At a glance
- Achieving high-income status by 2045 would require Indonesia to increase productivity growth by 1.6 times. GDP would need to grow at 5.4 percent a year, and productivity would need to play a bigger part—accelerating its growth rate from 3.1 percent a year since 2000 to 4.9 percent because of changing demographics. Other countries that started with comparable per capita GDP achieved high-income status within 15 to 30 years.
- A radical scaling of investment by tripling the number of medium-size and large companies could deliver. Indonesian business is dominated by informal microenterprises that give livelihoods to millions. But to reach high income, the economy would need to more than triple nonfarm capital per worker, boosting wages. To deliver that, more medium-size and large companies would be needed amid healthy competition. Looking at other economies near the high-income threshold suggests that Indonesia would need half of the nonfarm workforce to be employed in companies with more than 50 employees—from one-quarter today.
- All sectors would need to contribute to GDP growth, but about 70 percent could come from services. Indonesia could expand services sectors by making the most of tourist attractions, modernizing operations, and developing skills. It could also revive manufacturing by taking advantage of global value chain reconfigurations and capitalizing on rapidly growing domestic demand. Developing sustainable, livable cities could enable 40 million more people to move to urban areas—and into formal, productive jobs.
- Unleashing five forms of capital in a synchronized way can enable ‘enterprising Indonesia.’ Indonesia is bursting with potential but faces many challenges to growth, including ineffective urbanization, regional disparity and fragmentation, and underdeveloped capital markets. To overcome these hurdles, Indonesia would need to transform its ability to attract, grow, and deploy financial, human, institutional, infrastructural, and entrepreneurial capital. By doing so, it could increase productivity and scale, boost new businesses, and enable companies to pay higher wages.
For Indonesia to meet an ambition of becoming a high-income economy by 2045, it would need to create the right conditions for productivity growth and enable larger companies to thrive.1 Other economies have trodden this path to high-income status from comparable levels of per capita GDP as Indonesia today. For Indonesia to match their trajectory would require it to triple the number of medium-size and large companies and, by doing so, increase capital stock per worker in a process of rapid capital deepening. Pulling this off would need the full range of productivity enablers to be in place, namely financial, human, institutional, infrastructural, and entrepreneurial capital. With several precedents of fast-growth economies in Asia over recent decades, is it now Indonesia’s time? If so, what will it take?
This report describes one scenario for what Indonesia would need to do to achieve the 2045 aspiration. To develop this scenario, we looked at how other countries have navigated their journey to becoming high-income economies from a similar base to Indonesia. Our focus is on companies and the important role they play in capital deepening, which provides workers with more and better tools to boost productivity, as observed in other economies that have made this journey. The analysis aims to complement extensive studies on structural factors that deliver on productivity by offering a perspective on the corporate ecosystem that would be required to enable more households to benefit from a high-income economy. It identifies key milestones that Indonesia may encounter along this journey.
In 2012, the McKinsey Global Institute (MGI) described the potential of Indonesia—which we dubbed the “archipelago economy”—to become the seventh-largest economy in the world by 2030.2 While Indonesia has not reached that milestone yet, its income has grown 60 percent, and it is currently an upper-middle-income country. But growth has slowed, and many substantial barriers to growth and prosperity remain. Now comes the next phase of Indonesia’s journey.
Indonesia can realistically become a high-income country by 2045
The Indonesian government has set multiple goals for the country’s economic growth, including achieving high-income status before 2045 and accelerating the pace of growth over the coming years toward 8 percent.3 To become a high-income economy by 2045—that is, to reach $14,000 per person in income—would mean accelerating GDP growth from an average of 4.9 percent a year since 2000 to a CAGR of 5.4 percent in real terms between now and 2045.4
To help chart Indonesia’s potential path toward a higher growth rate, we draw on the experience of 16 reference economies that have substantial populations and have traversed at least some portion of the journey from $4,000 GDP per capita, just below Indonesia’s level in 2024, toward or beyond the high-income threshold relatively recently. Countries that became high-income economies from a base similar to Indonesia’s varied in the time they took—and their average growth rate—to reach that status. The top quartile of the 16 economies, Chile, China, Poland, and South Korea, achieved real GDP growth rates of 4 to 10 percent over two decades. South Korea achieved high-income status the quickest of any of the economies—from where Indonesia is today—expanding GDP at over a CAGR of 9 percent for 14 years (see sidebar, “Methodology: Using other countries’ journeys to high income to plot a way forward for Indonesia”).
The experience of these economies indicates that it is certainly within the bounds of possibility for Indonesia to reach high-income status before 2045. Since 2000, Indonesia’s GDP has grown at an average of 4.9 percent a year. This is two percentage points above the global average and faster than 80 percent of countries classified as upper-middle income today. Indonesia has reduced extreme poverty from 70 percent in 1984, when reliable measurement started, to less than 2 percent in 2023.5
In the early years of the period between now and 2045, while demographic trends are more favorable and Indonesia is at a level of development where the ceiling for fast productivity growth is higher, it may need to achieve more than 5.4 percent annually.6 Many of our reference economies hit much higher peaks than their average growth rate. For instance, Chile’s annual GDP growth averaged 5.6 percent, with the highest five-year rolling average at 7.9 percent from 1987 to 1991.
