BUSINESS ECONOMICS

THE ARCHIPELAGO ECONOMY:

UNLEASHING INDONESIA’S POTENTIAL

SYNDICATE 10

Erryn M Paramytha 29115016

Joshua Marvel L G 29115314
Mila Mujaadilah 29115053
Ridho Riadi Akbar 29115193

YP 53 B

SCHOOL OF BUSINESS AND MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2016
 A. EXCUTIVE SUMMARY
Indonesia’s economy has enormous promise, already the 16th-largest economy in the
world, this dynamic archipelago has the potential to be the seventh biggest by 2030. Between
now and 20130, Indonesia will be home to an estimated 90 million additional consumers with
considerable spending power. This growth in Indonesia’s consuming class is stronger than in
any economy of the world apart from China and India, a signal to international businesses
and investor of considerable new opportunities. The archipelago economy is confronted by
three major challenges in the period to 2030.
- Indonesia faces a productivity imperative
- Uneven distribution of growth across the archipelago and rising inequality are
concern
- Ensure that Indonesia does not suffer from infrastructure and resources constraint
as its expanding consuming class delivers a welcome injections of growth.

Indonesia economy, today has performed strongly over the past decade or more and
is more diverse and stable than many observes from beyond its shores realise (exhibit 1)

Exhibit 1. Indonesia Performed Over The Past Decade

GDP growth
standard Share of Inflation rate,
GDP 2011, current Real GDP deviation debt to 2011
price growth, 2000-10 annualized GDP, 2009 % GDP
Rank $trillion % 2000-10 % defiator
1 US 15.1 China 11 Ind 0.86 Russia 8.7 Jpn -2.0
2 China 7.3 India 7 Aus 0.95 Estn 9.0 Aus
3 Japan 5.9 Indonesia 5 Port 1.48 Luxm 12.8 Port
4 Germany 3.6 Russia 4.9 Norw 1.56 Chn 16.5 Norw
5 France 2.8 Slovakia 4.9 Fr 1.59 Austr 24.1 Fr
6 Brazil 2.5 South Korea 4.2 NZ 1.70 Ind 25.1 NZ
7 UK 2.4 Turkey 4.0 Belg 1.74 Cezh 32.0 Belg
8 Italy 2.2 Poland 3.9 Switz 1.82 Norw 36.4 Switz
9 Russia 1.9 Estonia 3.8 Cnd 1.85 Slovk 36.2 Cnd
10 Canada 1.7 Chille 3.7 Inda 1.98 Dmrk 40.8 Inda
11 India 1.7 Brazil 3.6 SKor 2.00 Swd 44.2 SKor
12 Spain 1.5 Africa 3.5 Pld 1.02 Spn 46.4 Pld
13 Australia 1.5 Czech 3.4 China 2.09 Grmn 47.6 China
14 Mexico 1.2 Israel 3.1 Nth 2.10 Plnd 48.1 Nth
15 South Korea 1.1 Australia 3.1 US 2.14 Trk 51.4 US
16 Indonesia 0.8 Slovenia 2.8 SA 2.14 Cnd 53.1 SA
17 Netherlands 0.8 Luxemburg 2.8 Aust 2.14 India 53.7 Aust
18 Turkey 0.8 New 2.6 Itl 2.17 Nth 58.2
zealand
 Government debt as a share of GDP has fallen by 70% over the past decade and is
now lower than 85% of OECD countires. Inflation has decreased from 20% to 8% and is now
comparable with more mature economies such as South Africa and Turkey.

Indonesia economic growth centres almost exclusively on Jakarta; in fact, many other
Indonesian cities are growing more rapidly albeit from a lower base. The fastest growing
urban centres are large and mid-sized middleweight cities with more than two million
inhabitants (excluding Jakarta), which have posted annual average growth of 6.4% since
2002.

THE ECONOMIC AOUTLOOK IS PROMISING, SUPPORTED BY

FAVOURABLE LOCAL AND INTERNATIONAL TRENDS
Indonesia economic growth should benefit from a number powerful positive trends
including the resurgence of asia, continuing urbanization that is boosting the number of
consumers with the power to spend on discretionary items and a young population offering
economy a potential demographic dividend. By 2030, Indonesia could become the seventh
largest economy overtaking Germany and United Kingdom.

- The rise of Asia

- Urbanization
- Growing Working-age population
- An Emerging Digital and Technology-driven Nation

INDONESIA ECONOMY FACES SEVERAL CHALLENGES AND ACTION

IN FOUR AREAS WILL BE CRITICAL TO ADDRESING THEM
- Transform consumer services
The burgeoning consuming class will give rise to large new market, notably in
financial services and various retail services such as food and beverages. In
Indonesia there will be the new wave of consuming class and have a huge
opportunity, but to capture the full economic potential the sector needs to boost its
productivity and ensure that consumer services are widely available across the
Indonesia archipelago.
- Boost productivity in agriculture and fisheries
In agriculture Indonesia must have pursued three approaches-boosting yield,
shifting production into high value corps and reducing post-harvest and value-
 chain waste- then Indonesia could become a large net exporter of agriculture
products supplying more than 130 million tons to the international market.
- Build a resource-smart economy
If Indonesia did not build a resource smart economy, The McKinsey project that
55 million of Indonesia poorest people, accounting for 20% of the total population
could have no access to basic sanitation in 2030 and that 25 million could lack
access to water a decent quality.
Based on the strong demand for natural resources that McKinsey anticipated, it
would advantageous for Indonesia to maximize its energy supply from
unconventional sources such as next-generation biofuels, geothermal power and
biomass and to more productively extract, convert and use natural resources such
as energy, steel and water.
- Invest in skill building
Research by the World Bank Suggest that human capital is a major obstacle to the
development of a vibrant Indonesian manufacturing sector.in order to achieve our
base-case projection between 5 and 6 percent annual GDP growth, McKinsey
estimate that demand for semi-skilled and skilled workers will increase from
today’s level of 55 million to 113 million by 2030, a rise of almost 60 million
workers. Drawing on McKinsey’s global education work, their identified three
measures that could help to close the looming skills gap: raise the standard of
teaching significantly, with emphasis on attracting and developing great teachers,
(2) develop a more demand-driven curriculum and (3) create new, flexible
education pathways.

