Transforming Economies Through Growing City Regions

Why focus on City Regions?

Indonesia’s government projects that the population will reach 324m by 2045, an increase of 54 million from 2020 and that GDP/head will move towards $25,000/person. That projection may be an overestimate as it relies on fertility rates remaining high and life expectancy continuing to increase, but whatever the outcome Indonesia will need to accommodate an increasing population.
The projected growth would result in the equivalent of another 4-5 times Jakarta’s population. These are big audacious challenges and to deliver them it can’t be "business as usual", Indonesia needs to transition to a higher skilled economy. Even if 50% of the predicted growth was to occur in existing urban areas there would still be a requirement for 3 Superhubs, each with a population of almost 10 million or 6 “medium” scale Hubs each of almost 5 million population. Spreading economic growth more broadly across the country is necessary from both a national development perspective and potentially will be a political imperative.
The new capital of Nusantara could be one of those Hubs or Superhubs and may end up being far more important for its economic contribution than as a new administrative centre.
Regionalization over last two decades has provided more control over local decision making but is sub-optimal in implementation – it has failed to deliver the necessary up-skilling of regional governments and the private sector which has held back the performance of regions with the result that many decisions are still made at the centre.
Over the last 30 years the performance of urban areas has far exceeded that of rural areas, and it’s not just that urban areas tend to be better advocates for available investments, they have inherent strengths over rural areas in that they have the quantum and diversity of necessary skills, institutions and public expectations.

Simply in economic terms alone there appears to be a compelling case for continued growth in investment in city regions if the 2045 target has any chance of being delivered. On its own that would not be sufficient, social equity across regions needs to be addressed. In this think-piece we will explore the type of economy that will be necessary and the policy decisions that government will need to make and suggest ways managing the inevitable distortions that will arise.

The evolution of cities

Ever since the industrial revolution city regions around the world have become engines of economic growth and created a disproportionate share of nations wealth, alongside growth in inequality. The reasons are numerous: critical mass of skills and resources, higher population density and concentration of market incomes, wide range of specialized knowledge and institutions; diversity of needed facilities and services; and highly developed physical and social infrastructure. All of these are prerequisites for technological and organizational innovation, high quality services, efficient production, economic growth and investment.

Similar trends can be seen in Indonesia. Urbanization has reached almost 59%, an increase of 7% in the last decade and is set to increase further in the short to medium term. In 2023, Jakarta alone generated 16% of the country’s total GDP, with only 4% of the population. Even by international standards that performance stands out. Although not as extreme in other urban areas, the same trend can be observed. From 2010 to 2023, Indonesia’s GDP increased from US$165 billion to US$1.39 trillion, an increase of over 740% and most of that growth has been delivered in city/regions, even if that has been accompanied by pollution, traffic congestion, housing issues and inequality.

Indonesia is at a crossroads in its quest to become a high-income country by 2045

Indonesia has made great progress over the last 25 years in raising standards of living and reducing poverty, but it is now at a critical juncture in its economic development. It is highly unlikely that it can repeat the same success over the next 25 years with the same strategy. This is because the growth model of East Asian economies in moving from middle-income to high-income was driven by rapid export-led manufacturing. In a polarized world, the time of unconstrained globalization is over. More developed economies will be less open to cheaper exports from emerging economies. Also, Indonesia’s cost base makes it uncompetitive in manufacturing compared with India, China, Vietnam and Thailand and even in a “China Plus One” strategy it is rarely the preferred option. It is also far behind its East Asian competitors, China, Japan, South Korea and Taiwan in creating innovative technologies and that gap is unlikely to be bridged based on current trajectories.

So what should Indonesia do to deliver higher value growth?

Many countries have achieved economic success through tax subsidies and other incentives. Going forward, countries are more likely to be successful if they invest in their people and skills. The record from more developed economies is that broad-based development of public and private resources, and institutions help drive greater productivity. These include:

Investments in transportation and infrastructure that move people, goods, and information most efficiently and cost-effectively. Indonesia’s targeted investment in public transport is well targeted.
Investments in education and workforce development that make people more skilled and innovative. Currently Indonesia invest only 2.4% of GDP in education. This is much too low and for a country with Indonesia’s aspirations it should be of the order of 5%. In comparison Singapore spends 13.2% on education, China 3.3%, Japan 7.4%, Korea 5.1%, Malaysia 20.2%, Philippines 3.6% and Vietnam 3.9%.
Investments in research and technology to generate new ideas, products and services that are highly valued in the world. Indonesia only invests 0.24% of GDP in research and development in comparison 1.9% in Singapore, 2.6% in China, 3.6% in Japan, 5.2% in South Korea, 1.4% in Malaysia with only Philippines investing less at 0.16%.
Investments in healthcare and social safety nets that make places attractive for living, working, and visiting. Indonesia invests 3.7% of GDP in healthcare, in comparison to Singapore 5.9%, China 7.1%, Japan, 10.8%, South Korea 9.72%, Philippines 5.9% with only Malaysia investing less at 2.0%.
Investments in the physical environment and cultural infrastructure make places more attractive, life more enjoyable, and people more motivated to achieve. Indonesia has invested in its rich cultural and heritage infrastructure, but further efforts are needed to enable it to make a bigger contribution to a broader economy.

Indonesia has demonstrated over the last decade its ability to create new technology enabled services for the domestic market. Going forward, it needs to grow this sector more strongly and export these services to its ASEAN neighbors. There is an imperative to create a growth path that is both inclusive and sustainable, increasing productivity whilst minimizing net job losses, and through the creation of higher value employment. Although private sector organizations can individually play an important role in innovation and increased productivity, the role of government is critical in driving through a state-led industrial development strategy and strengthening its delivery.

But it’s at the level of city-regions where the greatest impacts can be made. Regional development planning can integrate all the necessary ingredients for success through inclusive urban regeneration, aligned to government policy. New mixed-use urban centres can be created through densification in areas of deprivation and underused land, whilst improving infrastructure, services and public realm. This should not follow a “build it and they will come” mantra but requires targeted sectoral development support by national and regional governments aligned with the key success factors.

Economic Transitioning creates winners and losers – how to deal with resulting inequality?

In summary city/regions have benefitted from the growing sophistication of their economies but the rural areas less so, and paradoxically, relative inequality has increased as Indonesia has become wealthier. Distributing a high value economy equally across the country is not a realistic aspiration, but reducing the digital divide can help spread wealth beyond existing urban centres. With shrinking employment in agriculture, the rural economy is in urgent need of fundamental reform, potentially using more technology investment in agriculture, higher value tourism, more responsible resource exploitation, etc., but these are beyond the scope of this think piece.

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