6 Percent Growth: Between Optimism and Our Homework

The government’s economic growth target for Indonesia in 2027, set at a range of 5.8 to 6.5 percent, deserves appreciation. From the lower and upper bounds of that target, it can be inferred that the Indonesian economy is expected to grow at around 6 percent in 2027.

After years of the national economy growing at around 5 percent, Indonesia indeed needs a bigger leap if it wants to accelerate the improvement of people’s welfare and escape the middle-income trap. The government has encapsulated this quite well through the theme of the Macroeconomic Framework and Fiscal Policy Principles (KEM-PPKF) for the 2027 Draft State Budget, namely “Grow Higher, Prosper Faster”.

However, the experience of various countries shows that high economic growth optimism is not always synonymous with sustainable progress or welfare. It is also important to answer how that growth is achieved and who enjoys its benefits. Therefore, the discussion regarding the 6 percent growth target should not stop at the figure, but also touch upon the foundations that support it.

Investment as the Engine of Growth

In various government presentations related to the KEM-PPKF for the 2027 Draft State Budget, there appears to be a consensus that investment will be the main engine of Indonesia’s economic growth, alongside household consumption which has been the largest pillar of the economy. The Ministry of National Development Planning (Bappenas) itself targets Gross Fixed Capital Formation (GFCF) growth in the range of 6.5 to 7.5 percent in 2027.

This target certainly sends a positive signal. However, several important questions still need to be answered in more detail. Where will the main sources of this investment come from? What contribution is expected from the private sector, the government, and Danantara? How does the business climate need to be improved to boost investor confidence? What type of investment should be encouraged to produce the greatest multiplier effect for economic growth and job creation?

These questions are not merely technical matters. Their answers will determine whether the ambitious growth target has a sufficiently strong foundation to be achieved realistically.

Old Unresolved Problems

In truth, rather than simply seeking additional investment, there is a more fundamental issue. Investment will only effectively drive growth if it enters an efficient economic system.

Herein lies Indonesia’s real challenge. Over the past few years, the national investment efficiency level, reflected in the Incremental Capital Output Ratio (ICOR), has remained around 6. This means that to produce an additional 1 percent of output, Indonesia requires investment of about 6 percent of Gross Domestic Product (GDP). This figure is relatively high compared to many East Asian countries that successfully grew rapidly and escaped the middle-income trap with an ICOR in the range of 3 to 4.

The consequences are very real. If the 6 percent economic growth target is to be achieved with an ICOR of 6, then Indonesia’s investment requirement reaches about 36 percent of GDP, or between Rp9,300 trillion and Rp9,700 trillion. Conversely, if economic efficiency can be improved so that the ICOR falls to the range of 5 to 5.5, the investment requirement to achieve the same growth target can be significantly reduced to around Rp7,800 trillion to Rp8,500 trillion.

Therefore, the policy focus should not be on how much investment comes in, but on the productivity of that investment in generating added value. Improving investment efficiency must be placed on par with the agenda of increasing investment itself. Without efficiency improvements, Indonesia will continue to need increasingly large amounts of capital just to produce relatively the same growth.

Productivity as the Key

The next, more decisive factor for sustainable long-term economic growth is productivity. Nobel laureate in Economics, Robert Solow, demonstrated that the main source of long-term economic growth is not merely capital accumulation, but rather an increase in productivity or Total Factor Productivity (TFP).

The simple explanation is that a country cannot continue to grow just by building more projects, expanding credit, or increasing investment. At a certain point, what matters is the ability to produce greater output with the same resources.

In the Indonesian context, this message is highly relevant. We have been relatively successful in maintaining macroeconomic and financial sector stability. The banking sector has strong capital levels, controlled credit risk, and adequate liquidity. Bank credit is even projected to grow close to 10 percent in 2027.

However, reality shows that economic growth still struggles to move much above 5 percent. This indicates that the problem is no longer simply about the availability of funds or financing. The problem is how that financing is translated into increased national economic productivity.

Therefore, if Indonesia wants to escape the middle-income trap, then improving the quality of human resources, innovation, technology, research, bureaucratic efficiency, and legal certainty must become the main part of the growth strategy. All of these are prerequisites that we must possess, or at least, we must be making every effort to achieve them.

Growth Must Be Visible in Jobs

The success of economic growth cannot be measured solely by the size of investment or the height of GDP figures. Growth must be translated into broader employment, better incomes, and greater life opportunities for the community.

Therefore, the target of 6 percent economic growth should be accompanied by a job creation target that is equally ambitious.