Yet, Indonesia’s record of productivity growth has weakened. Growth slowed from about 3 percent per year from 2002 to 2016 to about 2 percent per year since then, and ineffective urbanization and regional disparities remain considerable challenges. Indonesia’s economy has not improved its standing since 2012 and still ranks as the 16th largest economy in the world.7 There are also indications that growth of the middle class has slowed.8 Is Indonesia stuck in a so-called “middle-income trap”?9
Accelerated productivity is needed for Indonesia to achieve faster economic growth
If Indonesia is to achieve the high-income aspiration by 2045, productivity growth would need to be the primary driver of its 5.4 percent annual GDP growth (Exhibit 1). The contribution from population and participation factors would be lower in the years ahead, likely accounting for about 0.5 percentage points of GDP growth—less than one-third of what it has been since 2000 at 1.8 percent.10 The balance would need to come from productivity growth, which would have to increase 1.6 times from the 3.1 percent CAGR that Indonesia achieved between 2000 and 2023 to 4.9 percent.
A common pattern in the economies that achieved fast productivity growth to reach the high-income threshold was a high rate of capital deepening that enhanced labor productivity and produced positive spillovers across the economies. To deliver on the 4.9 percent productivity growth that Indonesia would require—using our best-performing reference economies as a guide—capital stock per worker would need to grow at a compound annual rate of 5.8 percent.11 This would be nearly double the 3.6 percent observed from 2010 to 2023.12 To avoid a middle-income trap, such investment would need to be increasingly complemented by the infusion of technologies to support a more complex economy and innovation closer to the technology frontier as high-income status approaches.13 This can be done effectively by companies, and typically, large companies. Hence, in this report, we drill down from the macroeconomic goal of high income to the proximate goal of capital deepening and to the main driver of that, company formation and growth.
Indonesia’s size, geographic dispersion, and scale of urbanization pose a challenge to growth
Indonesia has many unique strengths and endowments. However, it also has unique challenges stemming from an unusually large, highly dispersed population, fragmented geography, and the sheer volume of people moving to cities.
Indonesia is an archipelago: It has about 6,000 inhabited islands, and, as such, its population is widely spread. This has contributed to large disparities in per capita GDP. At the top end, the per capita GDP of Jakarta is 14 times higher than that of Nusa Tenggara Timur at the bottom.14 For comparison, the difference between Malaysia’s top and bottom states is eight times, and in China, it is four times. Indonesians are not only far apart in traveling distance; they are far apart in living standards, too.
Indonesia’s geography has also resulted in high logistics costs incurred when forging connections between people, businesses, and markets. This makes it difficult for businesses to scale efficiently across the nation. But there is a significant opportunity to use the country’s extensive network of ports to streamline trade and logistics, connect remote regions, and enhance economic integration. Furthermore, Indonesia’s large labor force, diverse population, varied regional endowment, and economic profile provide scale, complementarity, and innovation capacity. And its proximity to major economies in Southeast Asia positions it as a strategic hub for regional trade and investment.
Urbanization is a particular challenge: As is typical of middle-income countries, Indonesia is undergoing rapid urbanization, but its large population and the scale of the shift to cities make urbanization a significant challenge. Over the past two decades, new arrivals to cities from the countryside have largely been employed in low-wage, often informal jobs that tend to have low productivity. From 2010 to 2018, agriculture’s share of employment declined by 8.5 percentage points, while the trade services subsector experienced a 3.6 percentage point increase in employment share—the largest of any subsector. The productivity of trade services is 1.1 times higher than that of the agriculture sector but well below the economy’s average.15
In some fast-growing economies, as people moved into cities, better infrastructure and more buildings were developed.16 The growth in the construction industry meant that these economies were better able to absorb the newly urbanized, while creating the needed infrastructure. For example, in China, India, and Vietnam, the share of employment in construction increased by five to seven percentage points from 1999 to 2019.17 For urbanization to be effective in Indonesia, planning and building the right—and sustainable—infrastructure will be vital. If the country is able to handle its large-scale urbanization effectively, four million additional urbanites per year could be a tailwind for productivity growth.