CONCERTED ACTION IN THESE FOUR AREAS COULD OFFER

BUSINESSES A $1.8 TRILLION OPPORTUNITY BY 2030
- Consumer services
- Agriculture and fisheries
- Resources
- Human capital
To capture this opportunities, businesses will need to rethink their geographical
footprint in Indonesia given the shift toward middleweight cities and the rise of new,
economically important regional centres. Businesses will also need to consider how they can
collaborate most effectively with local governments to tackle some of the barriers impeding
regional growth today and how they can best develop local talent, particularly in the ranks of
middle management
1. Five myth about Indonesia’s recent growth
a. The Indonesian economy is relatively unstable
The reality is Indonesia’s economy has had the most consistent growth rate among
any OECD or BRICS country over the past ten years. During these years, Indonesia
has experienced the lest volatility in economic growth of any organization for
economic co-operation and development (OECD) plus South Africa economy in the
world. From 200 to 2010 Indonesia annual GDP growth ranged between 4 and 6
percent. Indonesia recent growth has been supported by high demand for its export
commodities combined with a strong domestic market.
b. Economic growth centers almost exclusively on Jakarta
The reality is large and midsize middleweight cities are growing faster than Jakarta.
The economies of mid-sized and large middleweights-with between two million and
ten million inhabitants-have been growing at a faster pace than Jakarta. These cities
include Bandung, Bekasi, Bogor, Depok and Tangerang are often treated as part of the
Jakarta urban agglomeration. The output of these cities is expandinf mainly thanks to
their high population growth.
c. Indonesia follows the Asian tigers’ export-driven growth model
The reality is non-commodity exports have a much lower share of GDP in Indonesia
than in Malaysia or Thailand. In indonesia, export generate 35% of GDP, a relatively
low proportion with non-commodity exports accounting for only 11 percent. Indeed,
Indonesia’s total exports as a share of GDP are roughly half those of Malaysia in 1989
when the average income there was similar for indonesia’s today. The share of non-
commodity exports in indonesia’s GDP is about one-third that of Thailand or
Malaysia today.
d. Resources are the economy’s main driver
The reality is The resource sector’s share of the economy has fallen over the past
decade. Indonesia resources sector is substantial and the worlds largest producer and
exporter of palm oil, the second largest exporter of coal and the second largest
reserves of nickel and bauxite, respectively, according to government data. But
Indonesia’s economy is becoming more advanced and its large endowments of natural
resources, including crude oil and natural gas, no longer drive the country’s
economics development.
e. Growth has come largely from an expanding workforce
The reality is Increasing productivity has been the main driver of GDP growth.
Contrary to conventional wisdom, improving productivity, rather than a higher
number of workers has been the most important driver of indonesia recent growth.
Labour productivity has grown at a rate almost 3% a year over the past decade, among
the highest rates observed in ASEAN countries. One night assume that indonesia;s
relatively strong productivity performance results from its evolving mix of sectors,
especially the declining weight of agriculture. The majority of indonesia’s
productivity gain has come not from a shift of workers from lower-productivity
agriculture into more productivity sectors, but from productivity improvements within
sectors. The three sectors that have made the biggest contributions to overall
productivity improvements are whole sale and retail trade, transport equipment and
apparatus manufacturing and transport and telecommunications.

2. Indonesia Growth Could Benefit from Powerful Trends

a. Rise of Asia
Asia's share of global GDP is on the rise. The global consuming class will
increase with 1.8 people over the next 15 years (75% in Asia) fuelling demand for
Indonesian resources and commodities.
b. Urbanization
Indonesia’s urbanization could reach 71% in 2030 from 53% today. Economic
activities in urban areas will increase to a 86% share of GDP.
c. Working Age Population
Indonesia’s young and growing population could reach 280 million people by
2030, which can add extra 2.4 percentage points per annum to GDP growth.
d. Technology
Over the next two decades, Indonesia will become a truly mobile and digital
nation and can benefit from green technologies.
Asia was the majority of the global economy until the Industrial Revolution – and its
economic renaissance is well under way it can see from the graphic 1 below
.

Graphic 1. Share Of The Total GDP

Indonesia is rapidly urbanizing driven by middleweight cities (Graphic 2). McKinsey
use the definition of urban and rural area from Indonesia’s Central Bureau of Statistics.
Model is based on more than 400 cities and districts, covering 90 percent of GDP. GDP is
allocated to urban and rural areas based on population share, with a 28 percent premium per
capita for urban areas based on historic income differences.

Graphic 2. GDP Shares In Indonesia