Indonesia Joins the Big League: 8th Largest Economy in the World

An article recently published on Seven Stones Indonesia’s blog takes a deep dive into how, in 2024, Indonesia cemented its position as a global economic powerhouse, ranking as the 8th largest economy in the world as per GDP based on Purchasing Power Parity (PPP), according to the International Monetary Fund’s (IMF) World Economic Outlook (WEO) Database.

GDP based on PPP accounts for price level differences across countries, offering a more accurate measure of economic size and standard of living because it takes into account the relative cost of local goods, services, and inflation rates rather than just using international exchange rates, which can distort the real differences in per capita income.

With a staggering GDP of USD 4.66 trillion (approximately IDR 75.4 quadrillion), Indonesia places ahead of developed nations such as France and the United Kingdom, signaling a significant shift in global economic dynamics and underscoring Indonesia’s potential to play a larger role in global trade negotiations and economic governance.

This milestone is not just a testament to Indonesia’s rapid economic growth but also a reflection of its resilience and strategic planning in navigating global challenges. Over the past decade, Indonesia has implemented a series of reforms aimed at fostering sustainable growth, enhancing fiscal discipline, and solidifying its position as one of Asia’s most vibrant economies.

Economic Growth Amidst Global Challenges

Despite global turbulence, pandemics, geopolitical tensions, and volatile commodity markets, Indonesia’s economy has shown impressive resilience. The IMF’s 2024 Article IV Consultation projects a robust 5.0 percent GDP growth in 2024 and is predicted to rise to 5.1 percent in 2025. This growth is driven by strong domestic demand bolstered by government investments in infrastructure and social programs.

Inflation remains well-managed, converging within the target range thanks to prudent monetary policies and a stable financial sector. This stability has attracted significant foreign direct investment (FDI), strengthening Indonesia’s balance of payments surplus and reinforcing investor confidence.

Key Drivers of Economic Success

Several factors have contributed to Indonesia’s impressive economic performance:

  1. Fiscal Discipline and Reforms:
    Indonesia has demonstrated strong fiscal management, achieving its first primary fiscal surplus in over a decade in 2023. The government’s focus on reducing deficits, targeting energy subsidies more effectively, and increasing revenues through tax reforms has created fiscal space for growth-friendly spending.
  1. Infrastructure Development:
    The government has prioritized infrastructure investments, improving connectivity and boosting economic productivity. Projects like the Trans-Java Toll Road and new international airports have facilitated trade and tourism, while rural infrastructure programs have enhanced agricultural productivity and reduced regional disparities.
  1. Resilient Domestic Demand:
    Indonesia’s large and growing middle class has been a key driver of domestic consumption, providing a stable foundation for economic growth. Rising consumer confidence and disposable incomes have further fueled demand for goods and services.
  1. Strategic Industrial Policies:
    The government has implemented policies to promote value-added industries, such as processing nickel and other critical minerals for the global electric vehicle supply chain. These initiatives have enhanced Indonesia’s role in global supply chains and diversified its export base.
  1. Political Stability:
    Indonesia’s stable political environment and effective governance have created a favorable climate for investment and economic growth. The government’s commitment to transparency and reform has bolstered investor confidence and reduced bureaucratic barriers.


Global Context: Challenges and Resilience

The IMF’s October 2024 WEO highlights resilience in the global economy, forecasting nearly 3 percent global growth despite ongoing challenges. Inflation is expected to decline to 3.5 percent by 2025, allowing for potential monetary easing in many countries.

While the U.S. has revised its growth outlook upward, the eurozone and China face slower growth due to weak consumer confidence and housing market challenges. Against this backdrop, Indonesia’s strong performance stands out as an example of resilience and opportunity.

Risks and Challenges

Indonesia’s reliance on commodity exports, however, makes it vulnerable to price fluctuations and geopolitical shocks. A slowdown in key trading partners or prolonged high interest rates in advanced economies could dampen growth. Domestically, weakening fiscal frameworks could undermine policy credibility.

The IMF recommends continued structural reforms to mitigate these risks. Enhancing human capital, improving governance, and fostering a predictable business environment will be critical for Indonesia’s sustained growth.

