'s economic transformation goals. Improving the quality of human resources will also reduce the poverty rate. The current cash transfer policy must accompany the development of HR quality as a social cushion. Education helps change thinking patterns so that the term of the decline in poverty is not necessarily meant "hereditary”, which means sustainable poverty.
Read more : Maintaining Purchasing Power
The next 25 years is not a short time for developing the economy. However, it is also not a long time to start laying the foundation for reaching a higher economic stage. There is still enough time if efforts are made now, but of course, it will require very hard work. The aim to enter the top five world economies and escape the middle-income trap is the vision of Indonesia\'s long-term economic development from 2020, by turning the population into a quality economic asset.
LANA SOELISTIANINGSIH, Lecturer, University of Indonesia Economics and Business School.