Indonesia is now racing against the clock to boost its manufacturing sector and strengthen its supply-side economy as the nation is on the brink of falling into the middle-income trap, a state that has afflicted other emerging market economies.
Government officials have acknowledged that Indonesia now needed bold policy measures to prevent the country from falling into the middle-income trap.
"Is there a risk that Indonesia will get trapped in the middle-income group? Unfortunately, the answer is yes. Indonesia has grown to become a lower middle-income country since the 1990s, and we are still there now," Finance Minister Chatib Basri said Thursday in his keynote speech delivered during an international seminar held in Nusa Dua, Bali.
With its gross domestic product (GDP) per capita of US$4,790, Indonesia is now classified as a lower middle-income country and - just like its peers at this level - is aspiring to become a high-income country, classified as the one with GDP per capita of more than $11,750.
However, some countries never get there, and instead see stagnation in GDP growth due to rising labour costs and decreasing productivity, leaving their citizens' income "trapped" in the middle level.
A study from the World Bank showed that out of 101 middle-income countries in 1960, only 13 graduated to become high-income countries by 2008.
Countries that were seen as case studies for falling into the middle-income trap were South Africa and Brazil. Both countries used to post strong economic growth, yet recently have seen a significant drop in GDP growth. In the third quarter, South Africa expanded by only 0.7 per cent while Brazil contracted by 0.5 per cent.
"Brazil and South Africa stayed at the middle-income level because they, just like us, continued to depend on natural resources and cheap labour," Chatib said. "If Indonesia wants to climb up the ladder, then we have to give more support to innovation and technology."
Signs that Indonesia might be falling into a middle-income trap have been apparent, with the economy already having slowed for five consecutive quarters to touch 5.6 per cent in the third quarter, its slowest growth rate in nearly four years.