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Productivity Must Be Enhanced To Achieve An Economic Growth Rate Of 8%

Bank Indonesia (BI) has indicated that Indonesia's total factor productivity (TFP) must increase significantly in order for the country's economic growth to reach 8%.  

According to data from the National Development Planning Agency (Bappenas), the average contribution of TFP to gross domestic product (GDP) growth from 2011 to 2019 was only 1.37%. Meanwhile, Indonesia's economic growth has hovered around 5%, attributed to the low contributions from capital growth, labor, and productivity. 

To achieve an economic growth rate of approximately 8% by 2029, BI states that TFP must be tripled to an average of 3.61% during the period of 2025-2029, as outlined in the Indonesian Economic Report 2024, referenced on Sunday (March 9). BI acknowledges that reaching the TFP target of 3.61% is a challenging task, as it necessitates improvements in investment, productivity, and economic efficiency. 

From a productivity perspective, the contribution of TFP to GDP has shown a declining trend since 2000, only beginning to rise again in 2022, primarily due to advancements in mineral processing and mining. Furthermore, investment efficiency remains low, as evidenced by the increasing Incremental Capital Output Ratio (ICOR), which hampers the contribution of capital to GDP growth. In 2023, Indonesia's ICOR stood at 6.33. 

Additionally, BI observes that foreign direct investment (FDI) in Indonesia is also low, resulting in a capital-to-GDP ratio of below 20%, significantly lower than that of Malaysia, Thailand, and Vietnam, which have reached around 50% of GDP. In comparison to Vietnam, the value of FDI in Indonesia, particularly from South Korea, Japan, and Taiwan in sectors such as textiles, electronics, retail trade, consumer goods, and services, is also notably lower. 

Tag: Bank Indonesia Bappenas Total Factor Productivity