Structural Reforms: The Path to Sustainable Growth

The IMF underscores the importance of structural reforms in raising Indonesia’s potential growth and resilience. Recommendations include:

  • Enhancing education and workforce skills to drive innovation.
  • Strengthening institutions to ensure effective policy implementation.
  • Promoting trade and investment policies to integrate Indonesia into global value chains.

These reforms will help to ensure that growth benefits are equitably shared, supporting Indonesia’s long-term development goals.

Looking Ahead: Indonesia’s Golden Vision 2045

Indonesia’s government has outlined an ambitious development agenda, known as Golden Vision 2045, which aims to position the country as a high-income nation by its 100th anniversary of independence. Key pillars of this vision include:

  1. Economic Transformation:
    Diversifying the economy from resource dependence to value-added industries.
  1. Sustainability:
    Advancing green energy initiatives and environmental conservation.
  1. Social Equity:
    Reducing poverty and inequality through inclusive growth policies.

The IMF has praised Indonesia’s commitment to this vision, noting that the country’s fiscal rule, a 3 percent GDP deficit cap, lays a solid foundation for sustainable development. Achieving these goals, however, will require proactive policies and effective reform implementation.

The BRICS Connection: A Platform for Growth

Indonesia’s inclusion in the BRICS (a bloc of major emerging economies comprising Brazil, Russia, India, China, and South Africa) on January 1, 2025, can further amplify its economic momentum.

The bloc, which recently expanded to include new members like Saudi Arabia and the UAE, represents 40 percent of the global population and a significant share of global GDP. It serves as a powerful platform for emerging economies to collaborate, counterbalance Western-dominated financial institutions, and promote south-south economic cooperation.

Several key benefits of joining BRICS align with Indonesia’s economic strategy:

  1. Enhanced Trade and Investment:
    Indonesia can expand exports to BRICS nations, especially China and India, and attract FDI in infrastructure and green energy. Access to BRICS’ New Development Bank (NDB,) established by BRICS, could finance major projects.
  2. Stronger Global Influence:
    Membership in BRICS can amplify Indonesia’s voice in global trade policies and financial systems, reducing reliance on Western-dominated institutions like the IMF and World Bank.
  3. Sustainable Development Collaboration:
    BRICS initiatives in renewable energy and technology transfer align with Indonesia’s goals, fostering innovation and supporting its Golden Vision 2045.
  4. Diversified Partnerships:
    Strengthening ties with BRICS nations reduces Indonesia’s dependence on Western markets, enhancing geopolitical resilience.


How BRICS Membership Can Expand Indonesia’s Growth

By joining BRICS, Indonesia can build on its achievements as the 8th largest economy in the world, leveraging the bloc’s resources and networks to sustain long-term growth. The combination of strong domestic demand, fiscal discipline, and BRICS-driven opportunities could position Indonesia as a key player in shaping the future of the global economy.

BRICS membership doesn’t just reinforce Indonesia’s economic resilience but also enhances its global influence, creating a pathway to achieve its ambitions. With the backing of a powerful bloc and its own growing economic clout, Indonesia’s rise as a global powerhouse seems inevitable.

While BRICS membership offers significant advantages, Indonesia must navigate potential conflicts of interest within the bloc and align its domestic policies with BRICS initiatives without compromising national priorities.

A Rising Powerhouse

Indonesia’s rise to the eighth-largest economy in the world is a noteworthy achievement that reflects the country’s resilience, ambition, and strategic vision. By maintaining fiscal discipline, pursuing structural reforms, and capitalizing on its demographic and resource advantages, Indonesia can navigate global challenges and sustain its economic momentum.

As Indonesia continues its journey toward high-income status, its success inspires other developing nations. The IMF’s insights underscore the importance of sound policies and bold reforms in building a prosperous and resilient economy. For Indonesia, the future looks bright. The big league is here, and the world is watching.

 

Sources: International Monetary Fund’s World Economic Outlook Database (2024), Indonesia 2024: International Monetary Fund’s Article IV Consultation, Seven Stones Indonesia

Stock image by Tom Fisk on Pexels

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