All these distinctive characteristics mean that while global lessons provide valuable insights, Indonesia will need to shape its own growth model. Lessons from the lesser-populated Asian Tigers—economies that relied heavily on manufacturing and exports—or from resources-rich nations such as Chile may not apply directly or will only inform one part of a multifaceted growth model.18
Indonesia faces global complexities: It is also worth noting that Indonesia is trying to traverse its journey to high-income status not only in the face of the country’s challenging characteristics but also in a changing global context. Geopolitical uncertainty is on the rise, and global supply chains and trade routes are reconfiguring.19 The world also faces the complex task of transitioning the energy system from high greenhouse gas emissions to a low-emissions system in order to tackle climate change. For developing economies that have to grapple with less advanced power systems, as well as the need to continue to expand access to energy for those who currently are underserved—still while transforming the energy system—the transition is an even more demanding prospect.20 Like other middle-income countries, Indonesia also faces the challenge of adapting to climate change, overcoming relatively high exposure while closing an infrastructure resiliency gap relative to high-income countries.21 At the same time, technology is evolving rapidly.22
In light of these major forces at play, past development models are unlikely to be sufficient, and new approaches are needed. There may be multiple pathways for Indonesia’s growth, but two interrelated ingredients have been common to successful journeys to high-income status: (1) the presence of larger and more productive companies in sufficient numbers, and (2) capital deepening in the form of more physical and intangible assets for each worker in the economy. These are the aspects that we explore most deeply in this report.
High-income status has come with larger, more productive companies and capital deepening
Around the world, large companies have played a key role in fast-growing, developing economies by boosting productivity, attracting capital, and driving innovation, technology, global flows, skills training, and R&D, among others.23 In this report, large companies are defined as having more than 250 employees (following most national statistics agencies), medium-size companies as having 50 to 249 employees, and small companies as having ten to 49 employees. Productivity is higher among large companies, and the share of employment in medium-size and large companies tends to rise with the level of an economy’s per capita income.24
This shift occurs as the informal and self-employed and the generation coming into the workforce seek higher-paying jobs in larger, formal companies and as some microenterprises formalize and scale. The growth of small and large companies is also interconnected. Many large companies are the anchor to corporate ecosystems that help small and medium-size companies to thrive and scale.25 In short, amid healthy competition, companies can become the agents for investment in capabilities and people that lead to productivity growth and higher wages.
If Indonesia is to triple its productivity level and reach high-income status, it will need a greater number of larger and more productive companies that have higher capital per worker. Microenterprises—defined as having fewer than ten employees—currently account for an overwhelming share of employment. Indonesia’s 2016 business census (excluding agriculture), which is conducted every ten years, showed that more than 97 percent of companies in Indonesia are microenterprises.26 Fifty-nine percent of Indonesia’s workforce is employed in these microenterprises—41 percent are self-employed, and almost all informal.27 A high share of employment in informal enterprises is common among developing economies, averaging 70 percent, and they tend to have low productivity—accounting for just one-third of GDP.28 While they provide livelihoods in the absence of other opportunities, these businesses not only have lower productivity but also less access to finance and slower physical and capital accumulation.29
As economies develop on their journey toward high-income status, there is a shift toward more larger companies that are also more productive. Consider Brazil, Mexico, Poland, and Portugal, the four economies in our sample that have available data and are closest to the high-income threshold: In Indonesia, large companies account for 15 percent of employment, much lower than 37 percent in Brazil, 35 percent in Poland, 28 percent in Mexico, and 24 percent in Portugal (Exhibit 2).
Based on a comparison with our sample economies, to achieve high-income status by 2045, Indonesia would need both a step change in the productivity of companies in each size class and a profound shift in the corporate landscape and employment structure toward larger enterprises. In our 2045 scenario, competition would need to increase, which would come about by tripling or more the number of medium-size and large companies to 200,000 and 40,000, respectively. In the scenario, each of these categories of companies doubles its productivity, and its share of employment increases from 8 to 16 percent and 15 to 31 percent, respectively. The share of employment accounted for by microenterprises falls by 26 percentage points as work shifts to higher productivity companies that pay higher wages (Exhibit 3). As a result, overall productivity triples. All categories of company by size increase productivity, but notably, more than one-quarter of the economy-wide increase comes from jobs moving from microenterprises to other companies. The rest comes from productivity gains within each category.
Growth in the number of larger companies and their share of employment would mean that more people would have improved access to technology and capital, such as advanced tools and infrastructure. Such an increase in capital per worker would rise, making workers more productive, especially in comparison with smaller, informal companies. If Indonesia were to follow a scenario based on where Brazil, Mexico, Poland, and Portugal stand today, it could increase nonagricultural capital four times to $14 trillion and grow nonfarm capital per worker from $31,000 to $100,000.
Capital per worker correlates strongly with productivity across economies. In our scenario, productivity increases with company size, and we would expect a similar pattern of increasing capital per worker across company size. Taking the same proportional increases across company-size categories, we model a doubling of capital per worker among medium-size and large companies. In combination with their doubling of employment share, the medium-size and large company share of capital increases from 51 to 65 percent.
As a result, larger companies are the pivotal agents in fostering capital deepening and productivity growth throughout the Indonesian economy (Exhibit 4). They also serve as critical nodes in a more sophisticated ecosystem surrounding small companies that are enmeshed in their supply chains, talent pools, and adjacent markets. To achieve a CAGR in capital per worker of 5.8 percent in the overall economy by 2045 would also require public investment, a large portion of which would go into urban infrastructure.
