It seems that Indonesian President Prabowo Subianto and his economic team urgently needs a new economic model to increase purchasing power, reduce poverty, generation of new jobs and gearing up of massive industrialization in the country.
The Indonesian President Prabowo also needs a new business model to further strengthen and diversify commercial ties and propositions with all the regional countries as well as international power brokers in the days to come.
An export oriented strategy, massive re-industrialization, development of SMEs, digitalization, e-commerce, modernization, openness, inclusiveness and last but not least trans-regional connectivity would be new a gateway of a prosperous Indonesia, transforming widening disparities into shores of community development, seas of poverty into sea-shells of sustainable prosperity and last but not least average human capital into qualitative human/social development transformation.
So, promoting trade facilitation measures, streamlining of customs procedures, enhancing transparency in nontariff measures and ensuring regulatory efficiency, will make Indonesia more attractive to multinational companies looking to establish supply chain operations in the country providing strategic cushions for robust development and sustainable prosperity.
Interestingly, Prabowo has set a target to accelerate economic growth to 8 percent, from 5 percent through developing industries that process Indonesia’s rich natural resources and relying on the economic impact of his flagship programs, such as giving students free school meals.
Prabowo’s most well-known campaign promise is the US$30 billion “Free Nutritious Meals” program providing food for 83 million children and pregnant women to fight stunted child growth.
Prabowo and his economic team have pledged to manage the government’s budget responsibly, defending the program as necessary for long-term human development. The program would be rolled out in stages starting from January 2025.
To achieve this goal, the new government has already increased 22 percent of funds (Rp 139.4 trillion & US$8.8 billion) in 2025, which is timely, giving hope of reducing purchasing disparity and poverty. The 2025 food security budget is 21.9 percent higher than last year’s.
The eventual US$30 billion-a-year outlay is equivalent to 14 percent of the entire 2024 budget and about 2.5 times its yearly health expenditure. It’s also five times the amount India, which runs the world’s largest midday meal scheme, spent in 2023.
It seems that the food security budget is quite substantial and spread across various ministries; however, the new government needs strong collaboration to meet the 2028-2029 self-sufficiency target. Thus self-sufficiency in food & security would guarantee further progress and prosperity of the country and its people alike.
The food security budget covers a range of measures aimed at improving domestic agriculture, with non-ministerial spending of Rp 44.15 trillion allocated primarily to fertilizer subsidies managed by state-owned fertilizer producer PT Pupuk Indonesia.
It also covers a 150,000-hectare plantation expansion program and an 80,000 ha plantation intensification program, which are to be jointly managed by the public works and agriculture ministries at an estimated cost of Rp15 trillion.
In addition to allocating funds from the central government, the food security budget is to draw on regional resources totaling Rp16.25 trillion from the Village Fund and Rp 20 trillion from local administrations. It will include improving access to farming resources like seeds, fertilizers and pesticides, as well as expanding food reserves and developing so-called food barns.
The food security drive also involves inter-institutional efforts between the Agriculture Ministry, the Maritime Affairs and Fisheries Ministry, the Villages and Regional Development Ministry and the National Nutrition Agency. The program targets key crops, such as rice, corn, sugarcane, soybean, cocoa, coffee, chili and onions.
Additionally, the “Food Estate” project, clearing swamps to make way for cassava planting has multiplier effects. It will be expanded, creating 3 million hectares to cultivate rice, corn and soybeans. That is roughly the size of Belgium. Some of the agriculture products will be made into bioethanol.
It seems that the new president Prabowo has also made preparations to increase the mandatory blending of palm oil-based biodiesel to 50 percent by next year, up from 35 percent currently, to reduce gasoil imports. Indonesia is the world’s biggest producer of palm oil.
Thus seeking more and more inflows of foreign direct investments and brightening the chances of joint ventures in the agriculture, food, energy, infrastructure projects including management of airports and seaports would be a right way of moving forward. Therefore, selling carbon credits overseas to fund green projects would be an innovative idea to create jobs and reduce poverty in the country.
Currently, according to reliable sources and local newspapers of Indonesia, it is preparing more measures to boost purchasing power, as a spate of factory closures and job cuts weakened consumption and slowed economic growth last quarter.
