Five Strategies to Achieve the 8 Percent Economic Growth Target

Over the past two decades, Indonesia’s economy has operated like a sturdy but sluggish engine—stable, yet slow. Since 2004, growth has been confined to around 5 percent, occasionally touching 6 percent during commodity price booms, before flattening out again. Even post-pandemic, after contracting to -2.07 percent in 2020, recovery has merely returned Indonesia to its “old habitat” at 5 percent. In 2024, the economy grew by 5.03 percent, projected to rise slightly to 5.11 percent in 2025. The 8 percent target is therefore not merely an ambitious figure; it is a demand for structural leaps—something Indonesia has not consistently achieved in the last 20 years. The issue is not a lack of programmes. The government is adept at launching social assistance, subsidies, and even free nutritious meal programmes. These instruments are effective in sustaining household consumption, which contributes more than half of GDP. Data shows that consumption remains the main pillar of growth, including in 2025, driven by public spending and fiscal stimuli. However, consumption only keeps the engine running, not accelerating it. To achieve 8 percent, Indonesia needs fundamental changes to its “growth engine” through five main pillars. First, a drastic surge in investment. Currently, Indonesia’s investment ratio is around 30 percent of GDP. This is sufficient to maintain 5 percent growth but impossible for 8 percent. Countries that have recorded phenomenal growth, such as China and Vietnam, have pushed investment to 35–40 percent of GDP. Without aggressive investment leaps, additional growth space will never open. However, Indonesia’s main problem is not just a lack of capital, but the high ICOR (Incremental Capital Output Ratio). Indonesia’s ICOR, still around 6, indicates high inefficiency. This means we need large capital to produce only small growth. Neighbouring countries with aggressive growth typically have an ICOR below 4. Without improvements in bureaucracy, corruption eradication, and logistics cost reductions to lower ICOR, any amount of investment will “evaporate” before it can propel the economic engine to 8 percent. Second, real industrialisation, not just jargon. Downstreaming strategies must transform into comprehensive industrialisation. So far, our economy remains heavily dependent on commodity price volatility. Without transitioning to high-value-added manufacturing—such as electronics, machinery, and global supply chain integration—growth will continue to be trapped in a monotonous up-and-down cycle. Third, exports as the main engine. Currently, Indonesia’s economic orientation is still too inward-looking. Although exports are projected to grow around 7 percent in 2025 (BPS), their contribution to the economic structure remains limited compared to Vietnam, which has made exports the backbone of the nation. Without a shift in orientation to global markets, high growth will be difficult to achieve and sustain. Fourth, accelerating labour productivity. Indonesia has an abundant quantity of labour but is weak in productivity. The majority of workers are still trapped in the informal sector with low added value. Without a massive migration of labour to industrial and modern service sectors, the demographic bonus will only add numbers of workers without significantly increasing economic output. Fifth, reorienting fiscal policy. So far, state spending has tended to be defensive to maintain purchasing power. While important for social stability, to achieve the 8 percent target, the state budget must be more aggressively allocated to productive sectors: strengthening industry, mastering technology, and research and education. The state budget must become a growth-driving engine, not just a consumption buffer. Therefore, 8 percent growth cannot be achieved through usual methods (business as usual). It requires the courage to overhaul the economic structure—from consumption to production, from domestic to global, and from stability to expansion. Over 20 years, Indonesia has proven itself as a resilient economy with long-term average growth of 4.7–4.9 percent. However, that stability has now become an invisible barrier constraining our potential. Indonesia’s major challenge today is not just to survive and grow, but to dare to step out of the 5 percent comfort zone and build a new engine capable of running twice as fast.