This analysis illustrates that Indonesia’s aspiration to become a high-income economy by 2045 is feasible but that there would need to be a substantial evolution of the business landscape. Informal employment in Indonesia has increased from 56 to 59 percent since 2019.30 A similar trend was evident across developing economies during the COVID-19 pandemic. Nonetheless, this trend suggests there is not enough labor demand from larger, formal companies to employ more workers and offer higher wages in comparison with what people can earn from self-employment. It also indicates that few informal businesses are formalizing and growing—graduating first into small and potentially medium-size companies and then into large companies. Successful reforms can ease the financial burden of formalization for small companies in terms of tax and compliance costs that are essentially zero for informal companies.31 A high-income Indonesia must be an enterprising Indonesia.
An overall shift to larger, more productive companies would also mean expanding the number of very large companies, defined as earning more than $200 million a year in revenue in 2022. These are the enterprises that invest the most in capital, technology, and skilled jobs and have higher productivity. Very large companies in Indonesia have a total revenue equivalent to 50 percent of GDP.32 This is a significant share considering that today, there are fewer than 400 companies in this category, compared with 10,000 “regular” large companies (defined as having more than 250 employees).33
Nonetheless, the aggregate size of supersize companies in Indonesia is still comparatively lower than in several reference economies, for example, Chile and Poland where the revenue (including overseas revenue) to GDP ratio is more than 100 percent and Brazil and Mexico at 74 and 52 percent, respectively.34 If Indonesia were to match Chile’s number and company size remained constant, it would need to boost competition and develop approximately 1,000 additional very large companies in various sectors.
Indonesia would need to develop enterprises of this scale beyond the resources and industrial sectors where very large companies are heavily concentrated today. In 2022, these sectors accounted for about half and one-fifth, respectively, of the revenue of very large companies. And, of course, if very large companies are to be developed in a broader range of sectors, the funnel of small, medium-size, and large companies would need to be wider.
Companies can raise value added across sectors, with the largest share likely to come from services
To achieve a shift toward larger companies with more capital and technology, new opportunities would need to be unlocked across sectors, especially in services and manufacturing. If Indonesia were to shift employment across sectors to reach distributions typical of countries when they cross the high-income threshold, the country would experience a 15 percentage point shift in employment share away from agriculture, mainly into services. One path based on these typical trajectories would be an increase in the services and manufacturing sectors of 13 percentage points and two percentage points, respectively, while the share of employment in the resources sector would remain constant.35
The shift in employment to services would be the most significant
Indonesia’s services sector is the fastest growing and already employs more than half the country’s workforce—with most employment in microenterprises. To match the trajectory of other economies that have achieved high-income status, Indonesia may need to quadruple the GDP generated by services. If this were to happen, services could account for about 67 percent of GDP by 2045 from 61 percent today. But the services sector’s productivity is low compared to reference economies in real dollar terms. And, while the gap is smaller in purchasing power parity (PPP) terms, three ways to improve productivity stand out.
Formalize and modernize sectors such as wholesale and retail trade, transportation and storage, and food services. These sectors account for a significant share of employment in Indonesia (for instance, 20 percent in wholesale and retail trade). Yet their productivity lags that of peer countries such as Malaysia and Thailand. Investments in technology, shifts in retail formats, and workforce training could raise productivity.
Boost sustainable tourism, including the country’s beautiful beaches, ancient temples, and tropical climate. Accommodation and food services, which forms an important category of the tourism sector, has a productivity of $7,000 per worker per year. That is far lower than Thailand’s $26,000, for instance. Improving infrastructure, digital accessibility, and service quality could help Indonesia attract more international visitors and boost this sector’s contribution to GDP. This could have potential spillovers to the productivity of broader sectors, such as food and accommodation services, transportation, construction, and the creative economy.
Improve the talent pool to grow high-value-added sectors, such as professional services. Sectors that include high value-add services, such as finance, insurance, real estate, and information and communications technology, employ less than 9 percent of Indonesia’s workforce, compared with 19 percent in Poland and 17 percent in Malaysia.36 Moreover, Indonesia’s professional services and administrative activities have a productivity level of just $20,000 a year, lagging far behind Mexico at $90,000 a year and Poland at $50,000 a year. Expanding access to education and vocational training could drive growth in these sectors and enhance overall productivity.
Across sectors, technology could play a transformative role, particularly in services. For instance, our analysis of 63 gen AI use cases suggests a significant potential impact on productivity in industries such as banking (ranging from 2.8 to 4.7 percent of industry revenue per year), healthcare (1.8 to 3.2 percent), travel, transportation, and logistics (1.2 to 2.0 percent), and retail (1.2 to 1.9 percent) globally.37 Developing and deploying AI could help Indonesia’s businesses improve sales and marketing, customer operations, and R&D and engineering capabilities, thus boosting productivity.
