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The archipelago
economy: Unleashing
Indonesia’s potential
CONFIDENTIAL AND PROPRIETARY
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1
Indonesia today and in 2030
SOURCE: McKinsey Global Institute
7th largest economy in the world 16th largest economy in the world
135 million members of the consuming
class
45 million members of the consuming
class
71% of population in cities producing
86% of GDP
53% of population in cities producing
74% of GDP
113 million skilled workers needed55 million skilled workers
$1.8 trillion market opportunity in
consumer services, agriculture and fisheries,
resources, and education
$0.5 trillion market opportunity in
consumer services, agriculture and
fisheries, resources, and education
INDONESIA TODAY … AND IN 2030
2
5 myths and realities
Indonesia’s economy has had the most
consistent growth rate among any OECD
or BRICS country over the past ten years
The Indonesian economy is
relatively unstable1
Large and midsize middleweight cities
are growing faster than Jakarta
Economic growth centers almost
exclusively on Jakarta2
Non-commodity exports have a much
lower share of GDP in Indonesia than in
Malaysia or Thailand
Indonesia follows the Asian tigers’
export-driven growth model3
The resource sector’s share of the
economy has fallen over the past decade
Resources are the economy’s main
driver4
Increasing productivity has been the
main driver of GDP growth
Growth has come largely from an
expanding workforce
5
3
SOURCE: Conference Board Total Economy Database; International Monetary Fund; World Bank; McKinsey Global Institute
analysis
Indonesia’s recent economic growth has been stable
3.4
2.1
2.1
2.0
2.0
2.0
1.8
1.8
1.8
1.7
1.7
1.6
1.6
1.5
0.9
0.9Indonesia
Australia
Portugal
Norway
France
New Zealand
Belgium
Switzerland
Canada
India
South Korea
Poland
China
Netherlands
United States
Average rest 1.7
3.1
3.1
3.4
3.5
3.6
3.7
3.8
3.9
4.0
4.2
4.9
4.9
5.2
7.7
11.5China
India
Indonesia
Russia
Slovakia
South Korea
Turkey
Poland
Estonia
Chile
Brazil
South Africa
Czech Republic
Israel
Australia
Average rest
Overview of OECD and BRICS
%
GDP growth, standard deviation,
annualised, 2000–10 Real GDP growth, 2000–10
1
4
Large and mid-size middleweights are growing faster than JakartaUrban1
Rural1
5.9
5.3
5.9
6.4
6.7
5.9
5.8
Indonesia2
Rural1
Other cities
Cities <150,000
Small middleweights
Cities 150,000–2 million
Mid-size middleweights
Cities 2 million–5 million
Large middleweights
Cities 5 million–10 million
Jakarta
%
GDP compound annual growth
rate, 2002–10
Share of
GDP, 20102
Share of
population, 2010
19
6
11
31
26
100
4
5
6
30
50
100
7 6
1 We use the definition of urban and rural area from Indonesia’s Central Bureau of Statistics.
2 Model is based on more than 400 cities and districts, covering 90 percent of GDP. GDP is allocated to urban and rural areas
based on population share, with a 28 percent premium per capita for urban areas based on historic income differences.
NOTE: Numbers may not sum due to rounding.
SOURCE: 2010 Population Census and Socio-Economy Survey, Indonesia’s Central Bureau of Statistics; McKinsey Global
Institute analysis
2
5
SOURCE: Bank of Thailand; Bank of Indonesia; Department of Statistics Malaysia; The Economist Intelligence Unit;
McKinsey Global Institute analysis
65
29
6
Malaysia
58
36
Thailand
54
17
Indonesia
11
24
Non-commodity exports have a lower share of GDP in
Indonesia than in Malaysia or ThailandNon-commodity exports
Commodity exports1
Domestic GDP
1 All non-processed commodities from agriculture, mining, and oil and gas, plus refined oil and liquefied natural gas.
Share of GDP, 2010
%
3
6SOURCE: Indonesia’s Central Bureau of Statistics; McKinsey Global Institute analysis
45 49
28 25
100% =
Services
Manufacturing
Agriculture
Mining and quarrying
including oil and gas
2010
708
15
11
2000
166
16
12
1 The compound annual growth rate is calculated based on 2000 real prices.
NOTE: Numbers may not sum due to rounding.
The resource sector’s share of the economy has fallen
from 2000 to 2010
Resources
6.2
3.6
0.3
2.6
Share of Indonesia’s nominal GDP
%; $ billion Real compound annual
growth rate, 2000–101
%
4
7SOURCE: The Conference Board Total Economy Database; McKinsey Global Institute analysis
1 Productivity is based on GDP contribution per employee over 20 years.
2 Higher labour input reflects increased population and changes in participation and employment rates; calculated as a residual.
