Waffaa K

This Deutsche Bank comparison is one of those tables that looks simple but actually tells a fairly uncomfortable story about Indonesia, because the country appears to possess several of the ingredients that should make it one of Asia’s major industrial winners, including relatively low government debt, very high gross capital formation and, most strikingly, the cheapest electricity among the 13 markets compared, yet somehow those advantages have not translated into technological sophistication, economic complexity, high-tech exports, talent competitiveness or broad competitiveness, where Indonesia sits close to the bottom of the table. That contradiction is probably the most important takeaway. Indonesia ranks #1 for electricity prices, #3 for gross capital formation and #4 for government debt, which on paper is an extremely attractive combination for an emerging industrial economy, because cheap energy lowers the cost of running factories, high investment should continuously expand productive capacity, and relatively low sovereign leverage should provide room for infrastructure and human-capital investment, yet Indonesia ranks #13 in high-tech exports, #13 in economic complexity, #13 in broad competitiveness, #12 in business infrastructure and #12 in global talent competitiveness, which tells us that the problem is not simply a lack of money, electricity or investment, but rather our inability to convert those inputs into sufficiently sophisticated productive output. That distinction matters enormously. Countries do not become rich simply because they build factories, roads, smelters or power plants; they become rich when those investments create increasingly complex capabilities that allow workers and companies to move from low-value activities into higher-value products, technologies and services, because ultimately productivity growth comes from producing things that fewer countries are capable of producing, with greater intellectual property, engineering content, process know-how and value added embedded inside them. And this is where Indonesia still looks weak. Indonesia ranks seventh in manufacturing value added as a share of GDP, which is not disastrous, but compare that with Taiwan at #1, Korea at #2, China at #3 and Vietnam at #4, and then look one row below at high-tech exports, where Taiwan ranks #1, Korea #2, Singapore #3, the Philippines #4, Vietnam #5 and Indonesia dead last at #13, and the message becomes fairly obvious: Indonesia has manufacturing, but not enough sophisticated manufacturing. This distinction is extremely important because manufacturing itself is not necessarily synonymous with industrial upgrading. A country can increase manufacturing value added by processing commodities, refining metals, producing cement, basic chemicals, food, textiles or relatively simple assembled goods, and all of that contributes to industrial activity and GDP, but the economic spillovers are very different from producing semiconductors, precision components, advanced electronics, industrial machinery, medical devices, aerospace equipment or complex chemicals, because the latter activities require deeper engineering capabilities, stronger supplier ecosystems, higher-skilled labor and much greater accumulation of intellectual capital. This is also why I find Indonesia's #13 ranking in economic complexity perhaps the most worrying number in the entire table. Economic complexity is ultimately a proxy for the diversity and sophistication of productive knowledge embedded inside an economy, so being at the bottom suggests that despite being one of the largest economies in Asia, Indonesia's productive structure remains relatively simple compared with its peers, and this matters because sophisticated economies tend to possess many interlocking capabilities that allow them to continuously move into adjacent high-value industries, whereas simpler economies remain much more dependent on commodities, basic manufacturing and domestic consumption. Look at Japan. Japan ranks only #8 in manufacturing value added and has expensive electricity at #11, government debt at #13 and gross capital formation only #6, none of which looks particularly exciting if you looked at those variables in isolation, but Japan ranks #1 in economic complexity, because decades of accumulated engineering capability, industrial know-how, supplier relationships, precision manufacturing and technological specialization allow the economy to produce products that are extraordinarily difficult to replicate. Now look at Indonesia. We have the cheapest electricity in the table. We have one of the highest investment rates. We have relatively low government debt. And yet we rank last in economic complexity. That is not a capital problem. That is a capital-productivity problem. It tells me that Indonesia is investing a lot, but the quality, allocation and productivity of that investment remain questionable. Gross capital formation tells us how much of the economy is being invested, but it does not tell us whether the money is being invested intelligently, whether a new Rp100 trillion project creates a globally competitive industrial ecosystem or simply adds another low-return physical asset, whether infrastructure reduces logistics costs meaningfully, whether factories generate technology transfer, whether foreign investment creates domestic suppliers, or whether workers accumulate capabilities that eventually allow Indonesian companies to move independently into more sophisticated products. This is exactly the same concept investors use when comparing corporate capex with ROIC. A company that spends 30% of revenue on capex is not automatically better than one that spends 10%. The question is what return that capex earns. Countries are no different. Indonesia