From BRIC to MINT Countries: Will Indonesia Become a Powerhouse?
Over a decade ago, economist Jim O'Neill became famous for the introduction of the term BRIC (indicating the promising economic perspectives of Brazil, Russia, India and China). Now the BRICs have lost some of its significance, he has turned to a new acronym: MINT. These MINT countries - consisting of Mexico, Indonesia, Nigeria and Turkey - share a number of features that make them potential giant economies in the future: promising demographic structure, strategic geographical location, and commodity-rich soil.
When the term MINT was first coined by Fidelity in 2011, prospects for Indonesia's economic growth were a lot rosier than at the start of 2014. Indonesia's exports have fallen considerably due to weak global demand for commodities and as commodities, particularly raw ones, account for around 60 percent of the country's total exports it makes Indonesia highly susceptible to the effects of commodity price volatility. This effect can be positive as seen in the commodities boom of the 2000s but has now turned negative amid price downswings in combination with a lack of structural change within Indonesia's industrial sector. These weak exports are partly responsible for causing a trade deficit as well as a current account deficit thus placing more pressure on the rupiah exchange rate (which depreciated about 26 percent against the US dollar in 2013). Not only these domestic financial troubles have led to capital outflows from the country's capital markets but also the looming end of the Federal Reserve's quantitative easing program causes many investor to pull out from riskier assets in emerging economies such as Indonesia.
However, despite the current less rosy outlook, it cannot be denied that Indonesia has plenty to offer on the long-term. By 2012, Indonesia had climbed to the world's 16th largest economy. According to the World Bank and Goldman Sachs, the country will be among the world's ten largest economies by 2050 with GDP growing from USD $850 billion in 2012 to over USD $6000 billion by 2050.
Indonesia's Gross Domestic Product Growth 2006-2012:
(in billion USD)
(annual percent change)
|GDP per Capita
Sources: World Bank and International Monetary Fund (IMF)
This article explores one of the characteristics of the MINTs - that is the demographic structure (in relation to economic growth and employment) - in the case of Indonesia.
The MINT countries all contain young populations. This is an important feature as young people can generally produce and consume more goods and services than the older generations, particularly in the context of rapidly domestic economic growth. In Indonesia, a country where an annual economic growth figure of below 6 percent is considered as a disappointment, this trend is clearly visible: more and more young adults belonging to the country's middle class follow the latest technology (for example smartphones) and own goods or use services that their parents could not afford. In 2012, Indonesia's middle class was estimated to number around 75 million people (of a total population of around 240 million people, the fourth most populous country in the world). Research firms the Boston Consulting Group (BCG) and McKinsey expect that the country's middle class will grow to between 130 and 140 million people by the period 2020 to 2030 amid continued robust economic growth. Not too long ago, the World Bank reported that around seven million Indonesians join the ranks of the middle class each year. A rapidly expanding middle class implies that domestic consumption in Indonesia (particularly private consumption) has a rosy outlook. Currently, domestic consumption accounts for about two-thirds of economic growth. Besides insulating Indonesia from the global financial crisis, domestic consumption is also one of the most important reasons why foreign companies want to enter Southeast Asia's largest economy. The country is now not merely seen anymore as an efficient production hub due to low regional wages (although these have been raised significantly in the last two years), but also as a market in its own right.
Returning to the topic of demography, Indonesia is considered to have a promising demographic structure in terms of age. The country's young population - half of the population is younger than 28.2 years - implies a large workforce. This is a strength when managed correctly (in other words, when this workforce can be absorbed by employment opportunities) but can turn into a weakness if employment opportunities are not sufficient. Looking at the country's official unemployment statistics, we see a promising downward trend from an unemployment rate of 10.3 percent in 2006 to 6.3 percent in 2013. The main factor that pushed this figure down was the country's robust economic growth between those years. As Indonesia is forecast to continue its economic expansion, albeit at a lower pace than in recent years, the unemployment rate is expected to continue its gradual decline.
However, there are some noteworthy facts about Indonesia's (un)employment situation:
• The informal sector - both rural and urban - plays an exceptionally large role in Indonesia's economy. It is estimated that between 55 and 65 percent of employment in Indonesia can be called informal. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.
• Around two million Indonesians enter the labor force each year. This is a big challenge for the Indonesian government as it needs to stimulate job creation
• Gender equality is an issue (as in most other countries too). Although progress has been made in several key areas (education and health), women are still more likely to work in the informal sector (twice as much as the amount of men), in poorly remunerated occupations and are paid less than men for similar work.
• The unemployment rate is highest for people between the age of 15 and 24 (far above the country's national average). This youth unemployment (among the freshly graduated) is a cause for concern and action.
Indonesia's Unemployment and Labor Force Statistics:
(percentage of total labor force)
Sources: World Bank and Statistics Indonesia
¹ data from August 2013
Source: Statistics Indonesia