Indonesia's first annual economic contraction since the 1998 Asian financial crisis may have a long-term impact on the country, pushing back the government’s efforts to escape from the middle-income trap by 2045, a top government official has warned.

The country’s gross domestic product (GDP) shrank by 2.07 per cent year-on-year last year as the Covid-19 pandemic suppressed social and economic activities, Statistics Indonesia (BPS) reported earlier this month.

As a result, the country’s GDP per capita – a universal measure of a country’s prosperity – fell by around 3.7 per cent to 56.9 million rupiah ($3,911) last year from 59.1 million rupiah in the previous year, according to BPS.

“The long-term impact, if we keep going down like this or our economic growth rate stays only five per cent, for example, is that it will be very hard to get out of the middle-income trap,” Minister of National Development Planning Suharso Monoarfa said at a recent virtual briefing.

The middle-income trap is a development economics term that, in short, describes an economy being stuck at middle-income level without progressing to the status of a high-income economy.

Indonesia had just celebrated the milestone of moving into the group of upper-middle income countries from its previous lower-middle income status, as its gross national income (GNI) per capita reached $4,050 in 2019, slightly above the $4,046 threshold for the category, as the World Bank announced in July.

Avoiding this middle-income stagnation is crucial for countries with a large working-age cohort like Indonesia, where people between 15 and 64 years of age account for 70.72 per cent of the population, according to the latest BPS census. The proportion is the highest since the decennial census began in 1961.

In his inauguration speech in 2019, President Joko “Jokowi” Widodo unveiled his ambition for Indonesia to escape the middle-income trap by 2045, aiming to turn the country into an advanced country with an annual income of 320 million rupiah per capita. This figure equals a monthly income of 27 million rupiah per person.

However, Sunarso warned that, with the current economic growth amid the pandemic, the government might not achieve this feat.

“Even in 2045, we cannot reach a level above $12,000. We may get into the upper-middle income [group], but not into the high-income [group] yet,” he said.

The Ministry of National Development Planning estimates that Indonesia that will need at least six per cent annual growth in per-capita income to pass the $12,535 threshold for becoming a high-income country before it turns 100 years old in 2045.

Suharso said the government was expecting the country to return to the upper-middle income group soon if economic growth reached between 4.5 and five per cent this year and above five per cent next year.

However, economists have also warned that the economic crisis due to the pandemic might deepen the income gap, as some sectors and income groups may recover sooner than others, a phenomenon described as a “K-shaped recovery”.

The fall in income per person, a common measure of living standards, is said to be more pronounced among low-income citizens than their more affluent counterparts during the pandemic, according to Centre for Reform on Economics (CORE) Indonesia executive director Mohammad Faisal.

“The gap is very wide. The rich remain strong and their savings even rise during the pandemic, while those at the bottom see their purchasing power fall as their income declines,” Faisal told The Jakarta Post in a phone interview.

According to BPS data, the gini ratio, which measures inequality based on spending, showed a slight increase to 0.381 in March last year from 0.380 in March 2019. Under the current macroeconomic assumption, the government aims to bring down the ratio to between 0.377 and 0.379 this year.

The latest GDP per-capita data suggests the government may need to assess its 2045 goal and Covid-19 policies, according to Bank Permata economist Josua Pardede.

While the government stimulus might be able to lighten the pandemic’s impact on the economy, the stringency of the country’s Covid-19 measure plays a key role in recovering the economy, so its growth returns to positive territory, he said.

“The government’s spending and stimulus must reach the right targets, so it can have an impact or restore private consumption and investment faster than in other countries,” Josua told the Post in a phone interview. “If the recovery takes place faster, we can still catch up.”

THE JAKARTA POST/ASIA NEWS NETWORK