The GOI’s primary development objective is to join the ranks of upper middle-income countries by 2025. If Indonesia could double shared prosperity over the next decade, that is, generate an annual real GDP per capita growth rate of 8.5 percent for the next ten years, it would be well on the path to achieving this objective. However, at the present maximum per capita annual growth rate of 4.5 percent, not only will
Indonesia fall well short of its target, but it will also continue to experience jobless growth, declining competitiveness, and rising inequality. Clear indicators of current trends, in addition to the modest GDP per capita growth rate, are the long-term decline in total factor productivity and more recent fall in manufacturing value added per employee, as well as steadily rising measures of inequality such as the Gini coefficient. The binding constraint to accelerating sustainable, inclusive growth is that Indonesia exploits neither the benefits of being a large country nor its international dynamic comparative advantage. Indonesia is beset by local economic fragmentation and global economic marginalization. At present, the sum is worth less than the parts – Indonesia does not have an integrated domestic economy. Instead, it is a collection of disconnected local and regional markets. The country has also undergone a significant disengagement from global production and distribution value chains. Its growth is dependent on commodities and old industries instead of high value-added products. Extending and integrating the domestic market, and linking it better to global value chains, will reduce economic distance and diminish barriers to trade and exchange. The key to addressing both domestic and international market problems is essentially the same, namely better hard infrastructure (ports, power, roads), soft infrastructure (government and governance), and wet infrastructure (human resources). This will reduce the costs of logistics and transactions, and promote productive employment and livelihoods. A requirement for effective implementation of new development policies is adroit management of both the horizontal politics (executive-legislative relations) and vertical politics (intergovernmental relations) of getting things done. Based on Indonesia’s historical context and its current economic, political, and social environment, the nation has a choice of three future development paths: reactive, proactive, and transformative. Reactive, or policy by exception, best describes the GOI’s current “muddling through” modus operandi; proactive, or sporadic reform, refers to policies pursued in response to past major crises such as widespread malnutrition and rural poverty in the 1960s and the collapse of oil prices in the 1980s; and transformative, or fundamental metamorphosis, characterizes the policies over the past half-century that have morphed the “Four Asian Tigers” (South Korea, Taiwan, Hong Kong, and Singapore) into highincome nations. The reactive approach will produce the same performance as the last decade – steady but unspectacular and largely jobless growth with declining competitiveness and growing inequality. The proactive approach will stimulate rapid growth in Indonesia for at least a decade, and inequality will not worsen – it might even decline. The transformative approach would, for the first time in Indonesia’s history, move the economy onto a robust, sustainable, and equitable development trajectory.