Returning to the Long-Term Agenda

India’s largest media outlet, The Times of India, on 3 June 2026 published a report entitled “World’s Most Powerful Economies by 2030: Prediction Reveals Future Global Leaders”, showing a shift in country rankings based on gross domestic product (GDP) globally by 2030.

The report revisited PwC’s 2017 projection, which placed several emerging economies in the global top ten by GDP in 2030 based on purchasing power parity (PPP), rather than nominal GDP. Those countries are China, India, Indonesia, Mexico and Brazil. For comparison, the IMF’s World Economic Outlook of April 2026 projects Indonesia to be around seventh in the world by GDP-PPP in 2030.

This also serves as a reminder to global leaders, particularly emerging economies such as Indonesia, to focus more on the long-term agenda by promoting economic growth based on productivity improvements. A large aggregate GDP does not necessarily reflect prosperity if it is not underpinned by rising productivity and innovation.

Productivity growth

The report aligns with the thinking of the 2025 Nobel Prize in Economics laureates Philippe Aghion and Peter Howitt, who introduced the Schumpeterian growth paradigm in 1992. To achieve high long-run economic growth, there are two main inputs for accelerating GDP growth: capital accumulation and innovation.

New innovation replaces old technology and subsequently increases the marginal product of capital, thereby encouraging capital accumulation. The accumulation of capital goods in an economy can drive further innovation.

Meanwhile, another 2025 Nobel Prize in Economics laureate, Joel Mokyr, in a chapter entitled The Institutional Origins of the Industrial Revolution (2008), stated that the prerequisite for sustainable economic growth is a continuous flow of science and technology within the economy.

History records that Britain’s economic growth in the period 1760-1850 was supported by technological progress and a high-quality workforce. There was a layer of educated, highly skilled professional workers who were adaptive to technological change as the drivers of innovation.

A country’s capital accumulation and technological innovation can be reflected in its ability to produce a diverse range of products that are difficult for other countries to manufacture. This capability is partly reflected in the Economic Complexity Index (ECI).

The ECI measures the diversity of products a country can export competitively and how rare the capability to produce those products is in other countries. The index serves as a proxy for the depth of productive knowledge, which is related to per capita income and long-term growth, but it is not a direct measure of societal welfare.

Policy focus

Observing the period 2012-2024, Indonesia’s ECI ranking declined from 67th to 69th. However, Indonesia’s ECI score rose slightly from around 0.19 to 0.23. This does not indicate an absolute decline in Indonesia’s productive capability, but rather Indonesia’s relatively slower progress compared with other countries.

Indonesia’s economic complexity remains far lower than Malaysia’s, as reflected in Malaysia’s ECI ranking of 31st in 2012 and 32nd in 2024. Indonesia’s ECI ranking is also far worse than Thailand’s and India’s.

Thailand’s ECI ranking improved from 38th in 2012 to 34th in 2024. Similarly, India’s ECI ranking rose over the 2012-2024 period, from 51st to 41st.

Indonesia’s ECI ranking is even considerably worse than Vietnam’s. Vietnam’s ranking climbed from 65th in 2012 to 45th in 2024. Vietnam has become a production base for companies from China, Japan, the United States and Europe, which has helped increase the diversity and complexity of its manufacturing exports.

The progress of India and Vietnam serves as a warning that Indonesia is moving too slowly compared with competitor countries in strengthening its productive capability. The country with the highest level of economic complexity is Japan, in first place. This is consistent with Japan’s sustained increases in research and development (R&D) spending, by both government and the private sector.

Likewise, China and the United States ranked 10th and 20th respectively in the global ECI in 2024. Both countries also have high R&D spending as a percentage of GDP.

Based on WIPO’s 2024 estimates, R&D spending in Japan and the United States is around 3.45 per cent of GDP respectively, while China’s is about 2.65 per cent. Indonesia is estimated at only around 0.28 per cent, although the Indonesian figure should be read with caution given data limitations and lags.

So what can the Indonesian government do to transform the economy from one driven by lower-to-middle-technology manufacturing into one that produces manufacturing goods with high knowledge and technology content?

The first step is to position downstream processing (hilirisasi) as part of industrialisation, not as an end goal. The industrialisation narrative should be directed at building an integrated industrial ecosystem linking core industry (national champion industry), supporting industry, and related industry.

The success of downstream processing should not be measured merely by the number of smelters or the value of investment, but also by increases in domestic value added, growth of local suppliers, mastery of technology, and the creation of quality jobs.

The second step is to provide incentives for the private sector to increase R&D spending in order to encourage new innovation and improve the efficiency of the national economy. The target is for R&D expenditure as a percentage of GDP to rise gradually from around 0.28 per cent in 2024 to 1.0 per cent in the early 2030s and 2.0 per cent in the long term.

The third step is to accelerate the transformation of national industry from lower-to-middle-technology manufacturing towards upper-to-middle-technology manufacturing. This step is expected to raise Indonesia’s ECI ranking from 69th to the 30-35 range by 2031, bringing it closer to the positions of Malaysia and Thailand. This target must be treated as an aspiration and supported by a measurable roadmap.

The fourth step is to accelerate the digital transformation of the national economy to improve efficiency. However, digitalisation alone is not enough to lower the Incremental Capital Output Ratio (ICOR). The government aims to reduce Indonesia’s ICOR from around 6.2 to 3.9 by 2029. Achieving this also requires improvements in project selection and execution, logistics, human resource quality, competition, regulatory certainty and governance.

In closing, in line with the experience of South Korea, Japan and Taiwan, the key to achieving developed-country status by 2045 is economic transformation towards an innovation-based economy.