can have extremely high gross capital formation and still achieve mediocre productivity growth if the marginal return on that investment is poor, if too much capital flows into low-productivity projects, if infrastructure is badly selected, if education quality remains weak, if regulation suppresses competition, or if the domestic value chain never develops beyond the initial investment. In other words, investment is an input; productivity is the output. And the table suggests Indonesia is very good at generating inputs but much weaker at converting them into outputs. The infrastructure and talent numbers explain part of the gap. Despite having the cheapest electricity, Indonesia ranks #12 in business infrastructure, ahead of only the Philippines, while Singapore ranks #2, China #3, Taiwan #4 and Korea #5, which tells us why obsessing about one input cost such as electricity can be misleading, because a manufacturer does not make its investment decision based only on the tariff per kilowatt-hour, but on the entire ecosystem surrounding production, including port efficiency, roads, logistics, industrial estates, customs, digital infrastructure, water supply, supplier availability, reliability of electricity, permitting, contract enforcement and the ability to move inputs and finished goods predictably across the country. Cheap electricity becomes much less valuable if everything surrounding the electricity is expensive. This is why competitiveness needs to be thought about as a system, not as a collection of isolated subsidies. The talent comparison is even more uncomfortable because Indonesia ranks #12 in global talent competitiveness, while Singapore is #1, Taiwan #2, the US #3, Europe #4, Japan #5 and Korea #6, and I think this is where the long-term bottleneck becomes much more serious, because factories can be built in three years but human capital takes decades to compound. You can build another 10GW of electricity. You can construct another industrial park. You can subsidize another EV factory. You can provide another tax holiday. But you cannot suddenly manufacture tens of thousands of world-class engineers, technicians, researchers, semiconductor specialists, chemists, software developers and industrial managers overnight. This is why I continue to think that Southeast Asia's development debate puts too much emphasis on physical infrastructure and not enough on human infrastructure, because physical capital without sufficiently capable human capital eventually runs into diminishing returns. Taiwan is perhaps the clearest counterexample. Taiwan ranks only #10 in surplus power capacity and #10 in electricity pricing, meaning it is not winning because it possesses extraordinarily cheap or abundant energy, yet it ranks #1 in manufacturing value added, #1 in high-tech exports, #1 in current account strength, #2 in talent competitiveness, #2 in broad competitiveness and #2 in economic complexity. That is extraordinary. Taiwan essentially demonstrates that the highest-quality industrial development comes not from having the cheapest input costs but from accumulating technological capabilities that allow companies to generate such enormous value added that they can tolerate higher input costs. TSMC does not dominate global semiconductor manufacturing because Taiwan has the world's cheapest electricity. It dominates because decades of engineering capability, supplier networks, process technology, customer trust, capital discipline and institutional knowledge created an industrial ecosystem that is extraordinarily difficult to replicate. That is the moat. Korea tells a similar story, ranking #2 in manufacturing value added, #2 in high-tech exports and #3 in economic complexity. China ranks #3 in manufacturing, #1 in gross capital formation, #1 in surplus capacity, #3 in business infrastructure and #4 in broad competitiveness, which explains why Chinese industrial policy has been so powerful, because capital expenditure was not deployed in isolation but alongside enormous infrastructure, increasingly sophisticated supply chains, technical education and intense domestic competition. Indonesia often tries to copy the most visible part of China's model, which is build more, while paying much less attention to the institutional ecosystem that made the building productive. This is why down streaming is directionally correct but should never be treated as the end objective. Turning nickel ore into nickel products is better than exporting raw ore. But turning nickel into battery materials is better than basic processing. Producing battery cells is better still. Designing battery chemistry, manufacturing equipment, power electronics and battery-management systems creates even more value. Owning intellectual property creates more again. And eventually producing globally competitive products under Indonesian brands would represent another level entirely. The objective should therefore not be downstreaming for the sake of downstreaming; it should be climbing continuously up the complexity ladder. Otherwise Indonesia risks becoming an enormous processing platform where electricity, land, minerals and labor are Indonesian while much of the highest-value technology, equipment, intellectual property and eventually profits remain foreign. Vietnam is particularly interesting in this table because it shows what another Southeast Asian country has managed to achieve through a different model. Vietnam ranks #4 in manufacturing value added, #5 in high-tech exports, #3 in current-account strength and #2 in electricity pricing, which is remarkable for a country with substantially lower GDP per capita than many peers, although its economic complexity remains weak at #12 and regulatory quality sits at #13, meaning Vietnam still has significant institutional