3 Labour productivity growth is measured as real GDP per employee times the average employment over the 20 years.
The growth has been driven mainly by productivity increases
3945
55
27
Malaysia
55
Indonesia
61
Labour input2
Productivity effect3
South Korea
73
Singapore
45
Contribution of labour input and productivity increases to overall GDP increase,
1990–20101
%
5
8
Indonesia’s growth is supported by 4 global and local trends
Rise of Asia
▪ Asia's share of global GDP is on the rise. The global
consuming class will increase with 1.8 people over
the next 15 years (75% in Asia) fuelling demand for
Indonesian resources and commodities
Urbanization
▪ Indonesia’s urbanization could reach 71% in 2030
from 53% today. Economic activities in urban areas
will increase to a 86% share of GDP
Working age
population
▪ Indonesia’s young and growing population could
reach 280 million people by 2030, which can add
extra 2.4 percentage points per annum to GDP
growth
▪ Over the next two decades, Indonesia will become a
truly mobile and digital nation and can benefit from
green technologies Technology
99
40
60
80
20
China
0
100
2000 2010 2020
Rest of
world
Europe
North
America
Rest of Asia
Japan
India
China
2030
SOURCE: Angus Maddison, Historical Statistics for the World Economy: 1-2003 AD; Global Insight;
McKinsey Global Institute analysis
Discovery
of America
Fall of
Roman Empire
Industrial
revolution
Marco Polo’s
trips to Asia
Share of total world GDP
Percent
Asia was the majority of the global economy until the Industrial
Revolution – and its economic renaissance is well under way
1970500 1000 1500 1800
10
Indonesia is rapidly urbanizing driven by middleweight cities Urban1
Rural1
1 We use the definition of urban and rural area from Indonesia’s Central Bureau of Statistics.
2 Model is based on more than 400 cities and districts, covering 90 percent of GDP. GDP is allocated to urban and rural areas
based on population share, with a 28 percent premium per capita for urban areas based on historic income differences.
NOTE: Numbers may not sum due to rounding.
SOURCE: 2010 Population Census and Socio-Economy Survey, Indonesia’s Central Bureau of Statistics; McKinsey Global
Institute analysis
2.0
1.7
6.3
6.9
9.1
5.3
5.1
Rural1
Other cities
Cities <150,000
Small middleweights
Cities 150,000–2 million
Mid-size middleweights
Cities 2 million–5 million
Large middleweights
Cities 5 million–10 million
Jakarta
Indonesia2
%GDP compound annual growth
rate, 2010–30
Share of
GDP, 20302
Share of
population, 2030
19
11
15
37
14
100
4
10
14
40
29
100
3 3
Exhibit 11
Some 90 percent of urban areas whose
GDP is growing at more than 7 percent
are outside Java
SOURCE: 2010 Population Census, Indonesia’s Central Bureau of Statistics; McKinsey Global Institute analysis
GDP development, 2010–30
GDP compound annual
growth rate, 2010–30 (%)
Less than 5 percent
5 to 7 percent
More than 7 percent
Mid-size middleweights (2 million–5 million)
Small middleweights (150,000–2 million)
Large middleweights (5 million–10 million)
Jakarta >10 million
Type of urban area1
1 Urban areas are aggregated areas consisting of cities (kota) and districts (kapupaten) rather than specific city jurisdictions,
12
An estimated 90 million Indonesians could join the consuming class by
2030
Million people1
135170
195
180
145
Consuming class2
Below
consuming class
2030 in 7%
GDP scenario
280
110
2030 in 5-6%
GDP scenario
280
20203
265
85
2010
240
45
SOURCE: McKinsey Consumer and Shopper Insight (CSI Indonesia 2011); 2010 Population Census, Indonesia’s Central
Bureau of Statistics; Canback Global Income Distribution Database (C-GIDD); McKinsey Global Growth Model;
McKinsey Global Institute Cityscope 2.0; McKinsey Global Institute analysis
40 90 125
1 Rounded to the nearest five million.
2 Consuming class defined as individuals with an annual net income of above $3,600 at 2005 purchasing power parity (PPP).
3 Based on annual GDP growth of between 5 and 6 percent.
Additional people in
the consuming class
13
Indonesia is at a critical juncture. There are three major imperatives…
2. Ensuring growth is inclusive. Amid concerns about rising inequality,
Indonesia needs to ensure that growth is inclusive. According to the
World Bank, based on a poverty line of $2 a day (PPP-adjusted),
nearly half the population is deprived, more than in Sudan where the
equivalent figure is 44 percent and Vietnam with 43 percent
3. Building resilience. Indonesia needs to manage the challenge of
soaring demand from its expanding consumer class. Demand for
energy could nearly triple over the next 20 years; steel could increase
by 170%, and water demand in 2030 could outpace supply by over
20%. At the same time, 55 million of Indonesia’s poorest people today
have no access to basic sanitation and 25 million lack access to
water of a decent quality
1. Boosting productivity. Indonesia needs to boost the rate of labour
productivity growth to 4.6% pa – 60% higher than in the past
decade—to meet government’s 7% GDP annual growth target. On
current productivity trends, our base case is for annual growth of
between 5 and 6 percent
14
Which we address in four key sectors
1. Transform consumer services. Local services account for 60% of the
productivity gap with Malaysia. Indonesia needs to overcome barriers to higher
productivity including regulation in financial services, protectionism in retail, and
poor infrastructure in transportation, which could result in a $1.1 trillion
opportunity
2. Boost productivity in agriculture and fisheries. 8 million people of working
age could leave rural areas for cities up to 2030, agriculture land is being used
for urbanisation – hence more is required with less. Three approaches—
boosting yields, shifting to high-value crops, and reducing post-harvest waste,
could allow Indonesia to become a net agriculture exporter
3. Build a resource-smart economy. Fossil fuels will continue to deliver most of
the energy supply, however unconventional energy sources could provide as
much as 20% of energy needs by 2030; using energy more efficiently could
reduce demand by 15%
4. Invest in skill building. By 2030 Indonesia could face shortfall of 9 million
educated workers. Three measures could reduce the skills gap further: raise the
standard of teaching; develop a more demand-driven curriculum; and create
new, flexible education pathways