The Indonesian statistics agency (October 2024), GDP expanded 4.95 percent in the three months through September from a year earlier, the country’s statistics agency.
The government is planning policies to revive the purchasing power of the middle-class that could be implemented this quarter. “Food prices are relatively high, and the newly formed government is worried that inflation will rise if oil prices increase.
Nevertheless, the fourth-quarter growth print could be much better as the government plans to roll out incentives for investment into labor-intensive sectors. So, the full-year GDP growth would likely come in around 5 percent. The rupiah gained 0.1 percent along with other Asian currencies while the benchmark stock index was up 0.2 percent.
Although Indonesia’s growth stands out as among the fastest in the region, the cracks emerging in its manufacturing sector could jeopardize employment and consumer spending that are critical to the US$1 trillion economy.
Unfortunately, labor-intensive industries, particularly apparel and footwear, have been suffering from a sharp decline in overseas demand and an influx of cheaper imports. The sector has seen a rising number of factory closures and debt distress, such as at textile giants’ PT Sri Rejeki Isman, also known as Sritex, and PT Pan Brothers.
Conformation of the labor ministry job cuts in Indonesia has increased by 31 percent from a year earlier as of October, reaching nearly 60,000 is a wake call for the policy makers of the new government. Manufacturing activity has also contracted for four consecutive months, its longest slump since at least 2021, based on the S&P Global purchasing managers’ index.
It shows that Indonesia’s unemployment rate fell to 4.91 percent in August, from 5.32 percent in the same month of 2023. But the underemployment rate, which captures those working less than 35 hours a week and still accepting side jobs, jumped to 8 percent from 6.68 percent previously. The proportion of full-time workers also fell slightly to 68 percent.
Evidently, many Indonesians have yet to regain formal employment after the pandemic. About 9.5 million people have fallen out of the country’s middle class, a crucial driving force behind domestic consumption that makes up more than half of GDP.
Moreover, consumption growth slowed to 4.91 percent in the third quarter, dragged by weaker spending on footwear, appliances services, housing and household goods, health and education confirming increase of poverty ratios and widening of disparity in the country.
Ironically, domestic consumption has struggled to get back to a 5 percent expansion, indicating weakening purchasing power. It is predicted that this trend will continue through the year-end if there is no significant stimulus from the government and the central bank.
It is good omen that other sectors witnessed faster growth in the third quarter, with exports at 9.09 percent, gross fixed capital formation at 5.15 percent, and government spending at 4.62 percent. On the production side, transportation and warehousing posted the highest increase at 8.64 percent, followed by accommodation, food and beverages at 8.33 percent. 
Manufacturing the industry with the largest contribution to GDP expanded just 4.72 percent led by base metals. However, lower commodity prices, subdued global demand and tight monetary policy may have impacts on demand.
The new government has already unveiled a number of measures to support the macro-economy, including extending tax perks for house purchases and imposing import duties to protect the local market which is a good omen.
Prabowo has set a target to increase government revenue-to-GDP ratio to 23 percent from about 12 percent, promising to do so using improved technology and without raising tax rates. Setting of a new tax collection agency modeled on the U.S. Internal Revenue Service would be pursued.
The possibility of lowering corporate income tax to 20 percent from 22 percent though this would depend on its impact on revenues. Raising of the value-added tax (VAT) rate to 12 percent from 11 percent on January 1, 2025 would be an unpopular plan.
Bank Indonesia has also started to lower its benchmark interest rate to help bolster spending and investment, though its easing has been put on hold amid currency volatility. It’s also expanded incentives to banks’ lending to labor-intensive businesses.
It seems that the creative economy has huge potential to support Indonesia’s economic self-reliance. Indonesia’s creative economy has 17 sub-sectors that have strengths and experience extraordinary development from time to time. Thus the creative economy can serve as an important pillar in the efforts to achieve national development goals during the presidency of Prabowo.
The ministry’s data found that the export value of Indonesia’s creative economy products in 2023 reached USD23.96 billion, or 88.91 percent of the determined target. Meanwhile, it added value in 2023 had reached Rp1,414.8 trillion (or around USD89.9 billion), or 110.44 percent of the target.
Considering these achievements and huge potential, President Prabowo Subianto specifically established the Creative Economy Ministry in his cabinet nomenclature which is a good omen.
