Structural Changes to Maintain a Strong Development Path in Indonesia

Abstract

Abstract For many years, Indonesia’s economic growth has been remarkably steady, raising average income by around 4% per year. However, achieving such rates in the medium-to-longer term will likely be more challenging. Using a growth accounting framework and shift-share analysis, this article reviews sources of past growth to highlight opportunities to raise future income growth. The main driver of GDP per capita over the past five decades has been greater use of labor and capital. Structural change in sectoral employment has been a key driver of labor productivity growth. There is scope for productivity growth through further structural change as well as catch-up growth. The role of key policy areas in facilitating this change is considered in light of the middle-income trap literature and policy gaps are assessed in these domains. Policies related to openness, education, rule of law, financial development, and aspects of entrepreneurship all represent opportunities to set Indonesia on a higher growth path.