What Is the Way Forward for Indonesia?

After years of steady growth that reduced poverty, Indonesia’s commodity-dependent economy is struggling. Former trade minister Gita Wirjawan spoke at Yale SOM about policies with the potential to reshape the country’s future.

Indonesia is at a crossroads. The country elected former businessman Joko Widodo as its president in 2014. To help revive a sputtering economy, he has started phasing out a fuel subsidy, which at times accounted for 20% of government spending. He aims to use some of the freed-up funds to develop the nation’s dysfunctional infrastructure. Spread across more than 13,000 islands, the country has substantial challenges, including Jakarta’s worst-in-the-world traffic.

Not long ago, some saw a way for Indonesia, already a member of the G-20, to rocket from poverty to high-income status by 2030. That is looking less and less likely; the country’s growth, which averaged 5.4% annually since 2000, has fallen off as the result of collapsing commodity prices on global markets.

Gita Wirjawan, former trade minister of Indonesia and founder of Ancora Group, spoke at a Yale SOM Colloquium on Business and Society in October 2015, outlining a series of policies that, he said, could help reinvigorate the country’s economy.

For example, he said, Indonesia is hobbled by an anemic tax regime. While the country has been making progress bringing people out of the most extreme poverty, only a small part of the population earns enough to be subject to income taxes. Among those who do earn enough, tax evasion is widespread. Only 27 million people are expected to pay taxes in Indonesia, which has a population of about 250 million.

In most countries, the taxes paid by citizens accounts for a significant portion of the national budget and overall economy. That’s not the case in Indonesia. “The ratio of tax revenues vis a vis the GDP of the country, it’s only at 10.8%,” Wirjawan said. “To give you perspective, the average OECD country runs at a tax ratio of 30%.”

Expanding the number of individuals paying taxes would create flexibility in budgeting. Wirjawan sees that as an opportunity to lower corporate tax rates that are currently 20% for public corporations and 25% for private firms. “Imagine if we were to grow the tax ratio to 15% or even 20%. We’re talking about being able to lower [corporate] tax rates to maybe 10%,” he said. “We could be highly, highly competitive.”

Former Trade Minister, Indonesia; Founder, Ancora Group