The manufacturing sector can be revitalized to meet domestic and global demand
Manufacturing was once an engine of growth for Indonesia. Its value added peaked at 32 percent of GDP in 2002 but then dropped to 19 percent by 2023, largely replaced by resources.38 Moreover, the “economic complexity” of Indonesia’s manufacturing is relatively low, at –0.1, in comparison with Vietnam at 0.2 or India at 0.6, as shown by the Economic Complexity Index.39 Indonesia’s low reading reflects that it still relies on the export of raw materials and commodities, such as palm oil and coal, rather than goods further down the value chain.40 A higher reading on the index indicates a country’s ability to produce and export complex goods. Such complexity—with more diverse products and sophistication—tends to accompany higher productivity and can happen incrementally even by adopting existing technologies and taking advantage of a large labor force and favorable geography for trade.
Moreover, Indonesia’s participation in global value chains is relatively limited compared with other economies.41 That participation—the share of exports that involves more than one country in production that tends to create higher value-added goods—fell from 36 percent in 2000 to 32 percent in 2020, lower than in most reference economies over the past 20 years.42
Indonesia could revive domestic manufacturing businesses and increase higher-value-added exports by taking the following measures (Exhibit 5):
Boost specialization in high-export sectors where domestic markets are growing. In sectors where Indonesia has a significant export share and growing domestic production, it could infuse additional existing technology to capture more of the value chain. Rather than focusing solely on commodities such as palm oil or base metals (for example, nickel that is used in electric vehicle [EV] batteries), Indonesia could develop higher-value products within these sectors, such as processed palm-based bioplastics or advanced nickel alloys for industrial uses. Indonesia has about 20 percent of the global reserves of nickel—the largest share of any economy—and, therefore, will be a pivotal player in the decarbonized economy. But to make the most of its position, Indonesia would need to shift toward producing higher-purity “Class 1” nickel required for lithium-ion batteries as opposed to “Class 2” nickel, which is mainly used for steel production.43
Strengthen products that have solid growth in domestic markets and take them onto the export stage. Indonesia’s domestic production of chemicals, food and beverages, and leather goods is growing, but these sectors do not yet feature large in world exports. As they grow domestically, they could become more competitive, enabling exports to generate higher margins and further boost competitiveness. Well-being products could also grow with targeted investment and innovation in niche markets. Examples include herbal or traditional medicine products, for which Indonesia already has a competitive advantage.
Take advantage of global value chain reconfiguration. Global value chains are starting to reconfigure as economies seek to build their resilience in the face of geopolitical uncertainty. Indonesia could potentially take advantage of such shifts by ramping up capabilities in subsectors where global trade is growing faster than in domestic markets and in which Indonesia does not yet have a high export share. These currently include electronics, textiles, and vehicles.
Unlocking agricultural productivity can enhance people’s livelihoods if paired with effective urbanization
Labor productivity growth in agriculture would enable employment shifts to services and manufacturing while increasing output and incomes for farmers. Farming still provides a vital source of income for many Indonesians, and there are opportunities to raise its output and productivity further. Output rose by 36 percent from $70 billion in 2013 to $95 billion in 2023 (at 2010 constant prices). But 99 percent of Indonesia’s landowners are smallholders with an average farm size of 0.6 hectares. This limits the scope to modernize and mechanize, both of which are critical for higher productivity. Moreover, the cultivation of high-yield seeds and the adoption of advanced technologies have been minimal. To address these challenges and lift agriculture labor productivity, farmers in Indonesia could take the following measures:
- Mechanize and digitize. Capital deepening is needed in agriculture, through investments in farm equipment and irrigation, for instance. Such investments would be more viable with larger farm sizes. Digital tools can enhance agricultural practices, too, helping farmers plant the best crops, monitor irrigation precisely, and harness climate information. However, currently only about 2 percent of Indonesian farmers use some form of e-commerce platforms to buy and sell goods, and over 55 percent are not willing to consider newer technologies, such as drone applications.44 Only 18 of the country’s 34 provinces have agencies providing agricultural resources.45
- Increase the use of high-yield seeds. Hybrid rice amounts to less than 1 percent of the rice planting area in Indonesia, and this share has stagnated for several years.46 Higher productivity could be achieved by planting hybrid rice seeds that have been shown to increase productivity compared with inbred rice.47
With employment shifting from agriculture to urban areas, managing urbanization is a significant challenge for highly populated developing countries such as Indonesia. By 2045, an additional 70 million people could migrate to cities, raising the urban population to 73 percent from 59 percent in 2023.48 Many urban migrants, hindered by low education and skill levels, struggle to find formal jobs and often turn to the informal sector for work. Improving urban infrastructure, such as roads, public transportation, and communication networks, could create connections between urban hubs and surrounding areas. This, in turn, could contribute to a better quality of life and provide social infrastructure, such as universities, hospitals, and recreational facilities—all important factors for attracting and retaining a skilled workforce. This urban infrastructure is also part of the capital deepening in the overall economy, which can raise the productivity of businesses that use public infrastructure.
