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World Bank Sounds Alarm for Indonesia to Avoid Middle-Income Trap

World Bank Sounds Alarm for Indonesia to Avoid Middle-Income Trap

By Ridho Syukra on 07:50 pm Jun 23, 2014

Jakarta. Indonesia needs economic growth of above 8 percent in order to escape the so-called “middle income trap,” and to provide jobs for 15 million new workers who will join Indonesia’s labor force by 2020, according to a World Bank report.

At the current 5 percent to 6 percent economic growth pace, Indonesians could be trapped in the condition characterized by a per capita income of below $12,000, low investment, slow manufacturing growth, limited industrial diversification and poor labor market conditions, the Washington-based lender explained in a report titled, “Indonesia: Avoiding the Trap,” which was released on Monday.

“The world is waiting for Indonesia to take its rightful place as a global economic leader. But to do so, Indonesia must improve its competitiveness, by closing its infrastructure and skills gaps, and by improving the functioning of markets,” said Rodrigo Chaves, World Bank’s country director for Indonesia. “These actions would have knock-on effects on raising productivity and incomes, and would require better government spending that cuts inefficiencies, such as fuel subsidies.”

World Bank estimates that with growth rates of closer to 9 percent, Indonesia can avoid the middle-income trap and join the ranks of high income countries by 2030.

The country expanded 5.2 percent in the last quarter — its slowest pace in more than four years — following the end of a commodities boom and the end of low global interest rates.

The World Bank said Indonesia “is well placed” to attract foreign and local investment in manufacturing, thanks to a high number of youths with access to education, which could offer cheaper labor amid increasing costs in China.

But the country lacks human resources with sufficient technical skills and stronger work ethics.

“There is little training offered to employees, and more modern training centers would help graduates obtain the skills to be competitive,” said Ndiame Diop, World Bank’s lead economist for Indonesia and lead author of the report.

The country also lacks infrastructure, with investment in the sector at less than 4 percent of gross domestic product in the past decade — or about half of what is needed. That alone costs Indonesia at least 1 percent of annual economic growth, the report estimates.

The country is urged to phase out subsidy spending, which amounts to 2.6 percent of GDP, and disproportionate benefits to the affluent, in order to spend more on infrastructure and health care, Diop said.

 

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