weaknesses of its own. But the important point is that Vietnam has become deeply embedded in global electronics and manufacturing supply chains, and that integration itself creates learning effects, supplier development and capability accumulation that can eventually raise complexity. Indonesia's challenge is different because the domestic market is enormous. That is an advantage, but it can also become a trap. A large domestic market allows companies to become very large without ever becoming globally competitive, because businesses can earn attractive returns selling into 280 million consumers while facing limited pressure to export, innovate or compete internationally, and eventually the size of the domestic economy masks weaknesses that would become obvious much earlier in a smaller country. Singapore has no such luxury. Taiwan has no such luxury. Korea historically had no such luxury. They had to compete globally. Indonesia can survive domestically. And that can reduce the urgency of reform. This is also why the #13 broad competitiveness ranking should worry policymakers more than perhaps any individual macroeconomic number, because Indonesia can continue growing at 5% for a long time simply from demographics, urbanization, commodity resources and domestic consumption, while simultaneously failing to close the productivity gap with more sophisticated economies. Five percent growth sounds good until you compare it with what China achieved during its convergence period. The difference between growing at 5% and 8% over twenty years is enormous. At 5%, an economy roughly triples. At 8%, it grows nearly fivefold. Compounding eventually overwhelms everything. The current-account ranking at #10 also shows another structural issue, because despite being a major commodity exporter Indonesia still sits relatively weakly compared with Taiwan, Singapore, Vietnam, Korea, Japan and China, which reflects how much of our domestic demand and capital formation continues to require imported machinery, technology, chemicals, electronics and other sophisticated goods. Again, this is not necessarily bad during industrialization. Countries often import capital goods while building capacity. The question is whether today's imports create tomorrow's export capabilities. If they do, the current account eventually strengthens because domestic firms learn to produce increasingly complex products themselves. If they do not, the economy remains dependent on commodity export receipts to finance imports of sophisticated manufactured goods. That is precisely why complexity matters. There are also things Indonesia genuinely does well, and I would not ignore them. Government debt ranks #4, which gives Indonesia considerably greater fiscal flexibility than many advanced economies. Electricity costs appear extremely competitive. Capital formation is already very high. Manufacturing remains a meaningful part of the economy. The domestic market is enormous. Natural resources provide a unique foundation for batteries, metals, energy and downstream industrial development. In other words, Indonesia does not lack opportunity. If anything, the frustrating part is how strong the starting hand actually is. This is not a country trying to industrialize without energy, commodities, capital or domestic demand. We have almost everything. What is missing is the ability to connect those advantages together into a high-productivity system. And this is why I think Indonesia's development priority should increasingly shift from how much we invest toward how productively we invest. From kilometers of roads toward logistics costs. From megawatts of power plants toward industrial productivity. From number of schools toward learning outcomes. From number of university graduates toward technical capability. From headline FDI toward domestic value added. From downstream investment value toward technology transfer. From number of factories toward export complexity. From GDP growth toward productivity growth. From protecting incumbents toward increasing competition. Because ultimately the most dangerous thing for Indonesia would be to confuse activity with progress. A Rp100 trillion investment announcement is activity. A new industrial estate is activity. A new smelter is activity. A new toll road is activity. Progress happens only when those investments allow Indonesian workers and companies to produce more value per hour, develop capabilities they previously did not possess and compete successfully against the rest of the world. That is the real development scoreboard. And the Deutsche Bank table, despite all the limitations of compressing different indicators and methodologies into simple ordinal rankings, sends a fairly consistent message: Indonesia has unusually strong physical and financial inputs but unusually weak conversion into technological and competitive outputs. That is simultaneously bad news and good news. The bad news is obvious: we are still far behind Taiwan, Korea, Singapore and increasingly parts of the regional manufacturing ecosystem in the capabilities that matter for long-term productivity. The good news is that Indonesia's problem is not an absence of resources. We already have cheap electricity. We already invest heavily. We already have manageable sovereign debt. We already possess one of the world's largest domestic markets. So the next stage does not require discovering some magical new economic resource. It requires improving institutions, human capital, competition, infrastructure quality and capital allocation so that resources we already possess generate much higher returns. Indonesia does not need more capital for the sake of capital. Indonesia needs a higher ROIC on the country itself. That, to me, is what this entire table is really saying.