One urban planning approach to achieve effective urbanization is the “X-minutes city.” This model promotes an urban lifestyle that allows mobility within X number of minutes. Several countries have successfully used this approach. Barcelona’s Superblock maximizes public spaces for local businesses and reduces carbon emissions by allowing only EVs to be used within it, and Singapore modified this concept to a “20-minutes town” and “45-minutes city” that reduced travel time and improved the efficiency of public facilities, such as pedestrian tracks and public parks.49
Five types of enabling capital are essential ingredients of an enterprising Indonesia
The road to national prosperity is paved with thousands of decisions to start, grow, and improve great companies. We emphasize capital deepening—the accumulation of physical and intangible assets—productively deployed by companies. But companies do not invest in isolation. There must be ample amounts of five types of enabling capital: financial, human, institutional, infrastructural, and entrepreneurial. All five are underdeveloped and, to some extent, stalled in Indonesia and would require resolute attention to enable an enterprising Indonesia. Our analysis shows ways in which each of the five types of capital could be developed.
Channel more savings into financial capital to support businesses of all sizes to invest and expand
Indonesia has a relatively high savings rate. It has averaged about 33 percent of GDP since 2010 and stood at 38 percent in 2023. This compares with Thailand’s 28 percent and Poland’s 24 percent. But Indonesia’s savings have not been harvested effectively into a well-functioning financial system. In 2022, the ratio of financial assets to GDP was low at 72 percent, compared with Brazil’s 194 percent, for example. On the International Monetary Fund’s Financial Development Index, Indonesia’s financial institutional depth—private sector credit, pension fund assets, mutual fund assets, and insurance premiums relative to GDP—has a score of 0.16, lower than in other emerging markets.50
Domestic savings matter—as does mobilizing them effectively. In recent decades, domestic savings contributed the bulk of investment financing in growing Asian economies.51 Some economies have implemented measures to improve access to financial services, mobilize (compulsory) pension plans, and establish state-managed funds. These channels pooled domestic savings for investment into strategic sectors. Institutional investors, including pension funds, sovereign wealth funds, insurance companies, and mutual funds, also played a crucial role by gathering and channeling capital into long-term assets that supported economic growth.
The other advantage of domestic savings is that they help build resilience in the face of external monetary shocks and prevent the current account deficit from rising too high. In Indonesia, a large amount of capital is held in the informal economy, and this limits the use of long-term savings instruments, such as pensions and life insurance. Neither of these is mature in Indonesia.52 Banks account for three-quarters of financial assets, and private credit is typical for Indonesia’s level of development; however, insurance and pension fund assets are equal to only 9 percent and 2 percent of GDP, respectively.53 Channeling more savings into such long-term formal instruments and capital market reforms to diversify savings and investment instruments could encourage more investment in small, medium-size, and large companies and potentially reduce their cost of capital.
Improve human capital by focusing on educational quality and matching skills to the jobs of a high-income economy
Indonesia faces challenges across the educational system and in matching skills to jobs. Educational outcomes on the Programme for International Student Assessment (PISA) and Harmonized Learning Outcomes (HLO) scores have been declining, and the share of the population attaining secondary school completion is low.54 Early childhood education is a proven enabler of higher educational outcomes, yet remains underdeveloped in Indonesia, particularly in rural areas. This perpetuates disparities in secondary and tertiary attainment. Indonesia’s education system is hindered by a severe shortage of teachers as well as inconsistent quality—again, especially in rural regions. Compounding this issue, Indonesia’s higher education system is not globally competitive—it has no universities in the global top 100 rankings.55
Educational shortcomings are exacerbated by a pronounced mismatch between jobs and skills. Two-thirds of unemployed people in Indonesia are vocational and tertiary graduates, but they do not have skills that match industry and business needs.56 Improvements could be made within the education system—the government and private sector could usefully collaborate to address these issues by, for example, creating internships and raising workers’ skills. In addition to plugging current skill gaps, Indonesia could focus on cultivating the next generation of leaders—individuals who are equipped not only with technical expertise but also with adaptability, innovation, and the leadership skills necessary to drive the nation’s economic transformation.
Enhance institutional capital to improve governance and support a more productive and competitive business landscape
Indonesia’s bureaucracy can often be complex, and this can increase costs for businesses, potentially constraining their agility and growth. Investors may face some inconsistencies between central and subnational governments, particularly regarding permitting processes and operational control. For example, various government agencies have developed around 20 different digital strategy road maps, leading to overlapping initiatives for internet expansion and creating challenges in data integration and development.57 Smaller companies, in particular, may lack the resources to navigate the regulatory environment.
Building stronger institutions is often influenced by broader economic, social, and political factors. To support a proliferation of larger companies and more competition, regulatory bodies must be knowledgeable and engaged on the one hand and independent, transparent, and even-handed on the other.58 This can take time and strong leadership. However, there are opportunities to streamline functions and increase transparency, enhancing institutional effectiveness. Investments in digital infrastructure and supportive, collaborative relationships between all stakeholders could also help strengthen institutional capital in Indonesia.