Hopefully it will further strengthen Indonesian economic independence supporting the government’s goals, especially in terms of economic diversification, job creation, and the development of innovation-based economic sectors.
Critical analysis reveals that the Indonesian president has two options: set an ambitious revenue target, or relax the fiscal rule to allow for a higher deficit and/or debt limit.
The next best alternative for raising revenue is through value-added tax (VAT). However, the VAT collection system is currently ineffective, with the share of VAT to GDP being less than 4 percent, despite an 11 percent VAT rate. This indicates flaws in the VAT collection system.
In real terms there is no easy solution for revenue generation in the short run for the new government. In the long run, sustainable generation of revenue will require structural transformation towards a stronger manufacturing sector, which can provide more formal employment opportunities. However, this falls beyond the realm of fiscal policy.
Prabowo has also suggested relaxing Indonesia’s fiscal rule, which currently caps the deficit-to-GDP ratio at 3 percent and the debt-to-GDP ratio at 60 percent. According to him, to achieve a high growth trajectory, Indonesia should consider relaxing these seemingly arbitrary caps however it would be risky as well. Thus the cautious fiscal approach should be maintained for Indonesia’s long-standing macroeconomic stability, preventing a debt-currency crisis spiral like those experienced by Turkey and Argentina.
The author suggests that the new government of Indonesia should reorient its industrial policy towards developing export-oriented service industries for the economy to grow beyond 5 percent. Refining raw metals onshore should be a strategic priority of Prabowo and the new economic team helping boost growth for creation of new jobs.
In this direction, services exports like tourism are more labor intensive and may generate more FX conversion which must be one of the main focuses of the new government in the days to come.
Promotion of qualitative human capital institutionalizing marketable skills in the new generation mainly women would be value addition gearing towards a prosperous Indonesia.
Proposals to overhaul the SOE ministry and establish a super holding company were first floated in a September 25 speech by Burhannudin Abdullah, former governor of the Bank of Indonesia and member of the advisory council for Prabowo, who was then still president-elect.
There is an urgent need for overall SOEs in the new government because it controls US$671 billion in assets, equivalent to 48.9 percent of the country’s GDP, in sectors spanning energy, mining, finance, agriculture and construction in 2023. Overhauling of the SOEs would benefit the country’s economic system.
It is good omen that Prabowo’s government has already chalked out a program to form a new super-holding company for SOEs and other government-controlled funds to be known as the Daya Anagata Nusantara Investment Management Agency, or Danantar.
The author suggests that Prabowo’s vision of economic sovereignty and strong governance must be implemented and institutionalized throughout the country. Moreover, the Indonesian president Prabowo may further expand the policy of domestic down steaming beyond nickel, incorporating other key commodities, such as palm oil, copper, and bauxite. It will align with Prabowo’s broader aim of achieving greater self-sufficiency in Indonesia’s industrial sector, which will generate new jobs, increase exports of high-value goods, and reduce the country’s dependence on volatile global markets in the days to come.
Last but not least, Prabowo’s good governance approach must compensate for democratization of sources of production and means of survival not pushing the common people into the deep sea of despair, depression and poverty in the country. According to the Central Statistics Agency (BPS), 2024, the Indonesian middle class, once a symbol of the nation’s economic progress, has shrunk by a staggering 9.5 million people in the past five years, even as the total population grew from 267 million to 289 million. Thus resiliency of the middle class, the backbone of Indonesian economy must not be further eroded.
The incumbent government of Parbowo an ideal combination of the technocrats and politicians must be responsive, positive and participatory to provide basic necessities of life and protection of human rights to all the ethnic minorities and weaker factions of society transforming the country towards a prosperous Indonesia.
In this regard, the entrepreneurial spirit of its young population may be further furniture, financed and turning fault lines into fortunes. The shrinking middle class reflects not only wealth decline, but also the painfully slow upward mobility from poverty. Thus it is good news for the Indonesian middle income trap.
The author suggests that the new government must prioritise the needs of the rural poor for sustained economic growth. Hopefully, lifting rural communities above subsistence levels will not only fuel Indonesia’s economic ascent but it will also fulfil the duty of any government to improve the lives of its citizens.
