Yorga Permana

One of Indonesia's biggest long-term economic challenges is not simply generating more growth, but improving the quality of that growth. The World Bank's analysis highlights a structural problem that is often overlooked: Indonesia has become an upper middle-income country while retaining one of the region's most informal labor markets. Fewer than one in five workers are employed in the formal sector according to internationally comparable measures, far below what is typical for countries at Indonesia's income level. This matters because informal jobs tend to be less productive, pay lower wages, offer limited opportunities for skills development and innovation, and provide little or no access to unemployment insurance, paid leave or retirement benefits. A labor force dominated by informal employment inevitably limits productivity growth, and the numbers already reflect this. Output per worker has reportedly fallen from US$7,530 in 2015 to US$5,336 in 2023, an alarming reversal for an economy aspiring to become a high-income nation by 2045. The problem extends well beyond the labor market. A highly informal economy naturally produces a narrow tax base because businesses and workers operating outside the formal system contribute less to government revenue. Indonesia's tax-to-GDP ratio has declined from around 17% in 1980 to just above 10% today, one of the lowest among major emerging economies despite decades of economic growth. This leaves the government with fewer resources to invest in infrastructure, education, healthcare and social protection, while simultaneously making it more difficult to provide the very benefits that encourage workers and firms to formalize in the first place. It becomes a self-reinforcing cycle where weak social protection discourages participation, which in turn weakens fiscal capacity even further. This also helps explain why Indonesia can simultaneously attract robust foreign direct investment while domestic consumption, wage growth and household purchasing power remain under pressure. Investment builds factories, smelters and data centers, but unless those projects generate large numbers of productive formal jobs, the benefits remain concentrated and do not fully translate into stronger household incomes or a broader expansion of the middle class. The government's Golden Indonesia 2045 vision ultimately depends less on attracting additional capital and more on dramatically improving labor productivity and formal job creation. Indonesia's working-age population is expected to expand by more than 15 million people over the coming years. If current trends persist, only around one in five of those new workers is expected to obtain a formal job, and for women the figure could be as low as one in ten. That would make achieving high-income status substantially more difficult. The policy implication is clear. Indonesia does not simply need faster GDP growth, it needs growth that creates productive formal employment. Improving regulatory certainty, lowering the cost of formalization for SMEs, reforming labor regulations, broadening the tax base, strengthening vocational education and increasing the value of social protection are likely to be far more important than pursuing headline investment figures alone. The next stage of Indonesia's development will ultimately be determined not by how much capital enters the country, but by how many workers transition from low-productivity informal employment into higher-productivity formal jobs.

Good morning, everyone. Below is my latest research on why Indonesia has struggled to remain competitive as an economy and why premature deindustrialization has taken hold. My central argument is that the banking sector’s structurally high net interest margins (NIMs) are a significant part of the story. High borrowing costs raise the cost of capital across the economy, making it more difficult for manufacturers and other industries to invest, expand, and compete internationally. Ironically, our banks themselves have limited regional competitiveness, as reflected by their no presence outside Indonesia despite earning some of the highest NIMs in the world. Based on my back-of-the-envelope calculations, if Indonesian banks earn roughly 300 basis points more in net interest margin than comparable regional banking systems, this translates into approximately US$16.5 billion of additional interest income paid by borrowers every year. Assuming continued credit growth, the cumulative transfer over a decade could comfortably exceed US$150–200 billion, representing one of the largest reallocations of economic surplus within the Indonesian economy. I hope you enjoy the read, and I welcome thoughtful discussion and differing perspectives.