Indonesia’s president-elect, Prabowo Subianto, has laid out an ambitious goal of 8 percent annual economic growth during his first term, with the aim of catapulting Indonesia into high-income status by 2045.
Yet early signs suggest that his approach may already be misaligned with this target. The recent announcement of a cabinet expansion – with around 49 ministries and a proliferation of vice minister roles, the cabinet will include close to 100 appointees in total – raises concerns about whether his administration will prioritize the necessary institutional reforms and efficiency.
While merit is cited as a factor in these appointments, the impression remains that these roles are being doled out as political rewards for electoral support, rather than as a strategic effort to streamline governance and drive economic transformation.
Institutional reforms are essential if Indonesia is to achieve the growth targets Prabowo envisions. The country’s current trajectory points in the opposite direction. Expanding the bureaucracy risks bloating administrative costs and slowing decision-making processes at a time when Indonesia needs lean, agile institutions to tackle complex economic challenges.
More than ever, Indonesia requires efficiency in governance, alongside structural reforms that foster competitiveness, transparency, and innovation.
Central to these concerns is the fate of Indonesia’s middle class – a crucial indicator of economic prosperity and resilience. Over the past few years, the middle class, which had been steadily growing, has begun to shrink. According to Indonesia’s Bureau of Statistics (BPS), the proportion of the population defined as middle class fell from 23 percent in 2018 to just 17 percent in 2023. This decline, which started even before the COVID-19 pandemic, reflects broader challenges facing the Indonesian economy, from stagnating wages in the formal sector to rising inequality.
The middle class plays a critical role in driving consumption, generating demand for goods and services, and contributing to political stability. A shrinking middle class not only limits domestic consumption but also raises the risk of broader social instability. Job creation in industries that can support middle-class growth is vital, particularly in sectors like manufacturing and services.
Yet Indonesia’s manufacturing sector has struggled to regain the momentum it enjoyed in the 1990s, when the country experienced its last significant growth surge. Without a revival of this sector, alongside policies that integrate Indonesia into global value chains, Prabowo’s target of 8 percent growth will remain elusive.
The expansion of ministries is particularly concerning given the fiscal pressures Indonesia faces. The country’s debt-to-GDP ratio, while still within safe limits, has seen a steady increase, and Prabowo has pledged to increase it further. The rising debt service ratio (DSR) also leaves less fiscal room for social spending and infrastructure investment. In 2020, the DSR peaked at 46.7 percent, meaning nearly half of state revenue was devoted to servicing debt, rather than funding critical development needs. If the government continues to expand spending without addressing these imbalances, it will face significant constraints in executing its economic vision.
One way to address these fiscal challenges is by raising revenues, particularly through tax reform. Indonesia’s tax-to-GDP ratio has long been inadequate, hovering around 10 percent, well below the 16 percent that Prabowo hopes to achieve. Expanding the tax base is critical, especially by formalizing the country’s large informal sector, which accounts for nearly 60 percent of the workforce. Transitioning these workers into the formal economy would not only increase tax revenues but also provide them with greater job security and access to social protections.
But efforts to boost the tax base must be accompanied by improved spending efficiency. Fuel subsidies, for example, have been a longstanding drag on Indonesia’s budget. While previous administrations, particularly that of outgoing President Joko Widodo, managed to reduce these subsidies significantly, further reforms are needed to reallocate spending toward more productive areas like education, healthcare, and direct subsidies for the most vulnerable.
Beyond domestic fiscal challenges, Indonesia’s integration into the global economy remains crucial for achieving long-term growth. Prabowo’s administration will need to prioritize aligning Indonesia with international trade standards and a rules-based order if it is to attract more foreign direct investment (FDI).
The continuity in key appointments, such as Airlangga Hartarto remaining as coordinating minister for economic affairs and Sri Mulyani as finance minister, offers some hope that Indonesia will continue on a path toward greater openness and inclusivity in its economic policies.
FDI has been a key driver of growth in other emerging markets, such as Vietnam, which has successfully integrated itself into global value chains. By contrast, Indonesia’s inward FDI stock has been declining, from 2.8 percent of GDP in 2014 to 1.9 percent in 2022. This stagnation is one reason why Indonesia’s economic growth has remained stuck at around 5 percent since 2014. For Indonesia to become a global production hub, it must attract more FDI into export-oriented sectors, particularly manufacturing.
Yet Indonesia’s trade policies have often been more protectionist than progressive, hampering the ability of small and medium-sized enterprises (SMEs) to integrate into global value chains. Comprehensive support is needed for SMEs – not just in terms of credit access but also in mentorship, training, and technology diffusion. These enterprises have the potential to create middle-class jobs and drive broader economic growth, provided they can meet international standards and compete globally.
As Prabowo’s administration prepares to take office, there is still time to correct course. The preliminary cabinet announcements signal the beginning of his presidency, and it remains to be seen whether the expansion of ministries will be followed by a genuine commitment to the reforms Indonesia needs.
The country stands at a crossroads: It can either embrace the hard reforms necessary to unlock higher growth or continue down a path of inefficiency and missed opportunities.
Indonesia’s path to achieving 8 percent growth requires far more than political appointments. It demands deep institutional reforms, a renewed focus on growing the middle class, better fiscal management, and a commitment to international trade standards.
Prabowo’s government must walk the talk, ensuring that the expansion of ministries is not a sign of inefficiency, but rather a strategic move to make Indonesia a stronger, more competitive economy. The time for action is now, and Indonesia cannot afford to falter.