Boost infrastructural capital to connect Indonesia’s vast archipelago and enable seamless business operations
Infrastructure is the backbone that connects Indonesia’s many far-flung islands and has the power to enhance citizens’ quality of life and facilitate business. But the nation’s geographic fragmentation poses considerable challenges for land, sea, and air logistics infrastructure.
The government has responded to these challenges by clustering key infrastructure initiatives, such as constructing roads and airports, under a National Strategic Projects (PSNs) umbrella.59 There has been notable progress in developing essential infrastructure, but the pace of progress has arguably not been fast enough. On the World Bank’s Logistics Performance Index, which assesses factors such as the efficiency of customs and border management, the quality of trade and transportation infrastructure, and the timeliness of deliveries, Indonesia fell from 46th to 61st place between 2018 and 2023.60
Indonesia’s fragmented geography and infrastructure gap has consequences, one of which is inflated logistics costs, which are equivalent to 24 percent of GDP. This compares to 14 percent in Thailand, for instance. The relative lack of infrastructure and inefficiencies lead to longer delivery times and compromise the reliability and effectiveness of service delivery across sectors.61 This ultimately affects customer satisfaction and economic competitiveness.
Data-backed, integrated infrastructure planning executed across parties could improve the quality, objectivity, and transparency of infrastructure projects. In addition, using public–private partnerships could potentially be effective in increasing the involvement of private finance in infrastructure development and help to close Indonesia’s current infrastructure gap.62
Raise entrepreneurial capital to create more formal businesses, adopt better technology, and invest at a bigger scale
Entrepreneurial capital is needed to foster new ideas, stimulate competition, and drive the economic development needed for Indonesia to reach high-income status by 2045. But entrepreneurial activity, measured as the formation of new formal businesses, is low in Indonesia. The country produces only 0.33 new registered businesses per 1,000 working-age people per calendar year. This is lower than in reference economies—such as Brazil, which has a score of 5.1—where the economy has a much higher level of formality than Indonesia.63 On the funding side, private equity (PE) and venture capital (VC) investments in Indonesia also remain limited. Total funds deployed were about $1.7 billion in 2023—only 0.1 percent of GDP, compared with the average of 0.5 percent in the economies of the Association of Southeast Asian Nations (ASEAN).64
In their early lives, start-ups can often struggle with inexperience and lack of guidance. Incubators and accelerators can address these challenges by offering crucial support and mentorship. Indonesia has a substantial number of incubators and accelerators, but an Asian Development Bank survey found that many of these programs face significant obstacles, including a lack of staff, funding inconsistencies, and weak connections within the ecosystem.65
A range of measures could help to address Indonesia’s lack of entrepreneurial capital. Digital platforms and tools, and potentially gen AI, could play a transformative role, enabling incubators and start-ups to overcome limitations by providing data-driven insights, automating repetitive tasks, and offering tools for rapid prototyping and innovation at scale.66 Start-ups could thereby gain access to advanced problem-solving capabilities and market analysis, empowering them to make informed decisions faster and reduce their time to market.
In addition, collaboration with large, established companies could cultivate essential competencies in start-ups, expand their supplier networks, and develop social impact funds to provide the initial capital for these companies, which have high capital requirements but the potential to create meaningful social value. For example, Singapore’s GoBusiness initiative provides financial support for all businesses that adopt technology solutions to improve their business processes.67 Europe’s Small Business, Big World program offers guidance on customs procedures, trade regulations, and market entry requirements to enable small and medium-size enterprises to expand their export activities.68
Indonesia needs to shift from aspiration to action
Indonesia’s aspiration of becoming a high-income economy by 2045 is ambitious, and the task ahead is multifaceted and challenging. It is vital that it moves from aspiration to action. A guiding principle is good governance of the business sector. An engaged yet independent public sector could foster a more formal, competitive, and productive business sector. Broad public understanding and support could also be an indicator of the success and sustainability of policy reforms. Clear performance metrics and accountability could ensure institutions adapt and succeed.
Tracking progress is important. A benefit of our company-up approach to envisioning Indonesia’s development is that it yields a detailed and concrete set of markers. Two types of indicators can help guide efforts to build a vibrant and enterprising ecosystem. The first set aims to measure progress in developing more larger companies and the capital and employment trends that go with that. The second set is indicators that map progress against efforts to develop the five kinds of enabling capital that we have discussed. The two sets of indicators go hand in hand; while we emphasize that growing the five enabling forms of capital accelerates the growth of larger and more productive companies, the converse is also possible.
The reference metrics and targets presented here are potential markers on a journey to a place where entrepreneurs want to and can start their companies and then grow and effectively run successful small, medium-size, or large companies. The measures show that Indonesia has a long way to go, and it is not yet on track.
Productivity growth and business-building metrics
The first set of indicators tracks progress against key indicators of productivity growth and business building in the scenario where Indonesia achieves high income by 2045. Since these are based on the scenario developed in this report, we indicate the corresponding 2045 levels (Exhibit 6).
Per capita GDP: In our scenario, per capita GDP will reach the threshold of high income by 2045, increasing from $4,900 today to $14,000. This implies an annual overall GDP growth rate of 5.4 percent. However, precedents show high year-to-year variation on the journey; it may require faster growth in the earlier years as the rate of growth tends to decelerate as economies approach high income, and Indonesia’s demographic dividend is likely to diminish over time.
Productivity growth and company contributions: Productivity growth would need to increase at an average CAGR of 4.9 percent and be the primary driver of Indonesia’s 5.4 percent annual GDP growth, given that the contribution from a growing labor force will diminish. The largest contribution would come from medium-size and large companies as they double their employment share (across company sizes) and level of productivity.
Number of companies: If Indonesia is to triple its productivity and reach high-income status, it would need a greater number of larger and more productive companies. The number of medium-size and large companies would more than triple to 200,000 and 40,000, respectively. Almost 80 percent of these companies would come from the services sector.
Capital deepening by companies: In a high-income-by-2045 scenario, Indonesia would increase nonagricultural capital fourfold to $14 trillion and grow nonfarm capital per worker from $31,000 to $100,000. In a scenario in which capital scales with productivity growth across company sizes, medium-size and large companies would increase their capital share of nonfarm business from about half to almost two-thirds. Companies of all sizes would need to at least double their capital per worker.
Employment share by sector: As is typical in countries crossing the high-income threshold, Indonesia could shift its employment share away from agriculture by 15 percentage points, mainly into the services sector, which would grow 13 percentage points in our scenario—and is the main source of growth. The manufacturing sector would increase by two percentage points, while the share of employment in the resources sector would remain about constant.
Enabling capital metrics
The set is not exhaustive but aims to cover the critical components. The reference economies provide a range for these metrics since structural factors could affect what “good” means in any given country. The range is meant to inform planning, not establish a precise target (Exhibit 7).
Financial capital: Financial depth, measured as private credit by banks and stock market capitalization, indicates whether the financial system is expanding and allocating more capital. It is the most direct measure of increasing financial capital. Stock market capitalization in Indonesia is 47 percent of GDP, while in neighboring economies such as Malaysia and Thailand, it reached 130 to 109 percent of GDP.69 Financial inclusion measures the share of the population using modern financial services—bringing more savings into the financial system increases financial depth. The share of pension assets can indicate the development of institutional financial systems and long-term instruments for domestic savings. These are important for growth and are particularly low in Indonesia. In 2023, pension assets were only 2 percent relative to GDP, while other reference economies reached a range of 4 to 76 percent.
Human capital: Secondary education attainment is a simple and accurate measure of the level of education that is needed to support skills levels of high-income economies. In Indonesia in 2023, 40 percent of those between ages 25 to 34 had completed upper-secondary school, compared with a range of 48 to 57 percent in top-quartile reference economies.70 The number of researchers in a country is another targeted quality measure that identifies higher skill potential. Indonesia only has 400 researchers per million people, compared with a range of 500 to 4,000 people in reference economies.
Institutional capital: The cost and time required to open a new business are key indicators of government efficiency. They are also proxies for deeper factors such as trust and the rule of law. In 2023, the average cost of opening a business in Indonesia was $1,300, compared with $28 in the low end of reference economies. Opening a domestic business averages 43 days, similar to the longer end of the reference range and three times longer than in Singapore.
Infrastructural capital: Infrastructure is the backbone of citizens’ activities and business operations. Key metrics include road density, mobile download speed, and median time spent in port. These all affect business operations and quality of life, and the different dimensions vary in importance depending on the sector. Indonesia’s road density and average mobile download speed are low relative to reference countries, though road density is affected by Indonesia’s expansive geography. However, it performs in the middle range on median time in port at 25 hours, compared with a range between 18 to 41 hours in reference economies.
Entrepreneurial capital: New formal business density is crucial in the creation of larger, more productive companies, and, in turn, in growing Indonesia’s overall formal economy. Indonesia’s value of 0.3 per 1,000 working age people is near the low end of the observed values in reference economies. Indonesia’s employment in informal economy is relatively high at 80 percent, by the ILO’s measure, while other economies reached as low as 25 percent.71
Indonesia’s government has set an ambitious aspiration of attaining high-income status by 2045. Our analysis suggests a path forward by analyzing the trajectories of other economies that started from a similar base to Indonesia’s today. The scenario we have developed implies that Indonesia would need to increase GDP by more than 5 percent per annum. This would only be possible with an increase of productivity growth of 1.6 times, which would require creating more medium-size and large companies, enabling considerable capital deepening, encouraging entrepreneurship, and shifting employment from the low-productivity informal sector to higher-paying jobs.
If Indonesia were to achieve these elements of a productivity-focused plan for the next 20 years, it could not only enhance the growth and resilience of its economy but also expand the ranks of the middle class across all regions and improve its people’s well-being. Indonesia would develop from being the archipelago economy that MGI described in 2012 to being the “enterprising archipelago” that can thrive well into the future.72
